LEGAL ASPECTS OF ADVANCESBorrowers may be classified into the

following important categories:Individuals/ Sole-ProprietorshipPartnership firmsCompaniesTrustsHUFCo-operative Societies

IndividualsAs per Sec 11 of the Indian

Contract Act ,1872, every person is competent to contract who is of the age of majority according to the law to which he is subject, and is of sound mind and not disqualified from contracting by any law to which he is subject

IndividualsWhile dealing with individuals , the following

3 important points to be kept in mind. He should not be a minorHe should be of sound mindHe should not be declared an insolvent

Any contract with minor is void ab initioA Minor can be taken only for profits of the

firm and not for losses

Partnership FirmsIn case of Partnership firms , the following

important factors have to be kept in mind:Partnership Deed need not be registered as

per Law ( Partnership Act/ Registration Act). However for granting loans we should insist on registration of the Partnership Deed

Registration should be done with the Registrar of Partnership Firms

There should be sharing of both profits and losses in the Partnership Deed

Partnership FirmsIt is essential and mandatory as per Law

that a retiring partner gives a public notice at the time of retirement, failing which , he and his estate shall always be liable for acts of the Firm even after his retirement

Death needs no notice- This is the only exception to the rule requiring issue of a public notice

Death itself is taken as public notice

Companies Public Limited Co. –Minimum 7 promotersPrivate Ltd Co.- Minimum 2 promotersCo. Regd with the Registrar of Companies( RoC)3 basic documents- MoA, AoA, ProspectusCertification of incorporation is issued by RoCIn the case of Public Ltd. Co. –Certificate of

Commencement of Business is to be obtained within 6 months

In case of Pvt Ltd. Company , in lieu of prospectus, a statement on behalf of prospectus is to be filed

Co. is an artificial , but a legal person. It has a different legal entity , different from its BoD, different from its shareholders and different from its promoters

Companies..Obtain Certificate of IncorporationIn MoA , also look for objects clause under: a) main objects b) ancillary/other onjectsWhether the project to be financed falls under

the object clauseArticles of Association : Board of Directors run

the Company & they are the mind of the Co. while MoA is the body of the Company. It deals what documents are to be taken and who will execute them, borrowing powers, resolutions to be passed etc.

Companies..It is the duty of every person dealing with a

company to inspect these documents and see that it is within the powers of the company to enter into such a contract

Thus , anyone dealing with a company is presumed not only to have read the provisions of the Memorandum and Articles , but also to have understood them properly

TrustsThere must be a specified Manager, who may

be the Trustee himself or an employee or outsider

The purpose of the Trust as mentioned in the Trust Deed is to be perused

The purpose of advance is to be strictly in line with the purpose / object of the Trust

It cannot be for any other purposeGuarantee from the trust can be accepted

only if provided in the Trust Deed

HUFMembers are called co-parcenersOnly males can be co-parceners and the

eldest co-parcener is the Karta

Co- operative SocietiesTwo factors are to be seen. Whether it is : Lending to the CO –operative society or Lending to the members of the Co –

operative societyCo operative Societies Act in applicable to

each State(Multiple Acts prevalent in Maharashtra only)An affidavit is taken from the members that

they are members of a single co operative Society

Whenever there is a conflict between Central Laws and State Laws , Central laws shall prevail

Security DocumentationThree most important factors to be kept in

mindDocument is an agreementIt has to be stamped in accordance with the

State Stamp Act( Sec 19 of Indian Stamp Act- State Subject)

Life of the DocumentAccording to Sec 19, stamp duty of the place

of execution or place of application , whichever is higher , is to be paid on the documents

Documentation3 important factors to be kept in mind while

executing security documents:Proper documentsProper stampingProper execution

Stamp dutyStamp duty paid on documents , whether more or less,

or no stamp duty at all –Documents are still valid in the eyes of Law, but it is evidently not acceptable in a Court of Law

To make such documents validly readable in such cases , one of the following 2 options may be followed:

1. Submit to the Collector of Stamps: He may levy penalty at 10 times of the applicable rate

2.Move an application in Court advising that the document is either under-stamped or non-stamped and with a request to the Court to send the documents to the Collector of stamps for adjudication

HypothecationNot defined in any Act except in SARFAESI

Act ,2002Difference between Hypothecation and

Pledge is only in possessionIn case of Hypothecation as also in the case

of pledge , the only recourse is to go to a Court for remedy

Or hypothecation has to be converted into a pledge and then to take cover under Indian Contract Act 1872

Hypothecation Means charge in or upon any movable property ,

existing or future, created by a borrower in favour of a secured creditor, without delivery of possession of the movable property to such creditor , as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property

Mortgage of movable property- hypothecationHypothecation differs from pledge because goods

remain in the possession of the borrower and are equitably charged in favour of the creditor under documents signed by the borrower

Hypothecation converted to Pledge.. The document provides for a covenanat, whereby

the borrower agrees to give possession of the goods when called upon to do so by the creditor.Once the possession is given up , the charge becomes transformed to Pledge

Hypothecation differs from mortgage in two respects.Firstly , mortgage relates to immovable property whereas hypothecation relates to movable s.

Secondly in a mortgage , there is a transfer of interest in the property to the creditor but in hypothecation there is only obligation to repay money and no transfer of interest.

Hypothecation..drawback..Possession.. Absense of credtor’s control-

fraud-stock statement- difficult to inspectRealise stock to pay off other creditofs..

Keeep obsolete goods .. Erosion of securityHypothecate same stock to different

bankers.. Same godown..notice..Realisaiton of obsolete/slow moving assets

deliberately kept..

Precautions..Ensure borrower is dealing with only one

bank.. Discrete enquiries.. with employees- Board dissplyed prominently..

Visit book kept at the factory.. If company charge should be registered with

ROC- search report.. Before sanction fo loan.. Before disbursement also..

Stockstatemtns.. Random verificaiton..Continuing security clause

PledgePledge means bailment of goods for the

purposes of providing security for payment of debt or performance of promise

There must be bailment of goods ( delivery )Bailment must be on behalf of the debtorBailment must be for the purpose of providing

security for the payment of a debt or performance of promise

Actual and constructive deliveryOwnership with borrowerPledge can be in the case of existing goods.

PledgeAgreement to Pledge is to be obtainedIn pledge , the creditor has the right to sell the goods

pledged( Sec 176 of ICA ,1872)Reasonable notice period has to be given before

effecting the sale. This has not been defined in the ActIn case of perishables , even with 24 hours notice ,

good can be soldSale can be by way of Private Treaties also, as against

earlier requirement of Public AuctionsIf goods are sold without giving notice , we cannot go

to the Borrower /Guarantor for any balance outstanding

MortgageMortgages are covered by Transfer of Property Act

1882( Sec 58. a to 58 f)Banks and IF s deal in only 2 types : Equitable Mortgage or Mortgage by deposit of Title

Deeds Registered Mortgage or Legal Mortgage /English

MortgageEquitable Mortgage: valid requirements:1.Deposit of Title Deeds,2. In a notified Centre 3. With an intention to create mortgage4. for securing a debt

MortgageProperty on which EM is being created can

be anywhere, not necessarily in a Notified Centre, but only that the deposit of Title Deeds should be done in a Notified Centre

Thereupon, the Title Deeds can be taken to any other centre or Branch

Recital is being written for creating an EM and then an independent letter of confirmation is taken to prove that there was an intention to create mortgage and there was no undue influence on the mortgagor

Mortgage –Stamp dutyStamp duty is to be paid as per the higher of the following

2 factors: place of execution and place of applicationFor filing a suit on the Borrower or for a decree to be

obtained on the property, stamp duty of the place where the land/property is situated is to be paid

Payment of stamp duty is to be borne by the B/G/M. Stamp duty of the higher centre will have to be affixed and the

stamp paper of the State has to be purchased, irrespective of the place of creation of mortgage and place of property

It is advisable to always create EM at the place where the property is situated, even it means payment of stamp duty/higher stamp duty at the centre

Title Deeds acceptable for EMSale DeedGift DeedPartition DeedConveyance DeedLease deed( with the permission of the

original owner)Certified copy , if duly registered and

stamped by the Registrar of AssurancesPatta ( issued by Govt-for agricultural

purpose only)

What do not constitute Title DeedsPower of attorneyPhotocopied documentsCertified copy, if not registeredKhazra/khatoni/jamabhandi are not title

deeds. They are only evidence to title. EM cannot be created while RM can be done

Agricutltural land can be mortgaged for agricultural and allied agricultural activities only

.

Thank you…