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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…