Chapter 7 Flashcards
Inherent Borrowing Powers
Definition: MOA contains the power for companies to borrow money (even if not mentioned in MOA).
Sources: Scheduled banks, financial institutions.
Securities: Issuance not based on interest.
Security for Borrowings: Companies can pledge, mortgage, or create a charge on their assets.
Condition: Borrowing powers cannot be exercised before obtaining a certificate of commencement of business (if applicable).
Ultra-Vires Borrowings
Company Restrictions: Borrowing powers can be restricted by AOA.
Approval Requirement: Borrowings exceeding a specified amount need member approval.
Consequences: If directors exceed borrowing authority, it results in “ultra-vires borrowings” (invalid).
Forms of Borrowings – Debentures
Definition: Any security evidencing a debt is a debenture.
Issuance: Public companies may issue debentures to the public or privately.
Security: Debentures may be secured or unsecured.
Forms of Borrowings – Credit Institutions
Sources: Commercial banks, investment banks, non-banking financial companies (NBFCs), modaraba, etc.
Terms: Loans can be against interest or profit participation.
Forms of Borrowings – Other Sources
Source: Sponsors or controlling shareholders.
Security: Usually unsecured but may be secured against company assets.
Types of Security – Pledge
Definition: Bailment of goods as security for a debt.
Assets: Movable assets.
Possession: Physical possession remains with the lender.
Types of Security – Mortgage
Definition: Interest or lien created on property as security.
Assets: Immovable property.
Possession: Transfer of title to the lender.
Types of Security – Charge
Definition: Security for debt without transferring title or possession.
Right: Lender has the right to possession if the loan is unpaid.
Types:
Fixed Charge: On identified assets (land, machinery).
Floating Charge: On fluctuating assets (debtors, stock).
Registration of Mortgages and Charges
Requirement: Certain mortgages & charges (e.g., on immovable property, book debts, ships, aircraft, intellectual property) must be registered.
Time Frame: Must be registered with the registrar within 30 days of creation.
Certificate: Issued by the registrar upon successful registration.
Mortgages/Charges Outside Pakistan
Property Outside Pakistan: 30 days from the date documents should reach Pakistan for registration.
Registration in Another Country: For mortgages/charges created in Pakistan on property abroad, registration in that country is also needed.
Consequences of Non-Registration
Effect: Mortgage or charge becomes void and cannot be accepted by a liquidator or creditor.
Obligation: This does not affect the obligation for repayment of the debt.
Modification of Mortgage/Charge
Definition: Change in terms, conditions, or operation of an instrument.
Registration: Modifications must also be registered with the registrar.
Satisfaction of Mortgage/Charge
Duty: Company must submit details of satisfaction to the registrar within 30 days.
Verification: Registrar confirms satisfaction with the lender before updating the register.
Late Filing: Can be filed with additional fees and penalties.
Rectification of Mortgage Register
Authority: SECP may extend the time for registration or rectify omissions.
Reasons: Accidental, inadvertent, or sufficient cause.
Effect: No prejudice to creditors/shareholders before registration.
Records and Register of Mortgages
Requirement: Companies must maintain a register of mortgages and charges.
Inspection: Open to members/creditors without fee, others with a fee.
Non-Compliance Penalty: Level 1 penalty, with the registrar empowered to compel inspection.
