Securities For Advances Flashcards
Classification of Securities
Personal or Intangible Securities: Tangible securities: Prime securities: Collateral securities: Movable securities: Immovable securities:
Classification of Securities
Personal or Intangible Securities:
- These are personal exclusive undertakings by some party to pay the amount of advances outstanding against a borrower.
- A demand promissory note
- Bill of exchange or a bond, guarantee and indemnity.
Classification of Securities
Tangible securities:
These are the securities. Which can be realised from sale or transfer.
Classification of Securities
Prime securities:
These are also known as primary securities These are main covers for an advance and they are deposited by the borrower himself. When a depositor of term deposits offers his Term Deposit Receipt to cover an advance, it is the primary security.
Classification of Securities
Collateral securities:
These are the securities provided as an additional cover for an advance where either the security is not very stable in value, or where the realisation of the securities to recover the outstanding amount of advance is difficult.
Classification of Securities
Movable securities:
These are the securities which are legally and physically both in possession of the lending bank.
Classification of Securities
Immovable securities:
These are the securities where the legal possession or right to takeover is entrusted to the lending bank. but the physical possession remains with the borrowers.
BANKER’S LIEN
‘Lien’ is the banker’s right to withhold property until the claim on the property is paid. The bankers look at their lien as a protection against loss on loan or overdraft or any other credit facility.
The securities after a reasonable notice.
‘general lien” or a “particular lien,” according to Section 170 and 171 of the Contract Act. 1872.
Conditions for a Lien
- the property is in the hands of the banker in the capacity of his customer’s banker;
- the instruments of the money or goods with the banker are not for a specific purpose inconsistent with lien;
- the possession of the instruments has been obtained lawfully as a banker:
- there exists no implied or expressed agreement contrary to the lien.
Property subject to Lien
According to Section 171 of the Contract Act. 1872, the bank s have a lien over any goods hailed to them by their customer.’ as security for a general balance of account.
That if the banker has the knowledge of a Trust, his lien cannot be applied to the Trust Account maintained separately; but lien can be applied if the banker has no knowledge of a Trust.
Authority under Lien–ran Implied Pledge
a banker’s lien has been defined as an “implied pledge”. Since this definition has been accepted as accurate, it has authorised the banker to treat his liens_ pledge, and consequently he may realize the securities over which he has a lien, after giving a reasonable notice to his customer.
the banker cannot exercise his lien on the customer’s money in general, but only to the amount earmarked earlier.
Charge
Section 100 of the Transfer of Property Act defines ‘charge’ in the following terms;
“Where immovable property of one person is by act of parties, or operation of law. made security for payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions herein before contained which apply to a simple mortgage shall, so far as may be. apply to such charge“.
This means that a charge is a right of payment out of certain property
Registration of a Charge:
No interest in immovable property is transferred under a charge, the document creating a charge would purport to declare a right to immovable property: and its registration should he made under Section 17(1-b) of the Registration Act. The Company Ordinance. 1984, has entrusted the responsibility of registration to the lending hanker within 21 days.
Enforcement of a Charge:
A charge cannot be enforced against a transferee for consideration without notice.
Fixed and Floating Charge:
Created on some space and ascertained property of the company.
Prevents dealings
Borrowing company creates a ‘floating charge’ on its present or future assets
PLEDGE
Section 172 of the Contract Act. 1872. defines a pledge } thus: “The bailment of goods as security for payment of a debt or performance of a promise is called pledge.”
The delivery of possession may he either actual or constrictive. Section 3 {d} of the Negotiable Instruments Act. 1881, says that “delivery means transfer of possession. actual or constructive, from one person to another“.
Person delivering the goods is called “ pledger” or - “pawnor” and the person to whom the goods are delivered is called the “pledgee” or “pawnee“.
In a pledge the ownership remains with the pledger. but the pledgee has the exclusive possession of property until the advance is repaid in full. while in case of default the pledgee has the power of sale after giving clue notice.
Authority to Pledge
Under Sections 178 and 178-A of the Contract Act, 1872. following persons have been authorised to create a valid pledge of goods or of documents of title to goods:
Owner of goods
A commission agent or broker may make a valid pledge of goods.
A seller, left in possession of goods, may make a valid pledge. Such an authority is also covered under Section 30 of Sale of Goods Act.
A hirer who has entered into a firm agreement of hire-purchase to buy goods may make a valid pledge.
A mercantile agent can create a pledge by delivering the documents of title. but the pledged goods must be delivered by the owner.
A person with safe custody of goods. or when entrusted with goods for a specific purpose. can not make a valid pledge.
HYPOTHECATION
When property in the goods is charged as security for a loan from the bank but the ownership and possession is left with the borrower, the goods are said to be ‘hypothecated’.
Banker’s Risk:
Floating charge
‘‘A floating charge is described as “an equitable charge_ on the assets for the time being of a going concern.”
hypothecation
Rights of the Creditor (the Banker):
The banker reserves the right to inspect the goods hypothecated to him and can asks for periodic stock reports, where necessary.
The banker, for his protection, may ask the borrower to insure. The banker may himself do so and recover the expenses from the borrower.
The banker may ask the borrower to maintain a valance of goods sufficient to cover the value under the contract.
hypothecation
Rights or the Borrower:
In a hypothecation the borrower has the following rights:
He has the right to possess the goods and have the physical possession of it with him.
He may retain the title and the control of goods and may dispose them off.
GUARANTEES
Definition: Section 126 of the Contract Act, 1872. de-fines ‘guarantee’ as “A contract to perform the promise. or discharge the liability. of a third person in case of his default”.
Competence for Guarantee:
Competence for Guarantee: Every person who is competent to contract in accordance with Section 11 of the Contract Act. 1872. is qualified to enter into a contract of guarantee.
GUARANTEES
Consideration
Consideration: Section 127 of the Contract Act, 1872. defines `consideration’ for a guarantee as under:
“Anything done, or any promise made, for the benefit of the principal debtor may he a sufficient consideration to the surety for giving the guarantee”.
INDEMNITY
Section 124 of the Contract Act, 1872, defines that “a Contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself. or by the conduct of any other person, is called a “contract of indemnity.”
Distinction between Guarantee and Indemnity:
A guarantee implies two contracts: a principal contract between the borrower and the lender;’ and another between the lender and the guarantor.. In case of indemnity, there is only one contract between the promisor and the promisee.
In case of a guarantee the borrower is the principal debtor to the lender. As such he is primarily liable, while the guarantor is liable only when the principal debtor makes default. On the other hand, in an indemnify the promisor is primarily liable when the promisee surfers a loss on account of his doing something at the express desire of the promisor.
If a guarantor pays the debt or performs the obligation of his guarantee, he can file a suit in his own name against the debtor. while an indemnifier cannot do so.
How Contract of Guarantee comes to end
Payment by the Pricipal Debtor Payment by the Guarantor Misrepresentation Notice of the Guarantor's Death Insolvency of Guarantor Change of Parties Release of Debt by the Creditor
