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LLB Notes
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eS |
Lending by Banks and Banking Securit
urities
123
jay in repayment of loan instalment, y
Mumosphere for improving the need these efforts can create a
ery.
bank can enforce 's Intervention
‘The bank a Security without legal action i
action in the followi
casts e following
cl
Save?
83 necovery Without Court’
() Where the goods are j .
pledgectbailee or where the Dank as tale,
hypothecated property. In respect of hypothecated pens tat cee
the bank can take possession, it should do so wits via
has been decided to recall the amount. ‘The hare ney on it
Inhibited by risks of criminal action if it taker eens, Mat eel
general consensus of judgements of the Supreme Court end the High
Courts is that no criminal action/proceedings lies against the bask
and its staff in such matters provided the security documents
(Hypothecation) agreement allows the bank to take or seize possession,
(ii) Where the bank holds deposits of the borrower, it can
exercise its right of set-off provided further notice is not required to
be given to the borrower in terms of the existing documentation.
(ii) Where the bank holds assignments on life insurance policies
and other actionable claims which can be realized without legal action.
(iv) Where the bank holds any property of the borrower (and the
guarantor, if any) in the normal course of banking business, it can
exercise its right of general lien unless there is a contract to the
contrary or notice of an intervening charge thereon.
(v) Where the bank is a mortgagee under an English mortgage
and the mortgage deed gives the bank the right of private sale.
684 Compromise with Borrowers
A compromise may be called a negotiated settlement in which the
borrower agrees to pay a certain amount to the banker after getting certain
concessions. A large number of compromise proposals are being approved
ty banks with a view to reducing the NPA and recycling of funds instead
of resorting to expensive recovery proceedings spread over a long period.
While entering into the compromise proposals, following points should be
taken into consideration :* |
_ @ Compromise proposals should be accepted by a bank keeping
in view the guidelines given in its loan recovery policy. :
(ii) A proper distinction should be made between wilful
defaulters and the forced defaulters. The compromise proposals should
be made with foreed defaulters whose situation has gone beyond his
control.
(iii) Where security is available, i
’ssessed taking into consideration the location,
Marketable title and possession.
its realizable value should be
present condition,
p A .
Re Strategies for Reducing Non-Performing Assets, BA Bulletin,
L
|
| Ranking Law A Negotiate teatrmmante Act
Y f any, should be an
ie) Worth of the guarantor, { eta
fe may be able to recover the amount with the hig yy
tiene ben!
gurrantee available J his paying capacit
(©) Rorrewer'e credibility and his pay nent attend
ed if recovery is to be made in instalments ay per bn
as
compromise proposal
(vi) Staff accountability should be examined &xpeditioursy
completed within a time frame.
(vii) All compromise proposals Soo nh oom fom ‘i
should be promptly reported to the next higher authority for
scrutiny Pog
(vii) Informal inspectors of the banks and statutory Arto,
should also examine the compromise proposals to ascertain thee Pes
have been negotiated in the interest of bank.
The compromise proposals have to be done with great care afer taki,
into consideration the various factors. As no formula can be Prescribed st
entering into a compromise proposal, banks should consider the
Points while taking a decision on a compromise Proposal. Presently re,
{mo settlement scheme! popularly known as OTS has been introduced
various banks to reduce their non-performing assets/overdues which ay
pending since long.
6.9 Enforcement of Legal Action
When a bank fails to recover the advance through normal course gf
Procedure, he is left with no other alternative but to adopt coercive methas,
to recover bank’s dues. Under such circumstances, he has to initiaty
recovery proceedings with or without the intervention of the court ip
circumstances such as :
() The period of limitation on the debt and/or security is abou
1 Spire and the borrower is unwilling or unavailable to execute
balance confirmation letter or the acknowledgement of debt letter, ete:
or
Git) The business of the borrower has become unviable and there
being no scope for its revival due to reasons either within or outside
the control of the borrower.
Apart from the above, there may be accounts involving small amounts
with or without the guarantee cover of DICGC, in respect of which chances
of full/partial recovery are remote and in view of the cost factor, legal
proceedings would prove infructuous,
Recovery of bank’s dues without intervention of the court can be made
1, NABARD Circular No. PCD 07/2001 dated 26.4.2001, Lending by Banks and Barking §
+s
ynforce securit; :
pank can ¢! y on ite own i
te ie, asset, transferee of a share encore, ie
Le a ie which cllows enforoment of the
rivate sale. ese, to get eu an
ete action through a competent cans Se ee oe
0
ing of Suits
yr
< A
1 FIUNP ot possible to enter into a reasonable settlement with 1
a if it Fis petter to recall the advance orate ei tee
ers time which may result i carly stage instead of
Toe a long time ah It in deterioration of the security
er, le to sel ity wit ening
one Furth , if it is not possible to sell the security without obtzining
x ve ger, suits may be filed against such borrowers.
sis of the recovery scenario of the Indian banks would revea
ange a host Baa alerted eteent a eae
‘chic are responsible for their poor recovery performance. Among
ternal factors contributing to poor recovery are the inherent
in system both of deploying of loanable funds and their effective
‘ion. The external factors include political intervention, lege!
ural calamities, direct lending, and above all, wilful default
rem; Trency must, of course, be the rule of the game in cases going by
ine because of natural and other genuine calamities, recoveries in ell
aeladt ces can, be effectively made only when the law is made stricter
ee rompt punitive action.
wit) | poor recovery performance implies, among other things, an
wpeeesive deployment of funds, a sizeable leakage of funds and their
soproductive use. As such, recovery of advances assumes greater
iportance than making advances and even mobilizing deposits. The state
of affairs of the Indian banking industry that has laid itself bare es a
result of the government's attempt to make our banking system at par
with the most ‘efficient systems of the world, is not a unique phenomenon
in India.
92 Debt Recovery Tribunal
‘An Act has been passed by the Parliament for setting up Debt
gecovery Tribunals for expeditious adjudication and recovery of debts de
penanks and financial institutions. The provisions of this Act titled as “The
Recovery of Debts due to Banks and Financial Institutions Act, 1995", are
applicable where the amount of debt due to any bank or financial
weitutions is not less than Rs. 10 lakhs. The Central Government has,
tovever, been empowered to reduce the lower limit of Rs. 10 lakhs but
not below Rs. 1 lakh by issuing a notification.
The “Debt Recovery Tribunals” are being set up in various States and
an Appellate Tribunal has been set up at Mumbai to hear the appeals
against the decisions of the Debt Recovery Tribunals. However, a provision
has been made in the Act to deposit 75 per cent of the decretal amount
before going for appeal which may discourage unnecessary delay in
1 DP Sarda p 13 126 Banking Law & Negotiable Instruments Act
scovory Tribunal Act addre
mendment to the Debt Recovery ‘ri uldretne
of ie ne in the original Act.! It Siapasiares Depeieore ry Tat
to attach the property on the filing of a comp! aint of do ute oe
borrower. It also empowers the presiding officer tp exe the de
the official receiver based on tho certificate insuc 1 ! e ebb
Tribunal. Transfer of cases from one Debt Recovery Tri bal to ant
has also been made casier. In order to obtain maximum advantages op
tribunals, banks should take following steps to ensure fast disposal of thet
claims :*
oe
Nery
(i In case of default, a decision to lodge an application with the
Tribunal should be taken on commercial consideration without Wasting
time. Many borrowers try to gain time by making false promise ¢
settlement/payment. In fact filing the case before the Tribunal ms!
induce the borrowers to enter into a reasonable compromise,
(ii) Recovery Department/Law Department should be given all
relevant papers in the first instance itself.
Gii) Affidavits filed on behalf of the banks should j,
self-contained giving complete details of the case.
(iv) Residential as well as business addresses of the borrower,
and guarantors should be furnished while making the application i,
the Tribunal so that time is not wasted in serving the summo;
mS on
the defendants.
cone py he, bank should also submit balance confirmation duly
signed by the borrower about the outstanding amount or a statement
ea account acknowledged by the borrower or acknowledged balan
sheet.
(vi) If mortgage is available to the bank, the application made
under Section 19 of the Recovery Act should ‘also include a further
application for interim order secking attachment of mortgaged
property,
(vii) Operational departments should not develop the tendency
of forgetting the loan account as soon as Papers are transferred to
Recovery neat The Law/Recovery Department should be
n consistent backing by operational depart i recovery
certificate stands executed. es ue
(viii) A quarterly review should be
A ly s Prepared and placed before
Pe pxceutive Committee/Management Committee of the bank giving
the applica a pctses filed before the Tribunals, Proper follow UP
as e oe ae a before the Tribunal is necessary to avoid delay:
may be observed from the above that the banks « full
: jc ¢ anks should take fi
advantage of the Tribunals by taking necessary steps without wasting time.
6.9.3 Recovery under Securitisation Act
The Securitisation and Reconstruction of Financial Assets 904
Enforcement of Security Interest Act (Commonte referred to 8
January, 2000 ~
2. DP. Sarda, p 14 Lending by Banks and Banking Securities 127
assets Serie ashe with the view to sell them to recover their
; 1 settin : i
a La .) for helping in the recun oS ao ae Reconstruction Companies
Under Section 13(9) of the Act, in case of i
lore than one secured creditors or joint Gnencing, “na oorured sreties
hall be entitled to exercise any or all of the rights conferred on him under
pursuant to sub-section (4) unless exercise of such rights is agreed upon
the secured creditors not representing not less than three fourth in
felue of the amount outstanding.... and such action shall be binding on all
fhe secured creditors". Sub-section (4) authorizes creditors to take
ppssession of the secured assets or their management or even put them
Ender an appointed manager.
In Abdul Azeez v. Punjab National Bank,’ the Court held that Section
g (1) of the SAFAESI Act confers powers on the creditor for enforcement
Security Interest without the court intervention. Nowhere it is stated in
je statute that once the jurisdiction has been invoked, the provisions of
FAESI Act would not apply. The expression, "without court
{ervention" was used to show that the onus is on the bank to move the
vil Court or the Tribunal under the Act but there is no bar under the
tute that having approached the Civil court, Section 13 of the Act be
: invoked. The provision of the Act and Rules made therein shall be in
ion to and not in derogation of the other laws, so the remedy provided
finder the Act is an additional remedy which unless barred by the statute
Gan be enforced at any point of time.
In Digivision Electronics Ltd. v. Indian Bank? the Court held that,
ere is a difference between a statutory notice and a non-statutory notice,
fh the case of non-statutory notice it could not be said that it was an
(ition taken under the Securitisation Act, but in the case of a statutory
Notice under Section 13(2) it is certainly a step for recovery under the
Securitisation Act, and is hence action taken under the Act.
610 Banking Securities : Introduction
It is a fundamental precept of banking everywhere that advances
Rade to customers in reliance on his promise to repay, rather than
curity held by the banker.“Security is required by the banker as
rotection against unexpected default in repayment by the customer. /
binker must bear in mind all times that if he has reason to believe tha
would be borrower would default, if a loan is granted, he should declin
make the advance. Whether or not security is offered, so far unsecure
Bvances are concerned, prudence dictates that such advances should k
lade only to customers of undoubted integrity and of the highest financi:
landing, although following the nationalization of commercial banks i
dia, the concept is slowly changing and proposals for unsecured advanc
e being considered from various types of new clients.*
1. 2005 (1) KLT 243.
2. 2005 also see K. Inbarajan v. TNB Ltd., and Somapandian v. Punjab National Bank.
3. See R.C. Suneja, ‘Bankers Securities Against Advances’, Vol. 1 (1973), p. 1 (hereinafter cit Lending by Banks and Banking Securities
ritisation Act) allows lenders to take over mana
i igement and attachment
pssots of defaulting borrowors with the vi "
[71 aso provides for sot viow to soll them to recover their
recs 8 up of Assots
RCs) for helping in the recovery alters ee Reconstruction Companies
Under Section 13(9) of the Act, in case of financing of an nsuct by
gore than one sccured creditors or joint financing, "no secured creditor
pall be entitled to exercise any or all of the rights conferred on him under
pf pursuant to sub-section (4) unless oxerciso of such rights is agreed upon
by the secured creditors not representing not less than three fourth in
jue of the amount outstanding.... and such action shall be binding on all
fhe secured creditors". Sub-section (4) authorizes creditors to take
possession of the secured assets or their management or even put them
gnder an appointed manager.
In Abdul Azeez v. Punjab National Bank,' the Court held that Section
{3 (1) of the SAFAESI Act confers powers on the creditor for enforcement.
pf Security Interest without the court intervention, Nowhere it is stated in
he statute that once the jurisdiction has been invoked, the provisions of
RFAESI Act would not apply. The expression, "without court
ention" was used to show that the onus is on the bank to move the
Givil Court or the Tribunal under the Act but there is no bar under the
rute that having approached the Civil court, Section 13 of the Act be
Got invoked. The provision of the Act and Rules made therein shall be in
iJdition to and not in derogation of the other laws, so the remedy provided
ere is a difference between a statutory notice and a non-statutory notice,
the case of non-statutory notice it could not be said that it was
Securitisation Act, and is hence action taken under the Act.
610 Banking Securities : Introduction
It is a fundamental precept of banking everywhere that advances
Made to customers in reliance on his promise to repay, rather tha
wurity held by the banker. “Security is required by the banker
fotection against unexpected default in repayment by the customer,
ker must bear in mind all times that if he has reason to believe
would be borrower would default, if a loan is granted, he should decli
make the advance. Whether or not security is offered, so far unsect
vances are concerned, prudence dictates that such advances should
le only to customers of undoubted integrity and of the highest financi
ing, although following the nationalization of commercial banks in
dia, the concept is slowly changing and proposals for unsecured advances
being considered from various types of new clients.’
1. 2005 (1) KLT 243.
12. 2005 also see K. Inbarajan v. TNB Ltd., and Somapandian v. Punjab National Bank.
13. See R.C. Suneja, ‘Bankers Securities Against Advances’, Vol. | (1973), p. 1 (hereinafter cited esing Law & Negotiable struments Act ace : WHE
= be regarded om eres = |
Racking securities, then, may as a safe (e) that he owns sufficient
cefetnn eveatualibes, which deprive the banker of diner hee ane locality where he carries ent landed and immovable property in
‘ooie, rather than as the expected "SP2Beq ST ee et Ge ee Pay,
s reported to b6.& Good pay masten and” Memdendes and is
-s can be divided into two groups, viz, 5
(@) that the borrower will be able to
4 me coe beers return the money in
wirmest, and those made on the gear A geriod and the loan will be used for gensine trade purpose
and nPand evidenced only by a promissory nay In at
Ties, Bask advances fall under two broad heads, * sipself o
scored advances. ‘unsecured a
the borrowing is sought by an at on i
we agent has aibory in the mate ands
tions in every advance is the
particularly important in the case
requires security as a protection “:
jank obtains a pronote from a client whether
‘ning any more than a promise from the clie
‘a given date, and the bank has to trust
against the personal security of te
e are common and the experience
rank, who are not so well placed and
hhas not been unsatisfactory.
suficently strong to justify
1e borrower would like to
for loan is not stro0g
“ ify an advance
2 eee ttests veould borrow on a cilateral basis rather
divulge to the bank their financial cos sgn set
3. The borrower may feel that ‘he has 2
and he may be freed to repay tbe VAD. a. ore favour
‘Sometimes a security is furnished Oe porate
Bometimetyy be obtained by the Por Lending by Banks and Banking Secs m
n automobile, it is a matter of
or costo to make
Sop any needed financing with the asset as security fr the
orrower may voluntarily offer collateral toa loan ifthe
in readily acceptable : ; Wis ese
reoperty sb len be ened byte gages te
sends oF securities is net trae ty te ees EET
cy eaves the pur es pa im A
alan in the acount is paid. Soar a henge Me
ne ean Say hata Len dan ae
ten oF oral, but it arises aly by quart ey Fe
m that the following requirements art fli SE
that the ereitor i a pouenson of he Ga,
ome in possession thereof inthe erinary sours ere
ited in its operation to, par
¥y subject to the lien, Fe
hhas a right of lien oi
and expense ay
n gives only a right to retain,
p further, and includes the ‘gh
Barnett? Lord Cazy
ndoubtedly have a general lien upon all
them as bankers by a customer, unless there
ireumstances that show an implied contract
-n possessed by the banker, giving him a
Securities deposited with him in the ordinary course
business as a banker, in respect of any balance that may be
due to him from the custo
there is at
ind gives no right
lien attaches only tose
ight of sale to secure thes of his trade as a banker"
in prods a 2 Se struments generally Where Makers Ui
{ |
‘sate | [ Artdlesdoeuments
custoty deposited for
secs | | speciic purpose
G12 Pledge
Section 172 of the Indian Contract Act, 1872, defines a pledge
Pawa, as “the bail
“fines bailment as “the delivery of goods
Purpose upon the contract that the)
vooteufatbose 46 accomplished ‘or otherwise. ds
feturn of goods are te
Began Sch ond age, tee
2 EP Eine a,
ged
‘al Fequisites of a bailment. In
AP at NR tan, Se ise
should be actually or constru
Pawnee has only a special pro
erty therein remains in the Pawner
ihe bailor’. Thus, delivery of
Andhra Pradesh High Court had
A Distinction betwes
greement between the parties, both |
goods, both have movable property. 25
et he by way of
nt of a debt orm
under no obligation to
‘are handed over to him
.e of making a depos
.on bailment and pledge
ween bailment and pledge,
oth involve transfer of
iNabject'matter of the contract,
‘> accomplishment of the purpose
are created
Se eamnesston of
a jared on the
cicero
ae jis about the pt
wie aS Siero
yon
of a pros
Kamla Prowed Jadawol ¥. Pani,
Mahatinga =. Ganapathi, (1902) 27 Mad 528; Nim ie asking Law & Negollable Instruments Act
y ws
pose of any Kind
referred
some advantages over the other
hand, is for UF
Rode
the possession of the bank,
ity in allowing their dety
elleey i
‘The bank finds no
f sold. a
oper precautions are observed regarding
inspections wd in case the godown Keepers are not dlishonegy
of their being pledged elsewhere by the pet tee
of the stock is not possible as the 4
4. Manip : ‘ods
in the pos bank and are under its strict superyse™%a
', Should the stock be insured and destroyed by fire it
easier to prefer claim with the insurance company and =
damage
Should the borrower go insolvent, the banker can sell the
prove for the balance of the debt if there be any shortfall,’ "°° ext
6.123 Letter of Pledge
From 2 law point of view, there is no necessity for any
Se eee ee a
See eters aaa ai a
‘Some banks require their customers to sign a document of thi
his nature
resyect of each transaction, in which ease the documents of tile tds
seeds are listed in a sebedule thereto; other banks obtain the eustoner,
signature to a document which covers all transactions. ‘The cates
contained in both types of document. f course, very similar. A
document of ies called a general letter o
pledge upea
ts into the
= es that the goods and documents of title
security forthe payment ofall sums ove
h any ‘other person &
guarantees or in respec
st with halfyearly resta sad
cave of default in repayment of
k may well the goods or 54
Wo. 2 (1908), pp. 28087.
The Las and Vrain of
vending by B.
Lending by Banks and Banking s,
as the bank may approve *
offee me customer undertakes
0 pay
and incidental to the warehousing of uae et Ad o
using of the ther expenses
of ant The customer agrees that the bog
the default of any broker employed to sat gut 19 be responsible
e sell the goods
4 nights of a Banker as a Pledgeg
1A ihe pledgee has the right to retain the
be ge SBM AG Ue ee sed te
ea
ce of an agree
fic yee can also lai na Gta
the serpledgee im any addtional expenses insured
ene ine preservation ofthe seen. a ao,
‘The banker is entitled to this right of the pawace in ease of cash
j arrangements, even if the customer has violated any provisone
2, In case of default by the pledger to make payment of the
the pages has the right either a
(a) to file a civil suit against the pledger for the amount due
tain the goods as a collateral security; or
8. The pledger is bound to disclose to the plaigee the faults, if any,
in the goods pledged which are within his knowledge, and which materially
interfere with the use to those goods or expose the pledgce to extraordinary
gee suffers any damage as a result of non-disclosure of
ppledger, the latter shall be responsible for such loss.
4. If the title of the pledger to the goods pledged is defective and the
rledgee suffers any loss due to this fact, the pledger shall be responsible
for such loss
5. If the pledgee has given his consent as a result of inducement by
fraud or misrepresentation in this regard or in regard to pledger’s intrest
in the goods, the contract would be voidable at the option of the pledges,
6. A pledgee's rights are not limited to his interest in the pledged
feds but he would have all the remedies that the owner of the goods
sold have against a third person for deprivation of goods or injury to
em?
such fault by t
OT Sask of kar The 10, Bank of Ina»
FA 911, $C 120,
fe of Maharashira Rac
re Lid Bob Ram, MR IS,
ae Bean aa prof nda, oe SC bel tht te bask at A
easpied dae A ahe consignment foc Railways, sasely, Ra 3$0005EL Afr
‘the armount due toi from the customer, namely 20000 z suting Law & Negotiable Instruments Act
f the Pledge
ec nd to return the go0d# On Payment of,
Tedgee to restore the goods to the plegg de
1¢ directions of the pledger ag gore” 4,
ischarged. 8 Uy
ry loss, di
purned by the ttn
edge
1e pledgve is FesPo
eee the goods, if the goods are not
atthe time!
ie Tie pledge is bound to use the goods pledged, accord
D8 to
ge if Poamtis, IC he Violates any of the conde
screnent Oy exact wouRtbe vodable at the option of the pled
isa contrast WPensation to the pledger if he suffers any get
see Unapproved use of the goods pledged. danas
ee va scigwe is also bound to deliver to the pledger any
eyo SAGES hive sored fom the goods bailed in the abo
fn agreement to the contrary?
She pledgee is bound to take as much care of the goods
sa man ef erdinary prudence would, under similar circumstances fe
hoces gods of the same bulk, quantity and value as the plejgd
SES Ifbe has dove so, he is not responsible for the loss, destruction
Ecroration of the goods pledged, in the absence of a special contrac
berween them?
6.13 Hypothecation
In ease of bypathecation, a mere charge is given on the.goods for be
count ef the debt but the bypothecated goods remain in the aul
Payne possession of the borroxer, and neither possession nor ownership
esses to the bank, or other lenders. The instrument which creates such
E charge is kavin as a letter of hypothecation which states that the gus
‘re at the order and disposition of the lender until the debt is cleared As
the byputhecated goods remain with the borrower and there is ofea
fraud, this facility is granted to parties d
‘and honesty. Hypothecation is, by nature, a weak
gods remain in the possession of the borrort
to give the possession of the goo
im to do so, The charge
Lending by Banks and Banking Sc
”
therefore, concluded that in Jay
cost od hypothe there as
edge a2 on with regard tiensce
Belen OMS ypothecated gots ae aarp Ml eon
Se rete af thnk Beet) ely a
aes
the Lender’s Risks
ing against the hypathestion of gus are tw
the obvious practical consideration eae
ere 15, gotual of constructive possesion of the gt, bs,
busin em is often very limited, with te resulta! the beruwer
frau.
£ 136 out of the pr
¢ bank and handed the balance off
bank thereupon brought an. action tft eds
declaration that they Were ASEM Oy wich ee ist
‘was bel
im of |
‘Judgement was given
by the customer was
being an unregistered
TT Syadicans Bank. Offi Ligier, ot soph
Comp. Cases 301, Bank of Barada w. BAOt ena jetaring Ut
for, Prosbant Bagi
p. 208.
B21. suing ta & Nestle Instruments At
sont
spnds i te rpner® de,
fe inter valid
alias as a warning t0 bankers, Ip g
se necessity of ogiserng 2b ot
ge of the car by arranging for the ;.." Ye
sve obtained a pled to the bani nee
Fee Should have obtained 9 Pe yave given to the bank the conser
harmo the bank. Thi stu
to ann of the veil
Precautions to be Taken By Banker
ease ner hypotecation iB fe aa
‘ve possession of the goods hypo
ie another banker on te al
cated by the PF
— rot be $2
oe et Ee
‘of loans on the basis of hypothecation of gue
inspect the hypothecated
thould be checked to ssomiag
count books of the bor
ihe position of stocks under hypothecation. Care should be taken ty
see that unsaleable stocks are not being maintained by the borrowe,
3. The borrower should be asked to submit a statement of sods
+ position about the stocks and its valuain
3 borrower possesses clear title to the same
,e fully insured against fire and other risks,
5. A nameplate of the bank, mentioning that the stocky are
hypothecated to it, must be displayed at a prominent place in the
business premises of the borrower for public notice. This is essential
1 amid the rik ofa second charg bring created on the same tds
chan It 28¢ the borzowing concern is a joint stock eompany, te
charge of hypothecation must be registered with the Registrar of
Plo apes Camiet At 1086 wn
6.13.3 Difference between Hypothe:
Hypothection ie ion and Mortgage
elotes i (litters from mortgage on the following points :
le property; hypothecation to movable prope
afer of some interest in the property!
rere is only an obligation to repay mosh
immovabl
or evidenced by an instrument whi
‘il of sle, such change wil
Lending by Banks and Basking Secures
18
tween Hypothecation and Pledge
ilar to pawn and pledge because both deal with
nity 1,8 Dao nd hover, the pss eh
wy pith the creditor, while in hypotheestion pesseetog nes
ety Toman debtor. amare
between Hypothecation and Hire Purchase
remainamurthi Mudaliar v. Generel and Credit Corporation
Bate Court hel that the dsincin betes tytn
id. the Te agreement is that while the former isthe species of
re purctessesion is transferred fom the pena othe pave,
sige Where Peg ballment with an option to purchase. ‘The later
purchaviges an irrevocable agreement to buy on instalment terms
udGat the ttle shall not pass until the instalments are paid.
compounded of the clement of bth the law of hire
the substance of the agreement. must he considered
oe ire P
ire Pure
mes 10°
wets the Proton is
BP pransacton
purchas
Me agreements
ks a Hypothecatee Faces
fe may lose his rights, over the goods hypothecated
Jreumstances :—
rf the hypothecator, in possession of the goods
a bon fide purchaser for value. without notice of the
Jhe purchaser gets a good ttle t
erent proceed against them.
9. fee hypothectr, in poset ofthe eds Dak
of the goods and the pledgee has no notice ofthe
sae posed
ypothecatet
Oi following
‘of the hypothecatee
pledge.
sc these patent risk, hypabecaton fits wou
vn poche jonable means and rest
ty a bank to customers of unqui a
1 pant cated goods remain in the possession ofthe borrwsr,
errant cused or even pledged elsewhere aro greater than in ce
af pledge. ous a
“theeation limits for this reason were generally tet SVT
nat thecation Ft ce granted to limited compares, Sine * We
tompany must have a eharge not being & pledge, on aD} MEN Py,
of the company registered. with the Registrar under S00 ice the
Companies Act within 30 days of the creation of the charg ner ee
charge will be void against the liquidator &
company. The banker thus regards
to a limited company. But in pres
trade to traders and merchants are
are trading firms, hypothecat
firms of repute and business integrity
EEE
1 AUR 1060 Wad 938
2 See Suaea,p. 19.
ally not allowed to ‘be kept under pledge,
‘and over which no cont
rer
021 ae Se
roe oO at
mater art ere Pa
sd ol ale deo
ay, ye sane conor ae
i og often oe alae
Ae a veri only after the baat hy
Sad an can bypberli
is the ey
6.138 Control over bypothecated goods
‘The only effective way in which the lending bank can exercise conta
ing statements of stocks periodical
ion that the borrowers have a clear tilt
tated in the statements are corre!
Hypothecatee (banker)
seh towever, romains with the boron
legal interest in the property t0 O
Lending by Baa and Barking Secures
us
se 1 reteset chars on
atk eto repay the ea, We dim thn Cana a he
defeat goods hypothecated: The ltr of ypaiectien tees
om je bank to tke possesion of the hp fad eta
tie avetion or by private negotiation and
oa WY Leisenarge of the debe aE ape the sae
\gpunses incurred on thal sexu 1 he se ee
Ape he deb, tho banker i eat to eve lance
ey bY set olf from borrowers credit balance un ther
cithe bank or by filing personal suit against the eames
srbreds eave sures lancer aust of he at i
rocee pay be made ever to the baroer er may alo be
ial amr ordering SY ether oi ote omnes whic bet
tue for payment.
acre
js40 contents of the Letter (Deed) of Hypothecation
6x00 Cpe of bypotbecation isa comprehensive document ing wie
“che bank, but experience shows that neither te bank oils
poves 4 Mowers care to Feed it or underiand te impos of
for the borreretter of hypothecation creates an equitable exd net legal
Gitrge on the stocks ‘hypothecated. The wording of the bypotbecaticn deed
ca oh anyway create pss aad psnvon of gas can Se {|
sows Tol by taking them in physical possession
ned Mant clauses in a letter of bypethecason are the Sowing! —
1, The borrowers, while hypothecating the goods mentioned as
gor sthedule declare, that such goods belog to them aly a24 se
ned in all respects, ‘Together with this, it is, a9
iy declared that besides the hypothecated goods sored in &
‘or in the borrowers premises, if any other goods belonging to
the borrowers, and forming ‘the part thereof (hypothecation), will be
the ‘bor thereunder for payment by the borrowers, of the balance dos
to the bank and such a balance due to the bank includes the principal
money from time to time due on ‘the said cash eredit account, the
interest accrued thereon at the ‘agreed rate and also ‘other charges:
for
for safety of the goods such as insurance cover, ete.
2. In the hypothecation deed the borrowers declare expressively
that the hypothecated goods, the sale proceeds thereof or any v \
insurance benefit obtained therefore, form the exclusive property of
the bank for the balance due to the bank ant
ae aay ee bangs o Ben thereon to ante JePAte unless ;
all the debts due to the bank are paid by them.
Sos au vecre, with the previous consent of the Wane
sell anne pares jypathecated gods of any part eed provi
qual amount thereof is. paid into the cash ‘eredit account oF
goods as per schedule, of the equal value, 81° substituted therefor
1 tds 182. Banking Law & Negotiable Instruments Act
46
4, It is also agreed upon in the deed that the bank sh,
sive rights to send its agents and servants from time tg sl! Boye
Ce tls cal ach sole nee
isan of te pated gods and uh downs ope
ch hypothecated goods, if necessary, have got to be i
1 if the borrowers fail 10 do so, the bank’ will hive an exe
Fight to get them insured at the cost of the borrowers, Any pase
ised, onder! such insurance ahall{tis applied tawaras adjust
the account. cs
‘The borrowers agree to pay all rents, rates, taxes and gy
outstanding of the godowns or premises where the hypothecated g°*®t
have been stored. 2)
7. It is agreed upon theroin by the borrowers that they sh
gending to the bank from time to time a stock statement at
hypothecated goods held by them and be abiding by all the rules a
regulations promulgated by the Government in respect of any sittd
imposed. “If thoy “are required to submit a. statement” ¢y itl
Government of the stocks held by them from time to
thereof has to be sent to the bank also.
8. The borrowers agree in the hypothecation deed to maintaig
always a stipulated margin for the advances allowed oF to be allanct
against the stocks and also agree to be charged an agreed rate"
interest on such an advance.
8. It is also declared by the borrowers that if the provsios,
incorporated in the deed are not complied with, to the satisfaction of
the bank, it has an exclusive right to seize the hypothecated goole
and dispose them of, in the manner it thinks fit and apply he
Proceeds thereof to the liquidation of the cash eredit or loan account
And, if there be any deficit, the bank shall have right to realize the
balance due from any resources of the borrowers with all the necessary
‘expenses incurred
10. If the borrowers be a firm or a company, any change in their
constitution will not impair or discharge their liabilities to the bank
during the continuance of the agreement unless all the dues of the
bank are completely satisfied.
time, a copy
6.14 Mortgage
When a customer offers immovable property like land and building as
security for a loan, charge thereon is created by means of mortgage. A
mortgage is the conveyance of a legal or equitable interest in real of
personal property as sccurity for the debt. Real property is freehold land
Everything else (including leasehold land) is personal property. Deeds are
mortgaged (real
Lending by Banks and a, anki r
by way of loan, an existing or fut 18
anced Pe nt which may give rise Go, WUC {eb ie pertrasace
on eOGRE che interest is called the ortgagon te, liability’, The
ig so transferred is called the mortgagee, (oe P50 to whee yt
ghereon, the Payment of whichis sere eq? OOPS ooey and
inet ng the instrument, if any, by which hy Tal the morgage
a0 g mortgage, deed, The transaction inset ig ayaa i feted ie
led 2. transaction. The-main charactristies op WHS a morgage oes
ue , The mortgagor does not transfer the owe
ne mortgagee. He transfers only some'sp Tae ete prperty
he cannot now sell the property witht Ge ect at a
eb
rigagee:
more Mortgage relates only to immovable nee
igaged should be specified by the mortgaree 5
Bich specification ean be done by mentioning
sue of the properties.
3, ‘The object of mortgaging the property isto give security fe
the loan to be taken or already taken for peromaeee'y
engagement giving rise to the pecuniary lablty. Transfer of perean
for any other purpose, ef. in satisfaction of a oan, will maven,
to mortgage
4, The mortgagee nced not be always given the actual possession
of the property.
5, The mortgagor gets back all his rights regarding. the
on re of loan, with interest due thereon
mortgaged property on repayment of loan,
In case of co-owners of a property, each co-owner has a right to
nortgage his share in the property.”
Parties. Propertios
the mortgage deed.
the name, location or
615 Types of Mortgages :
Mortgages are governed by the provision of the Tae of Prep
Act The various types of mortgages recognized and gove
under Section 58(b) to 58(g) are as follows :
6151 Simple Mortgage :
According to Section 58(b), @ simple mortgage is one where ost
ering possession of tho. mortgaged property, tbe merznecr Unde
to pay the morgage money and agree Soret)
i that in the event of his fasure to pay according aot
tke mortgagee shall have a right to cause the morigageé PRPS
fold and the proceeds of the sale to be applied s0 neces
‘nthe payment of the mortgage money’.
has two-fold security for the
roperty) and so are share certificates (personal property).
The subject of mortgages of immovable property is dealt with in the
Transfer of Property Act, 1882. Section 58 of the Transfer of Property Act
| defines a mortgage as “the transfer of interest in specific immovable
| property for the purpose of securing the payment of money advanced of 1
” NN
Thus, in sim, age, the mortgagee
dehy Tes: in simple mortgage,
ortgagor: and
(® the personal obligation of the mortgage
Gi) the property.
Debi Singh. Bhim Singh & Others, (1912, AIR Deb 316 Lending by Bhs ad Baking eet
mortgagor is thus gradually edu
yogor does not bind himselt
" poglish Mortgage
«x84 Et english merge. the mien sin rye
ot yon a certain date and transfer the mengaged opr
month mortgagee on the cooiion thatthe mata
wg same 10 the mortgagor upon payment of the congage
fe rgagee under an Bogish moze exile tinned
retain possession until he is repaid Thus, the
ergs by coding
Rh
ony at
voont bing made, the Sle shall become ya,
dpanment being made, the buyer shall trang gf | Sucsson and 1°
2008 urs personal lability to pay, and
ti in addition transfers the morgage propery sly,
sh al the interests and rights in the propery.
wife of default by the mariage, the mortage is eid w we
‘without seeking permission of the iar ia speci!