Documentation_Check_point_own.pptx

Type of Borrower
Individuals Singly
 Individuals Jointly
Proprietorship Firm
Partnership Firm
Company
Trust
Society

Types of Charges
Hypothecation Assignment
Set - Off
Lien Pledge
Mortgage

Types of security Mode of charge Governing Act
Securities in
possession of banks
Lien
Particular Lien
General Lien
U/S 170, Indian Contract Act ,1872 – Particular Lien
U/ S 171, Indian Contract Act ,1872 - General Lien
Moveable assets in
possession of Banks
Pledge Section 172 , Indian Contract Act ,1872
Moveable assets
possession with
borrower
Hypothecation No Possession , but the creditor reserves the right to
take Possession under SARFAESI ACT 2002,
Power of Sale – Yes under SARFAESI ACT
Securities with
Actionable claim
Assignment Under Section 38 of the Insurance Act, 1938.
Indian law as to assignment of life policies
before the Insurance Act, 1938 was governed by
Sections 130, 131, 132 and 135 of the Transfer
of Property Act 1882 under Chapter VIII of the
Act – Of Transfers of Actionable Claims.
Immovable property Mortgage U/s 58 ,Transfer of Property Act ,1882
Mortgage is defined as transfer of interest in the
specific immovable property for the purpose of
securing an existing or future debt

Facility wise Documents
Loans & Advances against
Approved Security
 All documents taken in DL
 Letter of Continuity
Loan & Advances Repayable on Demand
Demand Loans
1. D.P .Note
2. Letter of waiver
3. Letter of Interest Variation
4. Any of the following as the case may be
a. Letter of Lien ( FD)
b. Registered Pledge in favour of Bank (
NSC)
c.Letter of Assignment ( LIP)
5. Original FD Receipt / NSC/ LIP duly
discharged
CC (H) / OD
1. D.P .Note
2. Letter of waiver
3. Letter of Interest Variation
4. Letter of Continuity ( To be Stamped)
5. Letter of Hypothecation of Goods to secure
Advances
6. Letter of Personal Guarantee of Third Party
7. EM to created –Where CS is Property EM to be
created as per laid procedure
8. Letter of Lien – FD as Collateral
9. Letter of Assignment – LIP as Collateral Security
10. Letter of Pledge – NSC as Collateral Security
OD Against Security ODBD
All documents taken in CC
Letter of Hypothecation of Book Debts

Select D.P Note as per Type of Borrower
where D.P .N applicable

Loans & Advances
For Term Loan agreement documents does not require renewal since limitation period is calculated
from the date when each installment falls due.
But if the term loan installments are rephased , a fresh term Loan agreement should be obtained
Repayable after certain period with agreed terms and
asset created out of Bank Finance
Term Loans( General )
Term Loan Agreement ( General Purposes)
1. Letter of Hypothecation of Plant & Machinery
2. Letter of Interest variation
3. Letter of Personal Guarantee
4. EM to created –Where CS is Property EM to be
created as per laid procedure
5. Letter of Lien – FD as Collateral
6. Letter of Assignment – LIP as Collateral Security
7. Letter of Pledge – NSC as Collateral Security

Law of Limitation
• The Limitation period bars the remedy of
filing a suit.
• But it does not take away the right of
recovering the debt.
• There is no Limitation period for recovering
the debt by exercising the right of Lien, Set
–off, or Selling the goods pledged to bank

Limitation Period
• It is the time limit within which the parties to a legal
agreement can take action in a court of Law to enforce
any legal right.
• The provisions regarding limitation are contained in the
Limitation Act 1963 applicable in whole of India except
J&K.
• A suit filed after limitation period will be dismissed by the
court, even in case where limitation has not been set up
as a defense.

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Computation of Limitation period
In computing the limitation period for any
suit, the date from which such period is to be
reckoned shall be excluded.
The suit can be filed in the anniversary day
(sec 12 of Limitation Act) .Thus a suit based
on a DPN dated 05.03.09 can be filed latest
by 05.03.12

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Period excluded while computing Limitation
1. First day of the cause of action – As per sec. 12 of the Act, first day of
the cause of action may be excluded in computing Limitation period.
Thus, a suit on a DPN dated 5.3.2010 can be filed latest by 5.3.2013
2. Closure of Court – Where the limitation period expires on a day when
the court is closed, the suit can be filed on the day when the court
reopens
3. Absence from India – In computing limitation period for any suit, the
period for which the defendant is absent from India shall be excluded
4. Suit in Wrong Court – When a suit is filed in wrong court due to
inadvertence but in good faith, the time spent in such proceeding can
be excluded for the purpose of computing Limitation
5. Injunction – When the cause of action is restrained by Injunction from
court such period of injunction is to be excluded for the purpose of
computing limitation

Limitation Period
Type of Loans / advance Limitation Period Calculation
Demand Loans ( Supported
by D. P. Note)
3 years from the date of D/P Note
Term Loans 3 Years from the due date of each Installment
Note : If the entire loan is recalled then 3 years from the date
of recall
Clean Overdraft 3 years from the date overdraft
[ Since Bank generally does not obtain D.P Note ]
Cash Credit Facility 3 years from the close of the year in which last entry ( debit or
credit ) under borrower’s hand –writing is made.
Mortgage 12 years from the date of execution of Mortgage deed
For Equitable Mortgage – 12 years from the date of deposit of
Title Deeds
Guarantees 3 years from the date of guarantee .

Extension of Limitation Period
Mode Meaning
1.Acknowledgement of debt It serves the following two purposes
It gives the evidence of debt and
It extends the Limitation period.
It can be through Revival Letter, Certificate of
Balance and even by ordinary letter where
liability to the bank is admitted.
Even such a letter addressed to any other
person, than to bank, can be considered as an
acknowledgement.
An acknowledgement of liability in the balance
sheet passes in the Annual General Meeting
and signed by the authorised person will
extend Limitation as against a Company

Extension of Limitation Period
Mode Meaning
1.Acknowledgement of debt If the name of the Bank and debit balance are
mentioned in the Balance sheet published by the
borrower before expiry of the original document
will also be treated as valid “Acknowledge of debt
“ for the purpose of extension of limitation period
provided directors have signed the Balance sheet
without adding any qualification to it.
2.Part Payment by the debtor
under his signature
 The pay in slip signed by the borrower or his
duly authorized agents amounts to part
payment only if the payment is made before
the expiry of the limitation period.
 Acknowledgement or part payment after the
expiry of limitation period does not extend
period of limitation.
3. Fresh Documents  By taking fresh documents after time barred if
borrower and guarantor agree with bank.

Charges Application
Lien The Lien is the right of a person to retain his security or goods
until the Bank’s Debt is repaid.
Securities, Transfer of possession of the security to lender
Power of Sale – No but in case of Banker’s Lien which is implied
Pledge , power of sale is possible
Pledge Under section 172 , Indian Contract Act ,1872
It is a bailment of goods as security for repayment of a debt or
discharge of performance of a promise.
Bailment as defined u/s 148 of the Act, is the delivery of goods by one
person to another for some purpose , upon a contract that they shall ,
when the purpose is accomplished, be returned or disposed off as per
instructions of the person delivering them.
Bailment of Goods , Possession actual or constructive /symbolic,
Power of Sale - Yes but after giving reasonable Notice.

Charges Application
Lien The Lien is the right of a person to retain his security or
goods until the Bank’s Debt is repaid.
Securities, Transfer of possession of the security to lender
Power of Sale – No but in case of Banker’s Lien which is implied
Pledge power of sale is possible
Pledge Under section 172 , Indian Contract Act ,1872
Bailment of Goods , Possession actual or constructive
/symbolic,
Power of Sale - Yes but after giving reasonable Notice.

Charges Application
Hypothecation Goods/ Commodities, Movable Machineries , Vehicles
No Possession , but the creditor reserves the right to take
Possession under SARFAESI ACT 2002,
Power of Sale – Yes under SARFAESI ACT
Assignment It means a transfer by one person of a right , property
or debt to another person as security. Borrower
generally assign “ Actionable Claim to the Banker.
The notice of assignment is to be sent to the debtor
Actionable Claim , LIC Policy
Power of Sale – In this case security can be reassigned

Charges Application
Mortgage
[Transfer of
Property Act
,1882 ]
Mortgage is defined as transfer of interest in the specific
immovable property for the purpose of securing an existing or
future debt( U/s 58 ,Transfer of Property Act ,1882) .
It covers both fund based and non fund based advances
Special interest on the property passes conditionally to the
lender .Power of sale – Yes under SARFAESI ACT except
Mortgage by Conditional Sale where the remedy is foreclosure.
The power of sale can be done by intervention of court.
Set -Off A right of set-off is a right of the creditor to adjust debit
balance in one account with the credit balance in another
account .
It is a legal right.
Right of set-off can be exercised only when they are certain
and not contingent.

Check point - Documentation
• EQUITABLE MORTGAGE
Particulars Conditions
1. Where EM is to be
created
The EM is to be created at notified Town/Area declared by State
Government .
2. Land Documents  Original Title Deed & Other land related documents.
 Please obtain the certified copy of original Title Deed from
Registrar Office to ensure the genuineness of the original one
 A certified copy cannot be construed as a title to property,
unless it is made out that the original is lost and a public
notice was issued to that effect.
 Xerox Title Deed/ Laminated Title Deed not acceptable for
EM
 Legal Search Report ( LSR ) from Bank’s Panel Advocate
 Valuation Report of the Property , wherever applicable.

3. Letter of Intention Letter of intention from the borrower to be obtained from the
borrower duly signed by the borrower with place and date.
Party’s request letter in “ Inland Letter “wherein the following
wording must appear
“I, Mr X, visited the Branch on _____ at _____am/pm to
deposit the original Title Deed & other related documents with
an intention to create equitable mortgage to secure Bank Loan
………………”
4. Mortgage Register After obtaining the letter of intention EM is created fresh for
fresh sanction .
In case of enhancement /reduction in Cash Credit limit or
additional term loan for expansion , reaffirmation of EM is to be
made.
Mortgage Registered is to be kept as security register.

5. Stamp Duty  Applicable as per Stamp Duty Act of State
Government
6. Priority of Charges  When a mortgagor creates more than one EM over
the same property, the earlier mortgagee has prior
charge.
 If on the same property, both EM and Registered
mortgage are created, the earlier one will get priority.
EM in no way is inferior to Registered mortgage.

WHAT IS DOCUMENTATION ?
Documentation is a process by which a set of
documents is executed by the borrower to
acknowledge the promise of debts .
The documentation serves the purpose of
 Identification of borrower & Guarantor
 Identification of security & Loan quantum
 Identification of terms and conditions
 Protective clauses
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Objective of documentation
Documents serve as
 An evidence of a promise to pay to the bank a certain amount
of money by the executant
 The creation of charge on the securities in bank’s favour
against the advances allowed.
 A written evidence of transaction and hence cannot be
disputed.

Indian Evidence Act 1872
• The term “ documentation” refers to any
matter expressed or described upon any
substance by means of letters, figures or marks
or by more than one of those means intended
to be used or which may be used for the
purpose of recording that matter.
• It is also defined in Indian Penal Code 1860,
Indian Stamp Act 1899 and General clause Act
1897.
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• It gives power to the lender to take recourse to the security in
case of default.
• Charging does not involve transfer of absolute ownership. A
charge on future property is valid.
WHAT IS A CHARGE?
The Charge is the certain right created over the tangible assets offered
by the borrower to secure the Bank Loan .

Type of Charges
 Fixed Charges
 Floating Charges
 Pari-Passu Charges
[ Consortium Advances]
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Charge created for a specific assets whose identity
does not change during the pendency of the charge
like Land & building, Plant & Machinery
Charge created over the movable assets which are
subject to sale /conversion/replacement etc viz
Inventory, Receivables
Charge on assets to create equal rights to one or more
creditors as per their proportionate exposure.

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Type of Mortgage
• Simple Mortgage
• English Mortgage
• Mortgage by Conditional Sale
• Usufructuary Mortgage
• Equitable Mortgage
Right of Foreclosure :
• On default by the mortgagor, the mortgagee has the right to
bring a decree from the court to the effect that the former be
debarred for ever to get back the mortgaged property. Such a
right is called Right of Foreclosure. A suit for foreclosure must
be filed within 30 years from the date the mortgage money
becomes due.

Loans & Advances
COMMON DOCUMENTS
Repayable on Demand
Working Capital facility Demand Loans
 Demand Promissory Note ( DP Note )
 Letter of waiver
 Letter of Interest variation
 Letter of Personal Guarantee / Corporate Guarantee

Loans & Advances
OD Limit
C/C ,ODBD
Repayable on Demand
Working Capital facility
 Letter of Hypothecation of Goods
 Letter of Hypothecation of Book Debts
 Letter of Lien ( FD)
 Registered Pledge in favour
of Bank ( NSC)
 Letter of Assignment ( LIP)

Facilities Documentation
Cash Credit (H) -D.P Note [ Depending upon the type of borrower]
Letter of waiver
Letter of Interest variation
Letter of Continuity
Letter of Hypothecation to secure demand Cash Credit
facility against goods
Letter of Guarantee ( Personal guarantee of Partners/
Directors/ Third Party Guarantee)

Overdraft against
Book Debt / Bills
Receivables
-D.P Note [ Depending upon the type of borrower]
Letter of waiver
Letter of Hypothecation to secure demand Cash Credit
facility against goods
Letter of Hypothecation of Book Debts

CKCC D.P Note [ Depending upon the type of borrower]
Letter of waiver
Loan cum Hypothecation agreement (Crop, Animal, Livestock,
Plant & Equipment, Machinery etc.)
Letter of Guarantee ( Personal guarantee of Partners/ Directors/
Third Party Guarantee)
Form for creation of charge on agricultural land wherever
applicable
Revenue records (Khatauni & Khasra, etc.)
LSR from Bank's empanelled lawyer, (wherever required).

Term Loan Term Loan Agreement ( General Purposes)
Term Loan Agreement for Plant & Machinery
Demand Loan D.P Note
Letter of waiver
Letter of Lien [ Advance against FDR ]
Letter of Assignment [ Advance against LIP Policy]

Facility wise Documentations
Term Loan (Agriculture )
 Loan cum Hypothecation agreement (Crop, Animal, Livestock,
Plant & Equipment, Machinery etc.)
 Blank transfer deed.(in duplicate) ( For Tractor /Power Tiller)
Bank’s charge to be noted in the RC Book of tractor as a
‘Hypothecatee” and not as a Joint owner.
 Letter of Interest variation
 Letter of Guarantee wherever applicable
• Creation of Mortgage or Creation of Charge on Agricultural Land.
• LSR for 30 years from banks panel advocate and land found to be
free from all encumbrances.
For Term Loan agreement documents does not require renewal since
limitation period is calculated from the date when each installment
falls due. But if the term loan installments are rephased , a fresh term
Loan agreement should be obtained

BANK GURANTEE Letter of Bank Guarantee ( Model Format as
prescribed in Loan Policy)
Counter Guarantee

Documentation
Execution ;
Every person is competent to contract who is
 Of the age of majority
 Of sound mind
 Not disqualified from contracting by any Law
Incompetent to contract for valid documentation
a. Minor
b. Lunatics ( Persons with unsound mind)
c. Insolvents
d. Convicts

Documentation
ATTESTATION
Attestation should be done on the following documents :
 Mortgage Deed
 Gift Deed
 Will and
 Share Transfer Deed etc.

Guidelines for Documentation
FILLING UP DOCUMENTS
 It is essential that the documents should be filled up before
they are executed.
 Documents may be filled up in blank by the hand writing of
the borrower/ typing before executing the same; but should
not be filled up in two different handwritings or two
different inks.
 Documents preferably be on ledger paper.

1.DATE :
 Only the actual date of execution should be mentioned.
 If different executants sign the documentation different
dates , each one can put the date of execution below his
signature. The limitation will start from the date , the last
signatory signs.

2.PLACE OF EXECUTION :
(A) Execution by different persons at same Place where branch is situated
 The documents should normally be executed at the Branch where the
credit facilities are sanctioned and disbursed.
(B) Execution by different persons at different Places
 First documents should be executed at the Branch where the credit
facilities are sanctioned and disbursed.
 The documents should be sent to our branch which is situated near the
office /residence of another person.
 The subsequent executants should sign the documents and mention date
and place as well.
 If documents are executed at different places and on different dates
executants should write the place and date of execution.

3.STAM DUTY :
 Documents should be properly stamped as per Central Stamp Duty or
State Stamp Act as the case may be.
 The documents attract stamp duty of the state where the documents are
executed.
 If documents are brought from one state to another state, difference of
the stamp duty be paid if the stamp duty in second state is higher than
first state.( For the state of JNK please refer the State Act)

4. Cancellation of Stamp/ Stamp Paper:
• Cancellation of stamp / stamp paper is by signing or
putting round seal on the Revenue Stamp or by
effectively writing on stamp paper so that it will not
be used again.

• Compliance of KYC
WHERE STAMP PAPER IS USED ?
• Stamp paper should form the 1st page of documents. If more than one
stamp papers are used then type on these papers serially.
• Stamps be bought in the name of the Executors i.e. borrowers / Bank /
Guarantor and are valid for 6 months of purchase.
• All alterations, additions and deletions should be got initialed.
• Each page of the document should be got signed.
• Demand Promissory Note, Agreements of Hypothecation, Pledge and
Guarantee should not be got attested.

Type of Borrower Documentation
1. ILLETERATE PERSON In case of illiterate person, a separate letter should be taken
from a respectable known person identifying the party and
stating that the contents of the documents have been read out
and explained and the executant has affixed his left hand thumb
impression in his presence.
Left thumb impression for male and right thumb impression for
female should be obtained on the document in the presence of
bank official. This is a convention.
The following wordings should be appear below the thumb
impression
“ Left /right thumb impression of Sri/Smt
_________________________”
Warning ------Thumb impression should not be attested on
the document. It may be attested on a separate paper which
may be kept with the document

Type of Borrower Documentation
1. ILLETERATE PERSON In case borrower / guarantor do not
understand the language of the documents,
the same be explained to them in the
language known to them and certificate to
that effect be obtained.

Documentation – Partnership Firm
 D.P Note of a Partnership firm should be executed in
both representative and individual capacity
Individual Capacity Representative Capacity
For Kumar & Co
S . Kumar S. Kumar
B. Kumar B. Kumar
Partners

Documentation – Partnership Firm
 D.P Note should be signed by all partners in individual capacity &
the representative capacity.
Partnership Letter should be signed in individual capacity
All other documents should be signed by all partners in individual
capacity & the representative capacity.
The signature in individual as well representative capacity
will make bank a creditor against the
 Firm assets and
 Separate property of each partners.

• Company
• ROC will be created within 30 days from the date of
execution
Before
documentation/Before
sanctioning
Certificate of Incorporation
Certificate of commencement of Business ( In case Public
Limited Company)
Memorandum & Article of Association
Board Resolutions specifying power powers
List of Directors and Managers
Share Holding pattern of the Company
Board Resolution Names of the directors who will operate the account, execute
loan documents , acknowledge the debt and enjoy the powers
to create Equitable Mortgage of the company Property.
Borrowing Powers of the Company
Memorandum of
Association
Memorandum of Association gives the object of the company.
If a company enters into a agreement beyond its objects, such
a contract is unenforceable in law. It is Called “ UTLRA VIRUS”.

• Company
Charge with ROC Form 8 : For registering the charge
Form 13 : It contains the particulars of charges
already created over the assets of the
company
Form 17 : Satisfaction of Charges
 The Charge with ROC is to be created within 30 days
from the date of execution of documents.
 When Cash Credit Limit is enhanced , only the
enhanced amount of Limit is to be charged with ROC
as Modification by Form No 8 & 13.

• Company
COMMON SEAL Certain documents like power of attorney, share certificate,
debenture certificate etc must bear the Common Seal. It is
not compulsory that all documents to be executed by the
company must bear common seal.
The common seal must be affixed in loan documents where
articles of Association or the Board resolution stipulates so.
In case the Article and Board are silent about the common
seal, it need not be affixed.
In cases where the seal is to be affixed it should be done in
the manner specified in the Articles of Association or / and
Board resolution. Generally common seal is affixed in in
presence of one / two directors as authorized by Board
resolution, who certify under their signature, in the
document itself, that the common seal is affixed in their
presence.

Letter of Hypothecation
The following parameters are to be filled in the
Term Loan Agreement document.
 Bank’s name and borrowers name
 Place of Shop/godown
 Quantum of loan
 Margin of hypothecated goods
 Rate of interest.
 Place and Date of execution.

Term Loan Agreement
The following parameters are to be filled in the
Term Loan Agreement document.
 Bank’s name and borrowers name
 Quantum of loan
 Purpose
 Place of Shop/godown
 Margin of hypothecated goods
 Repayment Schedule
 Rate of interest.

Type of Suit
MORTGAGE SUIT [ TITLE SUIT]
Where there is a mortgage of property
MONEY SUIT
When movable securities are there and charge decree
against those is sought
SUMMARY SUIT
When there is no security

Case Study –I : D.P Note ( Single/Joint)
A ( Single / joint ) D.P Note dated 12.01.2011 .
The Period of Limitation to be commenced from = 12.01.2011
The document to be expired on = 12.01.2014
Case Study –II
A (joint ) D.P. Note signed by joint individual on different date .
A signed on 10.02. 2011 and B signed on 20.02.2011.

Case Study –III : Term Loan
A Term Loan repayable within 48 months and first installment will shall due
on 01.10.2010 .Observation in the account is as follows
1st Installment due on = 01.10.2010 ( Paid)
2nd Installment to 10th installment = paid regularly.
11th Installments due on = Aug ‘ 2011 ( Not paid )
12th installment due on = Sept ‘11( Not Paid)
Account slips to SMA -II

Case Study –IV : D.P Note & Collateral security as EM
An advance has been secured by collateral security by way of
Equitable Mortgage. The date of execution of document was
01.6.2011. Title deed was deposited by the party on 15.6.2011
and Equitable mortgage was created on 15.6.2011.
Banker’s preference for
 In case of Money Suit :
The Period of Limitation will start from = 01.6.2011
[ From the date of D.P Note ]
 In case Title Suit[ Mortgage Suit ]:
The Period of Limitation will start from = 15.6.2011
[ From the date of deposit of Title Deed ]

Case Study –V : Period of Limitation in CC Account.
A CC Limit was sanctioned and the date of document was
10.6.2010 . The borrower deposited Rs.1000 by his own hand
written on 20.03.2013. In the June’2013 quarter account turns to
NPA. In this case calculate the period of Limitation.
Period of Limitation shall start from = 31.12.2013
Document to be expired on = 31.12.2016

The Lien is the right of a person to retain his security or
goods until the Bank’s Debt is repaid.
Particular Lien
General Lien
Particular Lien:
 Particular Lien is u/s 170 of the Indian Contract Act.
 It is the right of a person to retain only those goods for which
he has rendered some service and his service charges have not
been paid.
LIEN

 Covered u/s 171 of Indian Contract Act.
 It is the right of creditor to retain any security which
comes into the hands of creditor in the normal course
of business , for all debts of the owner of the security.
 This General Lien can be applied by the followings;
a. Bankers,
b. Brokers,
c. Factors and
d. Attorneys of High Court,
provided there is no any agreement to the contrary.
 Bankers General Lien is an “ Implied Pledge”
GENERAL LIEN

• It does not create any charge over the assets of the
borrower.
• It is only an undertaking of the borrower wherein
he declares that assets charged to the Bank are
free and unencumbered are charged to the Bank
and undertakes not to sell, hypothecate, pledge or
mortgage them without Bank’s prior written
consent, until bank dues are repaid.
NEGATIVE LIEN

• Defined u/s 172 of Indian contract Act.
• It is a bailment of goods as security for repayment of a
debt or discharge of performance of a promise.
• Bailment as defined u/s 148 of the Act, is the delivery of
goods by one person to another for some purpose ,
upon a contract that they shall , when the purpose is
accomplished, be returned or disposed off as per
instructions of the person delivering them.
PLEDGE

• Bank may retain the goods towards the specific debt
including subsequent advances. The right does not
extend to other existing debts.
• In case of default, banker can sell the goods giving a
reasonable notice to the pledgor without
intervention of the court.
• Bank can file a suit for recovery of balance amount
after the sale.
• Bank’s rights on pledged goods cannot be affected
even by govt. dues like taxes.
• Bank can sell the goods even if the debt is time-
barred.
RIGHTS OF PLEDGEE
-BANKER-

LIEN PLEDGE
1. Right to retain goods &
Security
1. Bailment of Goods by the
borrower
2. Goods/Security can be retained
for specific /general debts
2.Retained only for specific debts
3.Right only to retain the
goods/security and not to sell
3. Not only right to retain but also
right to sell.
Difference between Lien & Pledge

 Hypothecation is a charge where ownership as well possession of the
goods remain with the borrower.
 Hypothecation is u/s SARFAESI Act 2002
 Types of securities covered under Hypothecation
MOVABLE ASSETS IMMOVABLE ASSETS
 Inventory Plant & Machinery
 Book Debts Furniture & Fixture
 Vehicle
 Livestock
 Borrower signs a hypothecation deed to hold the goods as agent/trustee
of the bank and to transfer the possession of goods as and when required
to do so.
 Banker can convert hypothecation into pledge in case of default, as per
SARFAESI Act through Bank sell the goods without intervention of court.
 Charge created over movable assets of a company should be registered
with the Registrar of Companies.
HYPOTHECATION

Working Capital Finance is sanctioned against
the hypothecation of Book Debts because
 Book Debts are not tangible assets and
advance is of clean nature.
 Contract is established between two parties
i.e. Bank and Borrower but in Assignment
three parties is essential feature .
Bank Borrower LIC
Assignee Assignor Trustee
Hypothecation of
Book Debts – Why ?

Hypothecation PLEDGE
1. No delivery of goods / property .
Possession with borrower
1. Bailment of Goods by the
borrower. It means actual or
constructive delivery of
goods/property to the
Pledgee by Pledgor.
2.Hypothecatee can sell the
property without intervention of
Court Under SAFAESI ACT 2002.
2. Not only right to retain but
also right to sell without
intervention of court
3. Safer Less Safer.
Difference between Lien & Pledge

An assignment means a transfer by one person of a right ,
property or debt to another person as security. Borrower
generally assign “ Actionable Claim to the Banker.
Assignment can be done only in writing signed by
transferor or his agent, clearly indicating his intention to
transfer.
The notice of assignment must be sent to the debtor,
otherwise the assignee may lose his right, if the debtor
makes the payment directly to the creditor.
Assignment is valid even if made without any
consideration.
Assignee can give a valid discharge for the debt and can
sue in his own name for recovery of the debt.
In case of absolute assignment, the assignor ceases to
have any interest in the actionable claim.
ASSIGNMENT

• A right of set-off is a right of the creditor to adjust debit
balance in one account with the credit balance in another
account .
• It is a legal right.
• Right of set-off can be exercised only when they are certain
and not contingent.
Example :
(A) The deposit balance in the name of guarantor cannot be set-
off to the debit balance in the name of borrower until a
demand is made to the guarantor and his liability becomes
certain.
(B) A term deposit which is yet to mature is not available for set-
off .
(C) A banker cannot retain the balance in a customer’s deposit
a/c so as to secure a future liability that may arise. Banker
has to give prior notice to the customer to exercise his right.
SET- OFF

Automatic Set –Off without notice under following
circumstances:
 On death/ insanity of the customer.
 On the winding up of a company.
 When a Garnishee order has been issued to the banker
 On receipt of notice that the customer has assigned the credit
balance to a third party.
 Set-off is available for time barred debts also.
AUTOMATIC SET- OFF

(A)U/s 58 of Transfer Of Property Act, Mortgage is defined as “
the transfer of interest in specific IP for the purpose of securing:
- The payment of Money advanced or to be advanced by way of
loan
- An existing or future debt
- The performance of an engagement, which may give rise to
pecuniary liability.
(B) Only IP can be mortgaged. Movable properties cannot be
mortgaged.
MORTGAGE

• Possession of the mortgaged property is not
delivered to the mortgagee.
• The mortgagor binds himself personally to pay the
mortgage money.
• On default, the mortgagee can proceed personally
against the mortgagor or sell the mortgaged property
after obtaining order from a Court.
• Mortgagee cannot get any payments out of the rents
and fruits of the mortgaged property nor can he sue
for Foreclosure I.e. to get the property permanently
in his own legal right.
SIMPLE MORTGAGE

Conditions
MORTGAGE BY CONDITIONAL SALE
Mortgagor ostensibly ( apparently) sells
the property on the condition
 On default of payment of mortgaged money on a certain date, the sale shall
become absolute or final
or
 On payment of mortgage money, the sale shall become void
or
 On payment of mortgaged money mortgagee shall retransfer the property to the
mortgagor.
 Possession of the property is not passed on to the mortgagee.
 On default of payment of mortgaged money , the mortgaged property shall be
treated as sold to the mortgagee [ after applying to the court for getting the
required decree.

USUFUCTUARY MORTGAGE
The mortgagor
delivers or binds
himself to deliver the
possession of the
property to the
mortgagee .
Mortgagee can only retain the
possession as long as the mortgage
money is not repaid. Mode of
repayment is
 Rent and Profit accruing from the
Property
 Mortgagor is not personally liable
for payment of mortgaged money
 Mortgagee cannot sue the
mortgagor in person fro
repayment debts or can he sue fro
sale of mortgaged property .

• The mortgagor delivers or binds himself to deliver the
possession of the property to the mortgagee .
• The mortgagee is authorised to retain his possession over the
property until the payment of mortgage money is made and
to receive rents and profit accruing from the property and to
appropriate the same in lieu of interest or repayment of the
mortgage money or both.
• Mortgagee cannot sue the mortgagor in person fro repayment
debts or can he sue fro sale of mortgaged property .
Mortgagee can only retain the possession as long as the
mortgage money is not repaid.
USUFUCTUARY MORTGAGE

Under equitable mortgage, a person delivers to
a creditor or his agent, documents of title to
immovable property with the intent to create a
security thereon, the transaction is called a
mortgage by deposit of title deed.
EQUITABLE MORTGAGE

• It can be created in the towns notified by the State govt. for
this purpose.
• It is effected by merely delivering to the creditor, document of
title to IP.
• EM can be created even in case of time barred debt.
• It must be done with the intention of securing a debt or even
to cover future debt.
• It must be done with the intention to secure a debt or even a
future advance. If the mortgagor can prove that he deposited
the title deed for some other purpose and not for creating
mortgage, the mortgage will be null and void.
EQUITABLE MORTGAGE

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