Creation of security –Various types of

borrower entities
 DIFFERENT TYPES OF BORROWERS
• Individuals ( including Joint Individuals )
• Sole Proprietor Firms
• Partnership Firms – Registered / Un-registered
• LLPs
• Joint Hindu Family / HUF (Hindu Undivided Family)
• Limited Companies ( Public and Private Ltd. One Person Company
)
• Co-operative Societies
• Clubs / Associations / Schools
• Trusts ( Registered / Un-registered )
 INDIVIDUALS AS BORROWERS
• Proper Identification proof and KYC norms to be verified before
execution. Any mis-match in documents regarding name, father’s /
husband’s name , address must be properly examined and satisfactorily
verified
• Confirm whether competent to contract – should not be minor (below
18 years of age), not of unsound mind, not having been declared
undischarged insolvent or a lunatic.
• In case of Joint execution by individuals, appropriate operational and
disposal instructions of securities, if any , must be clearly obtained
• Where the borrower is illiterate, Thumb impressions (Right in case of
Male and Left for female ) must be obtained, along with a letter duly
attested by a literate person( known to the borrower) / independent
witness, that the contents of the document/s being executed have been
explained and fully understood by the illiterate borrower/s in his / her
presence. Similar procedure to be adopted in case of blind person/s
also.
 INDIVIDUALS AS BORROWERS

• In case the documents are in a language other than that of the

borrower/s, a letter in vernacular duly signed / with thumb
impression to be obtained.
• Similar precautions must be taken in case of pardanashin ladies also.
• Banks now also maintain a separate Attendance register in which the
signature/s of such borrowers and the independent witnesses are
obtained and kept on record.
 SOLE PROPRIETORSHIP FIRMS
• In case of sole proprietorship firms, they are, for all practical
purposes, individual borrowers, except the fact that they run their
business in the “pseudo” name of the firm.
• Execution of documents have to be done by the sole proprietor in
the firm’s name ( with rubber stamp) as well as in their individual
capacity
• Sole Proprietorship letter must be obtained as an undertaking that
they are sole owners of the business, and fully responsible for all
acts individually too.
• Proper proof of registration of the sole proprietorship should also be
obtained (such as Sales Tax Registration, Shops and Establishment
Licence, Lease deed of business, etc.)
 PARTNERSHIP FIRMS
• Partnership firms are governed by Indian Partnership Act, 1932
• Registration of partnerships is not compulsory, however, registration is
necessary for the recovery of dues of a partnership firm, and hence, banks
generally insist on registration of partnership firms for safety of their dues
• Any partner can bind the firm for borrowing against its moveable assets,
however, banks insist on execution of borrowal documents by all partners
in their individual and joint capacity.
• Banks must scrutinise the partnership deed thoroughly to see if there are
any restrictive clauses.
• Banks must keep track of the Partners, since any new induction,
resignation, retirement, or death of partner shall dissolve the existing
partnership firm. All precautions must be taken to protect the Bank’s
interest in such situation/s.
• Peculiarity of partnership is Minors can be admitted to the benefits of a
Partnership firm. It is necessary to bind such a Minor on attaining majority
by reviewing the borrowal account/s on his attaining majority, and getting
the documents executed by all major partners again to make him liable. (S.
30 of Indian Partnership Act, 1932)
 PARTNERSHIP FIRMS
• Steps to be taken in case of dissolution of Partnership firm :
• break the account immediately on receipt of information of
happening of the dissolution for Crystallisation of liability of all
then existing partners.
• Review the account with a request letter from all the partners of the
reconstituted firm, and obtain approval of sanction of borrowal
limits for reconstituted partnership firm.
• Obtain all security documents signed by all partners of reconstituted
partnership firm, as well as an authorisation letter to clear the dues /
balance of old partnership firm, and debit / transfer the same to the
reconstituted partnership firm.
• Obtain a balance confirmation letter and close the borrowal
account/s of the old partnership, and transfer the balance to the new
account/s of the reconstituted partnership firm
 JOINT HINDU FAMILY / HINDU
UNDIVIDED FAMILY (HUF)
• HUF is a peculiarity of Indian set-up. Karta, who is the senior most
male coparcener of HUF, has the full authority to manage all the
affairs of the HUF for the benefit of the HUF.
• Karta is authorised to borrow against the HUF property for carrying
on any activity / business for the benefit of the members /
coparceners of HUF.
• Banks obtain a HUF letter signed by all the male coparceners of the
HUF, which include minor coparceners. As per Hindu law, even a
male in the womb of the mother has a share as coparcener.
• Banks have to keep reviewing the position of HUF borrowal
accounts, and obtain balance confirmation letters each time a minor
male coparcener attains majority in order to bind that male
coparcener’s share in the HUF. Hence, proper diary notes need to be
maintained in case of such HUF borrowal accounts.
 LIMITED COMPANIES AS BORROWERS

• Limited Companies are registered with the Registrar of Companies

• MOA, AOA and Certificate of Incorporation & Certificate of
Commencement of Business (in case of Public Limited Companies)
are important documents
• Under Section 180 of the Companies Act 2013, the powers of the
company (Public or Private) to borrow may be exercised by its
Board of Directors by means of resolutions passed at a meeting and
not by circulation. All advances granted to a company must,
therefore, be supported by resolutions so passed.
• Sec.180 of the Companies Act 2013( the Act) deals with the
borrowing powers of the company. It provides that a public
company or a private company can borrow up to the limit of paid
up capital and free reserves of the company without the approval of
shareholders in general meeting. If BODs wants to cross the limit,
then it has to seek prior shareholders consent.
MAJOR POINTS – PRIVATE AND
PUBLIC LIMITED COMPANIES
S.N Basis Public Company Private Company

1 Minimum number of members 7 2

2 Maximum numbers of members No limit 200

3 Name Word Public Ltd Word Private Ltd
used after name used after name
4 Commencement of business Not required Not required
5 Invitation to public Invites public to Cannot invite public
invest in to invest in
shares/securities shares/securities
6 Transfer of shares There is no There is restriction
restriction on transfer
7 Minimum share capital No minimum No minimum capital
capital
 LIMITED COMPANIES AS BORROWERS
• The Bank needs to obtain Certified copies of MOA, AOA, Certificate of
Incorporation, along with a certified copy of the Board resolution
authorising the Company to borrow up to a specified amount / limit, as
also authorising the Director/s/ Executives to sign, execute and do all
necessary acts in furtherance thereto, including affixing of the
Company’s Common seal (which should be countersigned by the
authorised persons) if the common seal is available as per AOA of
the company on the documents executed on behalf of the Company.
• The above documents must be certified by the Chairman of the meeting
where such resolution has been passed or any of the Directors authorised
therein or whole-time Company Secretary of the Company.
• The Bank must also obtain a Certificate from the Company’s Statutory
Auditors or the Whole-time Company Secretary certifying that the total
borrowing limits of the Company(excluding short term borrowing like
CC limit etc), including that in the proposed resolution do not exceed the
statutory limits as per Section 180 of the Companies Act (in case of
Public Limited Companies as well Pvt Ltd Co.)
• Types of charges to be registered-Companies act 2013, section 77: The
companies are required to register ALL TYPES OF CHARGES with the ROC
within 30 days of its creation
o Within or outside India
o On its property or assets or any undertakings
o Whether tangible or otherwise, and
o Situated in or outside India
• Registration of charges identifies the assets which are subject to the
charge and operates as constructive notice. It makes the charge
effective against each and every person including the liquidator. If a
mortgage or charge, which requires registration, is not registered, it
does not mean that the transaction is altogether void or the debt not
recoverable. The only consequence is that the security created becomes
void against the liquidator and other creditors.
 LIMITED COMPANIES AS BORROWERS
• The omission to register charge does not prejudice any contract or
obligation for repayment of the money secured by such charge, and
where the charge becomes void for want of registration, the money
secured by it immediately becomes payable. A subsequent charge in
respect of which particulars of charge are registered will have priority over
a prior charge in respect of which such particulars are not registered, even
if the subsequent charge-holder had notice of the prior charge.
• A floating security is an equitable charge on the assets for the time being of
a going concern. It attaches to the subject charged in the varying condition
in which it happens to be from time to time. An essential term of such
charge is that the security provider may continue to use its assets in the
ordinary way until the charge is crystallized, when it fastens on the
underlying assets. The charge, so to say, is kept latent and dormant, till it
crystallizes by the happening of some event which fixes the charge, e.g.
liquidation / bankruptcy / insolvency of the security provider or the
appointment of a receiver for taking possession of the charged property, or
default by the security provider / borrower, which would entitle its holder
to take action for the enforcement of the security.
 LIMITED COMPANIES AS BORROWERS
• Additional period to register the charge: As per section 77 ROC may on
application by the company, allow the registration of charge within 300
days 30 days + additional period of 270 days) Different forms have been
prescribed for different charges. CHG-1 is required to be filed for creation
of charge supported by a declaration in form CHG-10 from the CS or
Director. The aforesaid forms are required to be digitally signed on behalf
of the company and the charge-holder. After expiry of 300 days application
for condonation of Delay is to be submitted to the Regional Director in
form CHG-8. ROC issues certification of registration in for CHG-2.
• As per Section 78, if the company fails to file the form for registration
within 30 days, the person in whose favour charge is created will file the
form for creation of charge.
• If any term or condition or the extent of operation of any charge registered
by the company under the Companies Act, 2103 is modified, then
particulars of such modification should be filed with the concerned ROC
(as per prescribed form CHG-3). The time limit for filing particulars or
modification of charge is the same as for the original charge.
 LIMITED COMPANIES AS BORROWERS
• The following are examples of what would constitute ‘modification’ : :
• Security created for enhanced limit of credit facility.
• Further charge for the same loan or credit facility by way of additional
security on different property.
• Release of a part of security from the operation of the charge.
• Inclusion of different type of loan or credit facility within the overall limit
(provided original charge has not been registered for overall limit as such
without giving break up).
• Addition of another creditor as a charge-holder by modifying the original
document of charge, with or without any additional credit limit (provided
the original charge was registered as a joint charge and names of all
creditors have been mentioned).
• FITL does not need registration of modification of the charge
 LIMITED COMPANIES AS BORROWERS
• Change in chargeable rate of interest (other than Bank rate)
(provided the original forms specified the rate of interest).
• Change in the terms relating to the maintenance of margin or in the
period of repayment of a loan or any other change in repayment
terms (provided these terms are mentioned in the original forms).
• Change in the nature of security in respect of a charge already
created (eg. Equitable mortgage to legal mortgage, hypothecation to
pledge)
• Handing over title deeds by the mortgagee to another creditor for
continuation of security.
• Assignment of a charge.
• Upon satisfaction of debt / charge, Form CHG-4 required to be
filed. The company is required to file CHG-4 within 30 days of
satisfaction in full of any charge. If the company fails to file the
form CHG-4 within 30 days of satisfaction of the charge, the
company have to go for condonation of delay for satisfaction of
charge.
 COOPERATIVE SOCIETIES
• A Co-operative Society may be registered under the state-wise
enactments governing cooperative societies, or under the Multi-State
cooperative Societies Act, 2002. The extent and manner of exercise of
the borrowing powers of a society may be found in the respective
Acts, Rules/Regulations there under, or in the Bye-laws of such
Society. The purpose of the financial assistance should also fall within
the objects of the Society. In several cases, permission of the relevant
Registrar of Cooperative Societies may be required for the availing of
the assistance/creation of security. The documents would require to be
executed in accordance with the resolution(s) passed by the governing
body/managing committee members of the Society. The documents
would be required to be executed with proper authority.
 CO-OPERATIVE SOCIETIES
• A society registered under the Societies Registration Act, 1960, is
established for the promotion of literature, science or fine arts, or for
the diffusion of useful knowledge or of political education or for
charitable purposes. Such a society is governed by a governing body
(governing council, directors, committee, trustees or other body).
• In most states, the Memorandum of Association and rules and
regulations governing the functioning of the Society are required to
be filed with the Inspector General of Registration/Registrar of
Societies/Charity Commissioner. However, such registration may
not be compulsory.
• The extent and manner of exercise of the borrowing powers of a
society may be found in the Memorandum of Association of the
society. The purpose of the assistance should also fall within the
objects of the society. The documents would be required to be
executed with proper authority, i.e. resolution passed at a properly
convened meeting of the Executive Committee of the Society.
 CLUBS, ASSOCIATION, SCHOOLS

• Such bodies, if not incorporated, have not contracting powers as

they have no legal entity.
• They can neither be used nor are the individual members of such
institutions liable for any credit facilities, as long as the members
signing the cheques do so in their representative capacity and not in
their personal capacity.
• No limit should be sanctioned without prior approval of the
controlling authorities. In such a situation, the bye-laws of the above
institutions should be studied with a view to ascertaining their
borrowing powers, the purpose for which a loan can be raised by it,
the powers of the managing committee to charge the assets of
institutions etc.
• A suitable resolution should be passed by the Executive Committee
duly elected in this regard.
 TRUSTS AS BORROWERS
• In case of advances lending to a Trust, documents should be
executed as per the resolution passed by the Managing Committee
of such Trust in terms of the rules/provisions governing the
respective institutions/bodies.
• Bye-laws / constitutional documents of such Trusts should permit
borrowings for specified purposes and creation of security.
• In case of Public Trusts, Charity Commissioner’s permission may be
required for borrowings/creation of security. It should be noted that
the Trustees are themselves owners of the properties of the Trust in
name only, as they are holding the same for the benefit of others. As
such, the Trustees’ powers and authorities are totally restricted by
the provisions of the Trust Deed/Agreement. The Trustees cannot
delegate their functions, even to a co-trustee, unless the
Deed/Agreement provides for the same; the delegation is in the
regular course of business, or is absolutely necessary; or if the
beneficiary of the Trust, being competent to contract, consents to the
same. In the absence of the above, it is advisable to have all Trustees
sign the documents.