Mortgages and Charges

Key Concepts
1) Movable & Immovable Property: a) Movable Property: Anything other than land that can be the subject of ownership, including stocks, money, notes, patents as well as intangible property. Also referred to as Personal Property b) Immovable Property: Land and ordinarily anything erected on, growing on, or affixed to it including buildings and crops. Also referred to as Real Property 2) Charge: A form of security for the payment of a debt or other obligation that does not pass title of the property or any right to its possession to the person to whom the charge is given.s a) Parties to Charge i) Chargor: The company granting the charge ii) Chargee: The person in whose favor the charge is granted b) Forms/ Types of Charge i) Fixed Charge passes legal title to certain specific assets and the company loses the right to dispose off the property. ii) Floating Charge an equitable charge on (usually) all the assets on terms that the company may deal with the assets in the ordinary course of business. Characteristics are (1) It allows companies to borrow even though they have no specific assets, such as freehold premises, which they can use as security. (2) Corporations can use floating charges and it does not affect their ability to sue the underlying asset as normal. (3) it becomes crystallized or frozen into a fixed the charge only if the company fails to repay the loan and/or goes into liquidation 3) Bailment: A voluntary transfer of the possession of goods by the owner to another person, who is not his servant, upon a trust or under a contract that such other person shall do something with or to the goods, or merely hold them and return them to the owner, or deliver them to his order when the purpose for which they were transferred has been accomplished. Characteristics are a) Delivery actual or constructive of goods b) By the owner c) To another person d) For specific purpose e) On condition that the goods shall be returned 4) Pledge: A pledge is a special form of mutual benefit bailment by which one person transfers possession of some articles to another to secure the payment of debt or the performance of a promise. Characteristics are a) Based on Bailment b) Transfer of possession of goods 5) Hypothecation: A transaction whereby money is borrowed by the debtor (owner of the goods) on the security for the movable property without parting with the possession of the movable property. 6) Mortgage: A mortgage is the transfer of interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to pecuniary1 liability. Relates to immovable property. a) Characteristics are i) Termination of the mortagees interest upon the performance of the obligation secured by the mortagage;
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Pecuniary: Relating to money

ii) The right of the mortagee to enforce the mortgage by foreclosure upon the mortagors failure to perform; and iii) The mortgagors right to redeem or regain the property. b) Kinds i) Equitable Mortgage: One that does not meet the legal requirements of a mortgage and must be accompanied by an agreement between all parties verifying its legality. (Has one or more steps missing in its completion) ii) Legal Mortgage: One that fulfills all legal requirements for a mortgage. Legal mortgage occurs when the owner gives legal title of property to a creditor to secure payment of the owners debt. 7) Lien: Lien is the right of retaining goods belonging to another until a debt due to the person retaining the goods is satisfied. a) Kinds: i) Possessory Lien: Can be exercised only by a person in possession of goods ii) Maritime lien: Right specifically binding a ship, her furniture, machinery, cargo and freight for the payment of a claim based upon the maritime laws iii) Equitable lien: A equitable right conferred by law upon one man to a charge upon the movable or immovable property of another until certain specific claims have been satisfied

Concepts of Mortgages and charges

Restriction on Commencement of business (Public Company) u/s. 146 A public limited company cannot commence its business or exercise its borrowing powers unless:1. The Registrar has issued a Certificate for Commencement of Business2 that will be conclusive evidence that the company is so entitled; 2. Any contract made by a company before the date at which it is entitled to commence business shall be provisional only and shall not be binding on the company. Exercise of Borrowing Powers 1. Company with Trading Object (Profit-Making) a. Can Exercise Borrowing power b. Even if not mentioned in its objects 2. Company without Trading Object (Non-Profit Making) a. Can Exercise Borrowing Power b. Only if explicitly mentioned in its Objects Memorandum.
Remember, Company not being entitled to commence, can not exercise its borrowing powers. Whenever, a company obtains a loan and provides its assets to the lender as a security for the repayment of loan or other obligations, this activity is called the creation of the mortgage/charge on the assets of the company The particulars of the charge are required to be reported to the Registrar concerned within 21 days from the date of its creation along with relevant documents. Similarly, in modification in the particulars of the mortgage/ charge is also required to be reported to the Registrar within 21 days of modification. As soon as the loan is repaid, it is the responsibility of the company to get the mortgage/charge vacated. The process is called satisfaction of the mortgage/charge to the registrar is 21 days from the date of its satisfaction
Certificate of Commencement u/s. 146: Certificate required to be obtained by a public company before it commences any commercial transactions.
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Registration of Mortgages and Charges

What mortgages and charges must be registered? [U/s. 121] Section 121 of the Companies Ordinance lists the following mortgages and charges to be registered under the Companies Ordinance 1984, mortgage or charges 1. for the purposes of securing any issue of debenture3; or 2. on uncalled share capital4 of the company; or 3. on any immovable property wherever situate, or any interest therein; or 4. on any book debts5 of the company; or 5. not being a pledge, on any movable property of the company; or 6. a floating charge6 on the undertaking or property of the company, including stock-in-trade; or 7. on a ship or any share in a ship; or 8. on goodwill, on a patent or license under a patent, on a trade mark, or on a copyright or a license under a copyright; or 9. or other interest based on agreement for the issue of any instrument in the nature of redeemable capital; or 10. or other interest based on a Musharika agreement; or 11. or other interest based on a hire-purchase or leasing agreement for acquisition of fixed assets; Which documents are required to be filed for registration of mortgage or charge? [U/s. 121] Form 10 containing particulars of mortgage/charges etc. Copy of instrument(s) creating the mortgage or charge, An affidavit to the effect that the copy(ies) of the instruments(s) is/are the true copy(ies) Filed with Registrar within 21 days after the date of its creation. What do instrument and evidence mean in this chapter? An instrument is usually a document evidencing creation of mortgage or charge which should be in legible form but it can also exist in electronic form. Evidence means to provide proof of the existence of something. What happens when the application for the registration reaches Registrar concerned? If the document is acceptable, the registrar concerned takes details from it to produce a certificate of registration of mortgage or charge. The registrar issues certificate of registration of mortgage or charge, and scans and records the particulars in the register. What if registrar concerned has cause to query the application?
Registrar will contact the presenter with any queries. If the form needs to be corrected, it must be done within the 21 days time limit.

What if the charge is not registered in time? If a charge is not registered in time, then it is void against the liquidator or administrator and any creditor of the company. This means that the debt for which the charge was given will remain payable, but it will be unsecured.
3 Debenture: Is an instrument issued by a company as evidence of a debt or other obligation. It includes debenture stock, bonds and any other securities of a company, whether or not it forms a charge on the assets of the company. 4 Uncalled Share Capital: Balance owing for shares that are issued partly paid. 5 Book Debts: are debts that in the ordinary course of a companys business are commonly entered in its books 6 Floating Charge: A charge that does not affect the assets charged until some event crystallizes the charge fixing it to a certain point in time.

Can a charge be registered out of time? Only the Commission can grant an extension of time for registration of a charge that was not received in time. The normal time limit is 21 days from the date of creation of the charge. What must a company do if it acquires property that is already charged? If the charge is of a type which the company would have hat to register if it had created it, then Notify registrar it has acquired property Form 11 Particulars of mortgage or charge subject to which property has been acquired. Certified copy of any instrument that created or evidenced the charge Within 21 days after the company completed the acquisition of the property What rights has the chargee? If the company does not send a charge for registration, then the charge or some other interested person can register the required documents. The charge must notify the appointment with the registrar concerned within 15 days using Form 18 Registrar will then enter this in the register of charges. On ceasing to act, a receiver or manager must notify the registrar concerned within 30 days using form 19. Registrar will then enter the fact in the register of charges.

Modification of Mortgages and Charges

What is modification in a mortgage or a charge? Modification is charge in mortgage or charges i.e. change in: Amount of mortgage/charge (enhancement or reduction in amount). Charge in particulars of property (excluding or including certain property or asset). Variation in the rate of markup or interest. Extension of time for repayment on period of maturity (Rescheduling). Charge in other terms and conditions. Which documents are required to be filed for modification in a mortgage or charge? Form 16 containing codification in mortgages, charges etc. Certified copies of instruments creating the mortgage or charge. Affidavit that copies of the instruments are true copies. Within 21 days of its modification Whether partial payment is treated as partial satisfaction or modification of a mortgage or charge? Partial payment is modification of a mortgage or charge and cannot be treated as satisfaction. The particulars of the modification are filed on form 16.

Rectification of Mortgages and Charges

What are the grounds of rectification of register of mortgages or charges? Omission to file charge within the prescribed period. Failure to file modification of charge Omission to intimate payment or satisfaction Omission or mis-statement of particulars.

Who is empowered to order for rectification of register of mortgages or charges? The Commission is empowered to order for rectification of register of mortgages or charges. Which document should be enclosed with the petition for rectification to be filed before the Commission? Copy of Form 10, 11, 13, 16 or 17 as the case may be. Copies of instruments relating to creation, modification, satisfaction etc. Copy of the resolution, if any Observation memorandum, if issued, of the registrar concerned. Affidavit verifying the contents of petition to be true. Which documents should be filed with the registrar concerned after passing or order by the Commission? Copy of Form 10, 11, 13, 16, or 17 as the case may be. Copies of instruments relating to creation, modification, satisfaction etc. Copy of the order of the Commission. Affidavit that copies of the instruments are true copies.

Satisfaction of Mortgages and Charges

What should company do when the charge is paid off (or satisfied)? The Company needs to inform registrar concerned that a charge has been fully satisfied. However, it is obviously in the companys own interest that investors and lenders know that all of the debt has been paid off. Therefore, it would be in the interest of the company if an NOC is obtained from mortgagee regarding payment of (or satisfaction of) the mortgage or charge. What if charged property ceases to be charged or to belong to the company? As with fully paid-off charges, the company needs to inform registrar concerned that its property has been released from a charge or that the property no longer belongs to the company. It is obviously in the companys interest that potential investors and lenders should know. The company shall file a memorandum of satisfaction of mortgage or charge in Form 17 with or without NOC obtained from the mortgagee. Additional Provisions (Just for Overview & Concept) 125. Register of Mortgages and charges 126. Index to Register of Mortgages and charges 127. Certificate of Registration 128. Endorsement of Certificate of Registration on debenture or Certificate of Debenture Stock. 130. Copy of Instruments creating mortgage or charge to be kept at registered office 133. Power of registrar to make entries of satisfaction and release in absence of intimation from company 135. Companys Register of Mortgages 136. Right to inspect copies of Instruments creating mortgages and charges and companys Register of mortgages