Documentation and Legal

Aspects

LEGAL ASPECTS OF LOAN

DOCUMENTS
Documentation is one of the most important
elements of the lending operation of a banker.
For realization of the loan amount together with
the other dues and repayable amount, the
document taken as security, from the borrower,
or/and, the guarantor, for repayment of loan
amount together with the other dues, is the
main basis of the claim of the banker and thus
realization of the Bank dues depends to a large
extent upon the precision and completeness of
the documents obtained from the borrower.

DOCUMENTATION

The process of obtaining proper

documents and completion of the
necessary formalities
connected therewith is called,
"Documentation".

NEED FOR "DOCUMENTS

The documents are necessary to be procured for the following
reasons:i. to identify the borrower;
ii. to identify the security;
iii. to have a written evidence of the transactions of lending
made by the bank;
iv. to ensure due repayment of the loan by the borrower/or
guarantor;
v. to entitle the bank to take legal steps for recovery of the loan,
in the
event of nonpayment by the borrower/or guarantor;
vi. to create a valid and effective security in favour of the bank
and to create charge on security;
vii in the absence of a document capable of being legally
enforceable the bank would find it hard to prove and establish
before a court of law that the amount was lent and the same has
not been repaid;

IMPORTANCE
Any document is obtained with an ultimate
objective of securing an advance by filing
a suit in the court of law / designated
authorities.
it procures a written evidence of
transaction and hence cannot be disputed.
No evidence is admissible if the oral
agreement sought to be proved is
inconsistent with the terms of written
instrument

Important Points to be borne in mind in Execution of Documents

i. The document should mention the date, month

and year of execution: for
determining the period of limitation;
ii. Document must mention Place of
execution: This is for determining the
jurisdiction of courts in case of disputes and for
purposes of payment of proper stamp duty, according
to the law applicable to particular place.
iii. Details of the Security/Collateral Security
must be mentioned
iv. Stamping
v. Registration

TYPES OF FACILITIES
The prospective may approach the Bank
for following types of facilities.
Borrowing: This is also known as fund
based facilities. Loans, Cash Credits,
Overdrafts, Bills Purchased, Bills
Discounting, Export Bills, Import Finance,
Hire Purchases etc.
Non- Borrowing: They are also known as
non-fund based facilities. Guarantees,
Letters of Credit, Bills of Exchange, Bill
Acceptances. Here the Bank does not lend
money ab initio but the liability of the
Bank is contingent.

The charge is of three types

Fixed Charge:
This covers a legal on specific asset of
the company and the company looses
right to sell the asset without paying
dues.
Floating Charge:
This is an equitable charge created on
certain property of the company, which is
continuously changing i.e. .Stock in
Trade.
Pari Passu Charge:
This charge is created in favour of several
creditors with priority.

Types of securities
Primary Security:- Hypothecation of
assets created out of bank finance
Collateral security :- Mortgage of
land Third party guarantee, security
by way of deposits etc

TYPES OF BORROWERS
Execution of documents depends on
(a) Constitution of the Borrowers
(b) Legal entity of the Borrower and
(c) Legal capacity of the Borrower.

Proprietory firms:
An individual executing the documents in
2 different capacities binding the firm as
well as personal security of the proprietor.

Trust:
A Trust can borrow only in terms of
provision of Trust Deed with proper
resolution and all the Trustees must
sign the documents. A charge on a
Trust property (mortgage) cannot be
created unless permitted by the
Charity Commissioner. Trustees are
not personally liable.

HUF:
Document must be signed by the Karta as
well as all the major co-parceners and
advance must be granted upon
undertaking that (i) the purpose of
advance is to run family business only (ii)
Coparceners are jointly and severally liable
and (iii) they will be liable even after
separation of HUF unless it is informed to
the Bank.

Partnership firm
Partnership is the relation between persons who have
agreed to share the profits of a business carried on by
all or any of the acting for all.
Partners collectively are called a 'firm'. A partner is the
agent of the firm for the purpose of the business of the
firm and can bind the firm, which authority is called
implied authority. Every partner is liable, jointly with all
the other
partners and also severally, for all acts of the firm
done or instruments executed while he is a partner,
provided the act is done or the instrument is executed in
the firms name and relates to the kind of business
carried on by the firm.

All documents of security/loan, in case of

partnership firm must be signed by the partner
concerned as a partner of the firm and also in
their individual capacity.
By obtaining the signature in both the
capacities as indicated above, the banker will
have a right set off on any private account of the
partner in respect of the firms debt. Additionally
the bank will have a right to prove concurrently
against the firm assets as well as the property of
each partner in the event of insolvency.

Limited Companies: It is a separate

Legal entity managed by Board of
Directors. Before granting loan to Limited
Company, following documents are to be
examined:Memorandum of Association: It
contains name, address of Registered
office, objective, capital, liability etc.
Banker should verify the objectives
thoroughly well.

Articles of Association:
It contains details of internal rules
and regulations of the Company, the
borrowing powers, seal clause,
powers of directors etc. The directors
can borrow on behalf of the company
in conformity with the provisions of
MOA vide this AOA.

Certificate of Incorporation:
This is the birth certificate of the
Company given by Registrar of
Companies. Certificate of
Commencement of Business is not
compulsory for a Private Limited Co.
Nevertheless, compulsory for a Public
Limited Company without which a
Company cannot borrow money.

Search:
The search should as a rule is taken
before entertaining any advance
proposal to know whether there is
any charge already created on the
assets of the company

stamping of documents
Amount of Duty: This must be in accordance with
the law prevailing in the State where the document is
first executed.
Kind of Stamps : Normally these are either
general stamp papers or adhesive/special adhesive
stamps. In normal documents like hypothecation or pledge
both kinds can
be used, but special adhesive stamps are affixed only by
the Stamp Office and cancelled by them before execution.
A promissory note bears a revenue stamp. For bills of
exchange and share transfers there are different kinds of
special adhesive stamps. Kinds of stamps differ in
different states in accordance with the prevalent rules

Writings on a stamp
paper
If general stamp papers are
used for a document, each paper
should have some substantial part of
the document written or typed on it.
The action of affixing general stamp
papers on printed forms is unlawful.
Pasting of stamps with the printed
documents is not proper.

Time on stamping and

execution
A document should be stamped before
it is
executed. The date of execution should
always be subsequent to the date appearing
on the stamp.
Place of stamping and execution: A document
should bear the stamp of that State in which it
is first executed. If any executant is in another
State, the excess duty, if any, in the other
state is to be paid there.

Cancellation of Stamps
A stamp must be cancelled in
such a way which would ensure
that it would not be used again.
Special adhesive stamps are
cancelled by stamp office.
Revenue stamps on Promissory
Notes and Other adhesive stamps
should be cancelled as
stated above.

Consequences of not stamping a

document according to law
As to the consequences of not properly stamping,
documents are divided into two classes:i. Those documents which are not admissible in
evidence at all if any of the rules is violated. These
are (a) Promissory Notes, (b) Bills of exchange and
(c)
Instrument chargeable with a duty of _____ paise.
(These are different states).
Inadmissible in evidence means they cannot be
produced and relied upon in any suit for
establishing any right there under.

Adjudication and impounding

1. Any document can be presented to the Stamp

Office for adjudication of stamp duty thereon (i)
before execution or (ii) within one month of the date
of execution.
2. The stamp authorities certify the document to be
properly stamped on charging
adjudication fees
and deficit duty, if any. Such adjudication certificate
is
conclusive that the instrument is properly stamped.
3. Stamp authorities have power to impound any
instrument coming before them.

Registration of charges
1. Mortgage of immovable property
i.e. land ,building etc
2. Registration of charge with ROC
when finance is extended to the
company

Time limit for registration of a Charge

A charge created by a company is

required to be registered with the
Registrar within thirty days of its
creation in such form and on
payment of such fees as may be
prescribed

PARTICULARS OF CHARGES

The following particulars in respect

of each charge are required to be
filed with the Registrar:
(a) date and description of
instrument creating charge;
(b) total amount secured by the
charge;
(c) date of the resolution authorising
the creation of the charge; (in case
of issue of secured debentures only);

(d) general description of the property

charged;
(e) a copy of the deed/instrument
containing the charge duly certified
or if there is no such deed, any
other document evidencing the
creation of the
charge to be
enclosed;
(f) list of the terms and conditions of
the loan; and
(g) name and address of the charge
holder.

Condonation of delay by Registrar

The Registrar may on an application
by the company allow registration of
charge within three hundred days of
creation or modification of charge on
payment of
additional fee.

Modification of the Charge:

U/S 135, any modification in charge,
must be filed within 30 days from the
date of modification. This may be
change in rate of interest, terms of
margin, additional security, amount
of limit etc.

CONSEQUENCES OF NON-REGISTRATION OF CHARGE

According to Section 77 of the Companies

Act, 1956, all types of charges created by
a company are to be registered by the
ROC, where they are non-compliant and
are not filed with the Registrar of
companies for registration, it shall be void
as against the liquidator and any other
creditor of the company. This does not,
however, mean that the charge is
altogether void and the debt is not
recoverable..

GIST OF E-FILING UNDER CHARGE MANAGEMENT

S.No.
E-Form Purpose
1 CHG-1 Creating or modifying the
charge
(for other than Debentures)
2 CHG-2 Certificate of registration
3 CHG-3 Certificate of modification
of
charge
4 CHG-4 Intimation of the
satisfaction to
the Registrar

5 CHG-5 Memorandum of satisfaction

of
charge

9 CHG-9 Creating or modifying the

charge in
(for debentures
including rectification)
10 CHG-10 Application for delay to
the
registrar