Ch7 Mortgages & Charges - Sheet1 Flashcards
Borrowing Powers
Borrowing powers to be part of memorandum [Section 30]
The memorandum and articles of a company is deemed to include (implied) power to enter into any arrangement for obtaining loans, advances, finances or credit, and to issue other securities not based on interest for raising resources from a scheduled bank, a financial institution or general public.
Restriction on borrowing powers [Section 19]
A public company shall not exercise any borrowing powers unless its documents have been accepted and registered by the registrar for commencement of business.
The Act does not prescribe any maximum amount that a company may borrow; however, articles may prescribe such limits.
Power to pledge/mortgage/charge company’s assets as security
A company having borrowing powers has also the power to pledge or mortgage any of its property or create a charge on its assets as security for the borrowing.
Manner of exercising borrowing powers
The articles may provide the manner in which a company can exercise its borrowing powers e.g. in general meetings or power vested to the board of directors. Where borrowing powers are vested to the board, the articles may fix the limit of the borrowings. The directors may also delegate such powers to a committee or to an officer of the company.
Ultra vires borrowing
If a company borrows money without or in excess of the powers conferred on it by memorandum, the borrowing is ultra vires the company. Any borrowing which is intra vires the company but beyond the limit prescribed by articles for the board, the borrowing is ultra vires the directors.
Forms of borrowings
Borrowing by issuing debentures
Effectively, any security issued by a company to raise capital, other than a share, is a debenture. A public company may issue debentures to public or may issue debentures to any persons privately. Debentures may be secured or unsecured.
Borrowing from credit institutions
Credit institutions include the commercial banks, investment banks, non-banking finance companies, modaraba and all other business organisations providing facilities for loan against the interest or sometimes against participation in profits of the company as per agreed terms. These loans too, usually are secured against the assets of the company.
Borrowing from other sources
Other sources for obtaining loans may include the sponsors or controlling shareholders of the company. This type of financing is usually unsecured, however, it may be secured against the assets of the company.
Forms of Security
Pledge
The Contract Act, 1872 defines pledge as “a bailment of goods as security for the repayment of a debt or performance of a promise”. The pledge relates to moveable assets whose physical possession is with the lender as security.
Mortgage
The Transfer of Property Act, ,1882 defines mortgage as “the transfer of an interest in specific immoveable 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 a pecuniary liability”. A mortgage relates to immovable assets when there is transfer of title (an interest) to lender as security.
Charge
According to the Transfer of Property Act, 1882 a charge is 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. A charge may relate to any asset that the lender has right to take possession in event of company’s default to pay the loan.
The two broad categories of charge are:
Fixed charge: The charge which is created on identified assets like specific land and building, specific plant and machinery, etc.
Floating charge: The charge is created over class of assets which changes over time like debtors, stock, etc. or the entire undertaking of the company.
Definition: mortgage or charge [Section 2(42)]
“mortgage or charge” means an interest or lien created on the property or assets of a company or any of its undertakings or both as security.
2.1 Requirement of registration [Section 100]
List of mortgage and charges to be registered
The Companies Act 2017 requires that the following charges (including mortgage and pledge) must be
registered:
a) a mortgage or charge on any immovable property wherever situate, or any interest therein; or
b) a mortgage or charge for the purposes of securing any issue of debentures;
c) a mortgage or charge on book debts of the company;
d) a floating charge on the undertaking or property of the company, including stock-in-trade; or
e) a charge on a ship or aircraft, or any share in a ship or aircraft;
f) a charge on goodwill or on any intellectual property;
g) a mortgage or charge or pledge, on any movable property of the company;
h) a mortgage or charge or other interest, based on agreement for the issue of any instrument in the nature
of redeemable capital; or
i) a mortgage or charge or other interest, based on conditional sale agreement, namely, lease financing,
hire-purchase, sale and lease back, and retention of title, for acquisition of machinery, equipment or
other goods.
Negotiable Instruments not to be treated a mortgage or charge
Where a negotiable instrument has been given to secure the payment of any book debts of a company, the deposit
of the instrument for the purpose of securing an advance to the company shall not be treated as a mortgage or
charge on those book debts.
Particulars, manner and time limit for registration
A company (for mortgage or charges as mentioned in above list) must file the specified particulars of the
mortgage or charge, together with a copy of the instrument, if any, verified in the specified manner, by which the
mortgage or charge is created or evidenced, with the registrar for registration.
Such mortgage and charge shall be registered within period of 30 days beginning with the day after the date of
its creation.
However, any subsequent registration of a mortgage or charge shall not prejudice any right acquired in respect
of any property before the mortgage or charge is actually registered.
If created outside Pakistan on property outside Pakistan
In the case of a mortgage or charge created out of Pakistan comprising solely property situated outside Pakistan,
it should be registered within a period of 30 days after the date on which the instrument or copy could have been
received in Pakistan in due course of post and if dispatched with due diligence.
If created in Pakistan on property outside Pakistan
In case the mortgage or charge is created in Pakistan but comprises property outside Pakistan, a copy of relevant
instrument may be filed for registration even when further proceedings may be necessary to make the mortgage
or charge valid or effectual according to the law of the country in which the property is situate.
Company acquiring property subject to a mortgage or charge
The above provisions relating to registration shall apply to a company acquiring any property subject to a
mortgage or charge.
Certificate of registration
On registration of a mortgage or charge, the registrar shall issue a certificate of registration under his signatures
or authenticated by his official seal in such form and in such manner as may be specified.
Constructive notice
A person acquiring the company’s property shall be deemed to have constructive notice that the asset is subject
to mortgage or charge from the date of its registration.
Effect of non-registration
If the company or interested persons fails or neglects to register the mortgage or charge as aforesaid, the
mortgage or charge would become void and shall not be accepted as such by the liquidator or any creditor.
However, this shall not affect any contract or obligation for repayment of the money secured by such
unregistered mortgage or charge.
Duty/Right as to registration [Section 105]
Duty of company
It shall be the duty of a company to file with the registrar for registration the specified particulars of every
mortgage or charge created by the company.
Right of interested person
The registration of any such mortgage or charge may be effected on the application of any person interested
therein (e.g. lender).
Where the registration is affected on the application of some person other than the company, that person shall
be entitled to recover from the company the amount of any fees properly paid by him to the registrar on the
registration.
Modification in the particulars of mortgage or charge [Section 106]
Meaning
It means the change in the terms or conditions or extent or operation of any mortgage or charge registered.
Duty of company
It shall be the duty of the company to send to the registrar the particulars of such modification together with a
copy of the instrument evidencing such modification verified in the specified manner.
Procedure
The provisions as to registration of mortgage or charge shall apply to such modification of the mortgage or charge
as aforesaid.
Company to report satisfaction of charge [Section 109]
Duty of company to inform registrar
A company shall give intimation of the payment or satisfaction in full, of any mortgage or charge to the registrar
in the manner specified, within a period of 30 days from the date of such payment or satisfaction.
Show cause notice to lender
The registrar shall, on receipt of intimation of payment or satisfaction by company, cause a notice to be sent to
the holder of the mortgage or charge calling upon him to show cause within such time not exceeding 14 days, as
may be specified in such notice, as to why payment or satisfaction in full shall not be recorded as intimated to
the registrar.
If no cause is shown
If no cause is shown, by such holder of the mortgage or charge, the registrar shall accept the memorandum of
satisfaction and make an entry in the register of charges kept by him.
If any cause is shown
If any cause is shown, the registrar shall record a note to that effect in the register of charges and shall inform
the company.
When show cause notice is not required
The show cause notice referred as above shall not be required if a no objection certificate on behalf of the holder
of the mortgage or charge is furnished, along-with the intimation submitted for the payment or satisfaction.
Effect of delay
If a company fails to file the particulars of satisfaction of mortgage or charge within the 30 days’ period, the
required particulars may be submitted with the additional fee, as may be specified and imposing the penalty as
specified.
Power of registrar [Section 110]
The registrar may enter in the register of charges and inform the parties concerned, on evidence being given to
his satisfaction with respect to any registered charge:
that the debt for which the charge was given has been paid or satisfied in whole or in part; or
that part of the property or undertaking charged has been released from the charge or has ceased to
form part of the company’s property or undertaking.
The registrar may do so despite the fact that no intimation has been received by him from the company.
Rectification of register of mortgages [Section 108]
Application to the Commission
The company or any person interested may apply to the Commission to grant relief in following circumstances:
the omission to file with the registrar the particulars of any mortgage or charge or any modification therein within the time; or
the omission or misstatement of any particular with respect to any such mortgage or charge.
Conditions for granting relief
The Commission shall grant relief on being satisfied that the above-mentioned omission or misstatement:
was accidental or due to inadvertence or to some other sufficient cause; or
is not of a nature to prejudice the position of creditors or shareholders of the company; or
that on other grounds it is just and equitable.
Order by the Commission
The Commission, on such terms and conditions as seem to the Commission just and expedient, may order:
that the time for filing the required particulars be extended; or
that the omission or misstatement be rectified; and
as to the costs of the application as it thinks fit.
A copy of the order passed for rectification of register of mortgages duly certified by the Commission or its authorised officer shall be forwarded to the concerned registrar within 7 days from the date of the order.
Prior rights not to be affected
Where the Commission extends the time for the registration of a mortgage or charge, the order shall not prejudice any rights acquired in respect of the property concerned prior to the time when the mortgage or charge is actually registered.
RECORDS AND REGISTER
4.1 Copy of instrument creating mortgage or charge [Section 107]
Every company shall cause a copy of following instruments to be kept at the registered office of the company:
every instrument creating any mortgage or charge requiring registration; and
every instrument evidencing modification of the terms or conditions of any mortgage or charge.
4.2 Company’s register of mortgages and charges [Section 112]
Requirement
Every company shall maintain a register of mortgages and charges requiring registration in such form and in such manner as may be specified and any violation shall be an offence punishable under the Act.
An officer of the company, who authorises or permits the omission of any entry required to be made, shall be liable to a penalty of level 1 on the standard scale.
Open to inspection
The register of charges maintained and the copies of instrument creating any mortgage and charge or modification thereof shall be open to inspection of:
any member or creditor of the company without fee; and
any other person on payment of such fee as may be fixed by the company for each inspection.
The refusal of inspection of the said copies or the register shall be an offence and any person guilty of an offence shall be liable to a penalty of level 1 on the standard scale, and every officer of the company who knowingly authorises or permits the refusal shall incur the like penalty, and in addition to the above penalty, the registrar may by order compel an immediate inspection of the copies or register.
