Security For A Particular Obligation Or General Obligation

When creating a security interest for financing it becomes extremely important to attend to the security documentation from the perspective whether the security would be a security for particular transaction or a security for series of transactions from time to time. Regarding customers with whom there is expectation of a continuing relationship, the better option is to have a security for all obligations generally.  The issue emerging from creation of a particular security or a general security would be more cleared from the following hypothetical case:

“NBP extends facility of finance to a company which is secured on its fixed assets by way of hypothecation as regards the stocks, and by way of mortgage as regards immovable property. This charge has been duly created and is recorded with SECP. Thereafter the same company successively obtains finance from two other institutions being ABC Bank and XYZ Bank, (after obtaining NOC from NBP, which is secured on the same stocks and the immovable property that are already under the charge of NBP. The facility that had been granted by NBP was a revolving facility for a period of one year. After this period has passed the liabilities are no adjusted and NBP renews the facility for another year without execution of new/fresh documentation. NBP would like to know whether under these circumstances its ranking would fall behind ABC Bank and XYZ Bank or remain ahead of them”

1. Before one addresses oneself to the legal questions involved in the above matter, it would be helpful to first state certain basic principles regarding creation of security of the above nature over the assets of a company, and then consider questions of priority.

a) Security  over the assets of a company involves two stages:

            (i) Attachment of security interest.

           (ii) Perfection of security interest.

b) Attachment of security interest means that a security is effectively created between the debtor and the creditor, and attaches to some specified present or future property. Such security becomes binding between them, irrespective of any “Perfection” issues.

c) Perfection of security interest means that, in addition to becoming binding between the debtor and the creditor, the security becomes binding against third parties also.

d) As regards companies incorporated under the Companies Ordinance, 1984 certain kinds of securities created over their assets, become “perfected” against other creditors and the liquidator only if they have been recorded with the Registrar of Companies within 21 days of their creation. These securities include hypothecation of goods and mortgage on immovable property, and necessary particulars regarding the scope of the security must be entered in the prescribed form. The priorities of such security are from the date of their creation and not from the date of their reporting to, or recordation by, the SECP.

e) Where particulars, required by law to be filed with the SECP, have been entered on the prescribed form, they constitute a notice to all other creditors, and any liquidator that may step in for a company. Particular not mandatorily required to be filed, or which are only contained in the documents referred to in the particulars, constitute notice only if actually known to the relevant creditor.

f) A charge or a mortgage is a security for a debt or other obligation. If the debt comes to an end, then the security also comes to an end. If the security is for a specific debt or for a particular time, then satisfaction of that debt or expiry of the time brings the security to an end vis-à-vis that debt or future obligations. If the security is not for any particularized debt but is a security for some aggregate amount as may be due from time to time without reference to any particular debt, then the security remains effective to the extent of that aggregate amount.

g) Although the Transfer of Property Act, 1892, barring a few sections, does not apply to the Province of Punjab, however, its principles are accepted as binding since they are considered to be in accordance with justice, equity and good conscience and are, therefore, applied by the courts in Punjab. Although this law governs immovable property, its applicable principles are also recognized in transactions relating to goods. The relevant principles, as far as the present questions are involved and which are contained in the statutory provisions, are reproduced below:

i) 48. Priority of rights created by transfer.— where a person purports to create by transfer at different times rights in or over the same immovable property,  and such rights cannot all exist or be exercised to their full extent together each later created right shall,  in the absence of a special contract or reservation binding the earlier transferees, be subject to the rights previously created.

ii) 79. Mortgage to secure uncertain amount when maximum is expressed.—if a mortgage made to secure future advances, the performance of an engagement or the balance of a running account, express the maximum to be secured thereby, a subsequent mortgage of the property shall, if made with notice of the prior mortgage, be postponed to the prior mortgage in respect of all advances or debits not exceeding the maximum though made or allowed with notice of the subsequent mortgage.

iii) 93.  Prohibition of tacking.—No mortgagee paying off a prior mortgage, whether with or without notice of an intermediate mortgage, shall thereby acquire any priority in respect of his original security; and, except in the case provided for by section 79 no mortgagee making a subsequent advance to the mortgagor whether with or without notice of an intermediate mortgage, shall thereby acquire any priority in respect of his security for such subsequent advance.

2. Once the above principles, discussed at No.1 above, are applied to the hypothetical questions arising out of the matter stated in the above quoted matter, the answer to the questions raised therein becomes relatively simple.

a) If NBP’s security was recorded with the SECP only for a particular loan, then if that loan was satisfied, the security would not be available for a subsequent loan. However, if the original loan was not satisfied but only carried forward, then the security continues for the maximum amount stated as secured.

b) If the security was for only a particular time, then finances provided after that time would not attach to the security. However, if the “new” transaction is only in the nature of continuation of the original loan, with the repayment period being “extended”, then the security continues.

c) If the security was stated to be upon a maximum amount, for any advances that might be advanced from time to time, [i.e. an “all Monies Security” – a security for past, contemporaneous & future advances] then NBP would have priority over ABC Bank and XYZ Bank for all subsequent advances as long as NBP does not report discharge of the security U/s 132 of the Companies Ordinance, 1984.

(d) It would not be possible for NBP or ABC Bank and DEF Bank to plead that they did not have the notice of a security where the security was of a nature which required to be mandatorily reported and had been reported to SECP in accordance with Section 121 of the Companies Ordinance, 1984. If the security has been perfected then by virtue of the provisions of Section 93 of TPA, 1882, mentioned above, NBP would continue to have a priority whether ABC Bank or DEF Bank inspected the company record or not. In fact as far as Section 92 of TPA is concerned, actual knowledge of the intermediate charge by NBP is irrelevant for retaining security priority, provided NBP’s security had properly attached in terms of Para 2(d) above and was perfected in terms of Para 2(c) above.

3. From the above discussion, it would be evident that it is extremely important that all security instruments of NBP should be clearly within the scope of Section 79 of TPA, 1882. Although the benefit of this Section is available if the subsequent mortgages are made with notice of the prior mortgage, however, no creditors can claim absence of notice if the proper particulars have been filed in accordance with Section 121 of the Companies Ordinance, 1984.

4. In filing particulars, with SECP, it is absolutely important that the necessary particulars must be entered on Form-X itself. If they are contained only in the attached documents, then the case law on the subject states that notice would be imputed only if it would shown that the relevant party had gone through the attached documents or that their contents had been specifically drawn to the attention of such party. The same is the position regarding such particulars which might have been filed with SECP but are not mandatorily required U/s 121 of the Companies Ordinance, 1984, and are only entries which are “optional” in nature.