Types of Customers:
(For Availing Credit Facilities From A Financial Institution)
A. Introduction:
Where credit facilities are required by a customer from a financial institution, two kinds of issues may arise:
i. Whether the customer is competent to borrow?
ii. Whether a security can be created over the assets of the customer?
There is a general principle of law that:
- An individual is competent to do everything except what is prohibited by law.
- An artificial legal person can do only those things that it is permitted to do under its constitution, as well as those things that might be needed to do what has been specifically allowed.
- A person acting on behalf of another person can do only those things that have been specifically allowed to him, as well as those things that might be reasonably required to do what has been specifically allowed.
B. Keeping the above general principles in view, the following would be legal position regarding specific types of customers, which would deal with competency of borrower as well as creation of securities over the assets of the different types of customers.
1. Individual/Sole Proprietor:
There is no legal limitation on such customer to contract loans or to create a security over his assets.
2. Partnership:
A trading partnership may contract loans for its business objects and also create a charge over its property. Ordinarily, one partner can act as an agent for other partners for contracting loans as well as creating a security over the assets of the firm, as long as the loan has been taken to achieve the objects of the business. However, a charge over immovable property cannot be created in absence of clear authority from other partners.
3. Limited Liability Companies:
○ A limited liability company established to conduct a business can ordinarily contract loans as well as create a security over its assets. However, the loan should be to attain the objects of the company as set out in its Memorandum of Association. One has to look at its Articles of Association to find out as to who has the powers to contract loans or create securities. Ordinarily, the Board of Directors is empowered for these purposes. The Board exercises powers through a resolution and in the resolution the Board may nominate a person to execute necessary loan and charge documents on behalf of the company.
○ In absence of clear powers, a company cannot create charge over its assets to secure third party obligations.
○ A public Limited Company can exercise borrowing power only a certificate for commencement of business has been granted.
4. Trusts:
In absence of clear powers, a trust can neither contract a loan nor create a charge over its assets.
5. Societies:
In absence of clear powers, a society can neither contract a loan nor create a charge over its assets.
6. Corporations & Co-operative Societies:
The general position regarding Corporations is the same as discussed against limited liability companies. One has to examine the legal charter through which the Corporation has been created to find out its borrowing powers as well as powers to create a security over its assets.
7. Un-Incorporated Clubs & Associations/Organizations:
In case of clubs and associations which are not organized as a registered society neither loans can be contracted nor a charge can be created over properties of the customer. However, In case the constitutional documents of the club or association empowers its office bearers to contract loans or create securities, the same can be done. In such cases, it would ordinarily be advisable to also obtain personal guarantees of the officers.
8. Govt. Departments & Agents:
In case of Govt. department and agencies only the state itself (Federation, Province, Local Body) may contract loan or create securities in accordance with the enabling laws.
We hope that this discussion proves helpful in understanding the matter generally. However, if any action is to be taken, relating to this Article, please consult your professional advisors.
