Issues Regarding Security: Banking & Corporate Law Series

While creating a security for a loan, following issues may arise:

1. Is the security creator competent to do so?

a) Limitation and absence of powers.

b) Authorization process & third party consents.

2. Is the security really available.

a) Limited Property rights – non-transferability.

b) Third-party NOCs.

c) Co-ownerships.

d) Third-party interests – tenancies possession.

e) Non-existent security – property already sold out or grant has expired.

f) Prior interests – importance of the chain documents.

g) Illusory securities – e.g. ground title to a land on which a building has been sold out.

h) Property yet to come into existence e.g. construction projects.

3. Security management and monitoring issues.

a) Taking care of pledged goods.

b) Monitoring pledged and hypothecated properties.

c) Preventing creation of third party interest.

4. Has the security been properly created & perfected.

a) Permission to create mortgage & NOCs.

b) Formal creation systems- execution, witnessing, registration, stamp duties etc.

c) Reporting requirements – companies, modarabas, allotments, leases etc.

d) Satisfying security requirements e.g. obtaining documents of title for equitable mortgage or consent of third parties to hold the documents on mortgagees account, possession in case of liens and pledges, retaining control of transport documents (bills of lading, truck/railway receipts etc.) and exercise of rights under such documents.

5. Exercise of security rights.

a) Notification requirements.

b) Enforcement in a fair and transparent manner.

c) Joining necessary parties in the enforcement process.

d) Seeking access to the enforcement forums by meeting necessary formal requirements e.g. proper drafting (mortgage suits) law of limitation etc.

 

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.