A Presentation on Documentation By SNG PARTNERS Index

A Presentation on Documentation By SNG & PARTNERS

Index § Documentation- Meaning & Significance § E-agreements § Banking terminology § Borrowers § Securities § Relevant clauses under Insolvency and Bankruptcy Code, 2016 § Debt recovery- legal framework § Guidelines for execution of documents § Statutory Compliance

Meaning of document • The term “document” as defined in Oxford Dictionary is “a deed, writing, inscription that furnishes evidence”. • This is a definition of wide import and would include even a piece of paper on which something is written by hand or typed or printed. However in legal arena the word document is given a different connotation. • The definition of term “document” as given Section 3 of Indian Evidence Act, 1872 is “a document shall include any matter written, expressed or described upon any substance by means of letters, figures or marks or by more than one of those means, which is intended to be used, or which may be used for the purpose of recording the same”. The same definition is also given under Indian the Penal Code, 1860.

Significance of documentation • Documents are the foundation upon which the superstructure of a legal/contractual relationship is built. Documents are of great importance as they assume the character of primary evidence in determining the rights and obligations of the respective parties in the day to day conduct of the account as well as when dispute arises between them. • The terms and conditions of loans/advances, securities charged and repayment are reduced in writing which in turn helps to avoid and resolve the ambiguities if any. Correct and properly executed valid documentation ensures safety of the creditor’s advances. It also helps in enforcing the security belonging to the borrowers when a suit is instituted in a court of law on default of the borrower.

Basis of documentation • Documentation varies depending upon the following factors: Ø Kind and constitution of Borrowers Ø Type of credit facilities sanctioned Ø Type of security offered Ø Nature of charge to be created

Proper Documentation • Proper documentation involves the following: Ø Selection of appropriate format of documents. Ø Proper execution of the documents. Ø Due stamping of the documents as per Indian Stamp Act, 1899 (where ever required as per the law). Ø Due registration with the appropriate authority agency / authority wherever required and within the time stipulated by law.

E- Agreements • Contracts formed through electronic means are valid [Information Technology Act, 2000 - Section 10 A] • Electronic records can be authenticated by affixing Digital Signature [Information Technology Act, 2000 - Section 3] • Electronic records are legally recognized [Information Technology Act, 2000 - Section 4]

E- Agreements & Indian Evidence Act • • Electronic record admissible in evidence provided: Ø used to store/process information Ø By the person having lawful control/use of the computer Ø Ø The computer was operating properly of the activities Subject to the compliance, a digital loan agreement will be eligible for being admissible in evidence.

Banking Terminology • Creditor: A creditor is an entity, a company or a person of a legal nature that has provided goods, services, or a monetary loan to a debtor. Creditor refers to the party that has delivered a product, service or loan, and is owed money by one or more debtors. • Borrower: A person or company that has received money from another party with the agreement that the money will be repaid. Most borrowers borrow at interest, whereby they pay a certain percentage of the principal amount to the lender as compensation for borrowing. Most loans also have a maturity date by which time the borrower must have repaid the loan.

Banking Terminology (continued) • CC Limit: Cash Credit is a type of facility provided by the bank or financial institution in which, a borrower can withdraw an amount more than what he/it holds to his/its credit against the security of stock. It is a short term loan provided to companies to fulfill their working capital requirement. • Term Loan: A term loan is a loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate. A term loan is for equipment, real estate or working capital paid off between 1 to 25 years. The loan carries a fixed or variable interest rate, repayment schedule and a set maturity date. The loan requires collateral and a rigorous approval process to reduce the risk of repayment.

Banking Terminology (continued) • Guarantee: A guarantee is a promise to take responsibility for another company's financial obligation. The entity assuming this responsibility is called the guarantor. Often a third party will request a guarantee of payment upon dispatching its goods or services to another party, and a bank can guarantee this payment through a contractual obligation. • Letter of Credit: A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank). A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documents within a fixed timeframe.

Banking Terminology (continued) • Letter of Lien: A notice of intent to lien is a lot like a demand letter. It is a document sent to certain parties on a construction project warning that if payment isn't made, the claimant intends to file a mechanics lien. A few states require parties to send a notice of intent to lien before they file a mechanics lien or bond claim. • Letter of set-off: A bank obtains borrower’s written consent to seize an account for non-payment of a loan or other obligations. If a bank believes its normal, lawful right to setoff may be challenged, it requires this letter. Offsets credit balance of one account with the debit balance of another. Also known as lien letter. • Banker’s General Lien: When the bailee is entitled to retain any goods bailed to him for any amount due to him in respect of those goods or any other goods, it is called General Lien. Such bailees can retain all goods of the bailor so long as anything is due to them. Bailees coming within the following categories have a general lien: bankers, factors, wharfingers, attorneys of High Court and policy brokers.

Type of Borrowers • • Minors Joint Account Holders Sole Proprietorship Concerns Partnership Firms Hindu Undivided Family (HUF) Companies-Private and Public Limited Liability Partnerships Trusts, Clubs, Societies etc.

Kinds of Securities • Movable Assets • Fixed Assets • Immovable Assets • Financial Securities

Mode of Charging Securities Lien Assignment Hypothecation Pledge Mortgage

Types of Mortgages • Mortgage is a transfer of interest in specific immovable property for the purpose of creating security for the money advanced or to be advanced, or for an existing or future debt or performance of an engagement giving rise to a pecuniary liability. The following are the kinds of mortgage. • Simple Mortgage- Possession of the property remains with the mortgagor. • Mortgage by conditional sale- It is an ostensible sale. If the debt is not repaid as stipulated the sale shall become absolute. On repayment, the sale shall become void and the property shall be reconveyed to the mortgagor. • English Mortgage- There is an absolute transfer of mortgaged property to the mortgagee. There is provision that the mortgagee will retransfer the property to the mortgagor upon repayment of the debt. • Mortgage by deposit of title deeds (generally known as Equitable Mortgage)- Delivery of documents of title of the mortgaged property by the mortgagor to the creditor or his agent with intent to create a security thereon, in a town notified by the State Government in the Official Gazette of the State, creates a mortgage by deposit of title deeds.

Guidelines on creation of Equitable Mortgage by Deposit of Title Deeds • Valuation Report • Verification of title • ROC charge report • Central Registry search report • Notified Place • Deposit of title deeds by the owner

Guarantees • Section 126 of the Indian Contract Act, 1872 defines the expression "contract of guarantee" as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor"; and the person to whom the guarantee is given is called the "creditor". • Section 185 of Companies Act 2013, imposes a restriction on company from directly or indirectly advancing any loan or giving any guarantee or providing any security in connection with any loan taken by Ø Any Director of the lending company or of a company which is its holding company or any partner or relative of any such Director; Ø Any firm in which such director or relative is a partner. • The provisions of Section 185 of the Companies Act, 2013 shall not be applicable to private companies subject to certain conditions. • A company may advance a loan, give a guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested subject to (i) a special resolution being passed in the general meeting of the company; and (ii) the loans being utilized by the borrowing company for its principal business activity.

Guarantees (continued) • The expression “any person in whom any of the director of the company is interested” means: - Ø any private company of which director is a director or member; Ø any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors together; or Ø any body corporate the Board of Directors, managing director or manager of which is accustomed to act in accordance with the instructions or directions of the Board of Directors or director(s) of the lending company.

Guarantees (continued) • The exemptions to this section are: - (i) conditions of the service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution; (ii) gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate declared by RBI; (iii) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or (iv) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company. Provided that the loans made under clause (iii) and (iv) above are utilized by the subsidiary company for its principal business activities.

Guarantees (continued) Section 186 of Companies Act 2013 provides that if the giving of any loan or guarantee or providing security or the acquisition by the company exceeds the limit of 60% of paid-up share capital and free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more, prior approval of the company by a special resolution is required. All provisions of Section 186, other than sub-section (1) shall not be applicable to any loan made, guarantee or security provided by a banking company, insurance company, housing finance company in the ordinary course of business or a company established with the object of and engaged in the business of financing industrial enterprises or providing infrastructural facilities.

Clauses relevant from the perspective of Insolvency and Bankruptcy Code, 2016 • Incorporation of clause in the loan documentation which provides for the occurrence of an event of default upon an application under Insolvency and Bankruptcy Code, 2016 made against the borrower. • Incorporation of clause pertaining to provision of consent by the borrower to the lender for submission of financial information to the Information Utility. Clause to also impose an obligation on the borrower to authenticate such information upon a request being made by the Information Utility.

Debt Recovery –Legal Framework Indian legal system encompasses varied legal provisions for recovery of debts by banks and financial institutions as follows: • Ordinary suit for recovery under civil law. • Original application to be filed by banks and financial institutions before Debt Recovery Tribunal for debt not less than Rs. 10, 000 under Recovery of Bank Due to Banks and Financial Institutions Act, 1993. • Action under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. • Initiation of resolution of proceedings under Insolvency and Bankruptcy Code, 2016. • Arbitration proceedings under Arbitration and Conciliation Act, 1996 for recovery of outstanding amount as per the arbitration clause under the finance documents. In such cases Recovery of Debts due to Banks and Financial Institutions Act, 1993 not applicable. • Initiation of criminal action in addition to the civil proceedings for prosecution and punishment under the Indian Penal Code and other laws where debt is also tainted with fraud, cheating, misfeasance etc. • Filing of complaint under Section 138 of the Negotiable Instruments Act, 1881 for the dishonour of any cheque issued by the borrower to the lender in discharge of legally enforceable liability.

Guidelines for execution of documents

Individuals/Sole Proprietors • The Bank should ensure that the borrower is not a minor, an undischarged insolvent or a lunatic. The individual may sign his full name or his abbreviated signature but it must be his own name and signature. • If some one is signing under a Power of Attorney the following precautions should be taken to ensure that the POA is properly executed and is valid and subsisting: Ø Ø Ø The Principal should be an identifiable one. The POA must be in force. It must have been notarized or executed before magistrate or a registered one if immovable property is involved. The branch may get confirmation in writing from the “Principal” while sanctioning / reviewing the limits, obtaining AOD etc. , stating that POA is valid. The original POA must be verified to ensure the correctness of its contents and a copy obtained for branch records must be kept along with Loan papers. Since the POA is revocable it should be ensured that the Bank gets a confirmation regarding the existence of the POA.

Joint Account Holders • All the joint parties should join in the application for the advance and in signing the documents. • Authority to either or any one of the joint parties to operate the current / savings bank account in credit does not apply to borrowing without the concurrence of all of them. • In the event of death, lunacy or insolvency of one or more joint borrowers, all operations in the account should be stopped and instructions be sought from the Appropriate Authority either for recovery of the dues or for continuance of the facility/ies to the remaining accountholders.

Hindu Undivided Family • The Joint Hindu Family declaration form duly stamped should be obtained. The form should be signed by the Karta and other major coparceners including females in their personal capacities and minors should be represented by their guardians. • An Authority letter should be obtained from all the coparceners of the Joint Hindu Family in favour of the Karta authorizing the Karta to execute the necessary documents for the benefit of the Joint Hindu Family. • Loan documents and other necessary documents should be signed by the Karta as the Karta of Joint Hindu Family after obtaining such Authority Letter from all members of Joint Hindu Family.

Partnership Firms • Letter of Authority to operate the borrowal account in favour of a third party partner should be signed by all the partners. Although one partner can bind the firm, it is necessary that all partners sign all the documents and letters of acknowledgment of debt/ revival letter. • Loan documents should be executed by all partners in their capacity as partners and also in their personal capacities. • If a limited company is a partner in a firm authorised persons of the company should sign documents showing the company as a partner. • When the facility is secured by way of hypothecation/mortgage then instead of executing fresh documents only an acknowledgement of debt can be signed by all partners new and existing and also by the guarantors if any. • However, if there is a change in constitution the firm may execute fresh documents along with acknowledgement of debt. • In the event of death, retirement or insolvency of a partner, the operations in the account should be stopped on receipt of notice of such happening.

Limited Liability Partnership • Documents to be obtained at the time of consideration of proposal- Ø Copy of the Limited Liability Partnership (‘LLP’) agreement and any amendment thereto; Ø Copy of the Form 8 (Statement of Account & Solvency) most recently filed containing the declaration on the state of solvency of the LLP and information relating to statement of assets and liabilities & statement of income and expenditure of the LLP; Ø Copy of the Form 11 (Annual Return) most recently filed; Ø Copy of any instrument relating to any charge created by the LLP; and Ø Copy of the Resolution authorizing the borrowing and other relevant matters.

Companies-Private and/or Public • Documents to be obtained at the time of consideration of proposal- Ø Certificate of Incorporation Ø Memorandum and Articles of Association Ø Certificate of Commencement of business (for public limited companies) Ø Audited Balance Sheets and Profit and Loss accounts for the last 3 years Ø Copy of the Board Resolution authorizing the borrowing and other relevant matters.

Scrutiny of Documents • • • Borrowing Powers of Company. Restrictions on Borrowing Powers of Directors. Board Resolution: - Board Resolution details: Ø Name of the Bank. Ø Paramount of borrowings and the types of facilities. Ø Names of the director(s) who are authorised to execute the documents. Ø Names of the director(s) in whose presence the common seal of the company will be affixed on the documents as per the Articles of Association of the Company. Ø Names of the directors who will deposit the title deeds belonging to the company for the purpose of creating an equitable mortgage. Ø Names of the directors who are authorised to operate the accounts of the company and sign the acknowledgement of debts, revival letter / confirmation of balances and securities periodically. Ø Borrowing limits if any. If resolution passed by a committee of the board of the borrower, check the resolution under which the committee derives its power. If the resolution provides borrowing limits, to obtain a CA certificate confirming that the said limits are not breached.

Trusts, Clubs, Societies, etc. • Since these bodies have no capacity to contract, the Individual members of such institutions are liable for any credit facility provided they sign the cheques in their personal capacity. • In case a loan is to be entertained, the constitution documents, bye-laws of the trusts, society or club should be studied to ascertain: Ø the purpose for which a loan could be raised, Ø extent of borrowing powers, Ø powers of managing committee to charge the assets of the trust, club/society, etc. • A resolution should be passed by the trust, society/club in this regard.

Additional guidelines for execution • It should be ensured that all the blanks in the document are filled and initials and seal of the parties are placed against the hand filled portion. • Names of the signatories are incorporated in the signature block. • The documents are executed by individuals authorized under the board resolution.

Statutory Compliance • Stamp Duty • Registration

Stamp Duty • An instrument should be duly stamped i. e. it should bear an adhesive or impressed stamp of not less than the appropriate amount. • In Maharashtra and some other States, the documents can be franked for the appropriate value of the stamp duty. The procedures followed should be as in the case of an affixation of special adhesive stamp. • Alternately, in some state documents may also be electronically stamped. The central government has appointed the Stock Holding Corporation of India Limited (SHCIL) as the Central Record Keeping Agency (CRA) for all e-stamps used in the country. • The payment for purchase of e-stamp certificate may be made by means of cash, pay order, bank draft, electronic clearing system, real time gross settlement or by any other mode of transferring funds as authorized by the Revenue Authority. The party to an instrument may, use impressed stamp(s) together with the e-stamp certificate to pay stamp duty chargeable on such instrument. • In case of sale, mortgage or settlement when several instruments are employed for completing the transaction only the principal instrument is chargeable to stamp duty and the other documents are liable to duty as per the respective

Stamp Duty (continued) • An instrument comprising or relating to several distinct matters shall be charged with the aggregate amount of the duties with which separate instruments each comprising or relating to one of such matters would be charged under the Indian Stamp Act, 1899 (Sec 5). • Subject to the above (Sec 5) an instrument so framed so as to come within two or more descriptions in Schedule I to the Act where the duties chargeable are different , shall be charged with the highest of such duties. (Sec 6 ). • All instruments executed by any person in India shall be stamped before or at the time of execution. • Every instrument executed ONLY out of India (not being B/E or P/N) may be stamped within three months after it is first received in India. • Adhesive Stamps must be cancelled by signing across the stamp so that they cannot be used again. In absence of such cancellation, the document shall be treated as unstamped. Stamps can be cancelled by drawing a line across it, or putting initials or signing on it etc.

Stamp Duty (continued) • Instruments written on an impressed stamp should be written in a such a manner that the stamp appears on the face of the instrument and the stamp cannot be used or applied to any other instrument. • If a document is executed in two different States in parts or the document is to be moved from one state to another, the stamp duty payable, will be higher of the two States. Such difference of duty can be made up only within the time and in the manner prescribed by the second State’s legislation. (Usually within 3 months from the date of receipt of document in the second State. ) • Further, in some states like Maharashtra, even the movement of electronic copies of the document attracts stamp duty. • The Borrower has to maintain the copy of the document in the registered office in terms of Section 85 (1) of the Companies Act, 2013. • Further in some states like Maharashtra, the obligation to ensure the sufficient payment of stamp duty has been imposed on the lender and in the event of a deficient stamp duty, action may be taken against the lender including initiation of criminal prosecution.

Stamp Duty (continued) • Therefore all these factors to be accounted for while determining the applicable stamp duty on a document. • Section 4 of the Maharashtra Stamp Act 1958, provides that where multiple documents are executed for the completion of the same transaction, the principal instrument only shall be chargeable with the stamp duty prescribed and each of the other instruments shall be charged with a stamp duty of INR 100. • However, in practice we have observed that the stamping authorities dispute the applicability of Section 4 of the Maharashtra Stamp Act, 1958 in multiple cases. Thus its advisable to seek the adjudication of the documents while seeking the benefit of Section 4 of the Maharashtra Stamp Act, 1958. • Section 31 of the Maharashtra Stamp Act, 1958 deals with the adjudication of documents. Adjudication means determining the chargeability of stamps duty on documents. When the quantum of stamp duty is variable and not fixed, it might often lead to confusion as to how much stamp duty is payable. • Hence to determine stamp duty payable, the government offers adjudications services where the government officer examines the document and determines what amount should be paid as stamp duty.

Registration • Filing of documents with the Registrar of Assurances. • Registration of documents with Registrar of Companies in case of companies being Public/Private limited. • Registration of charge with Central Registry of Securitisation Asset Reconstruction and Security Interest for charges on all immovable properties. • Forms for creation of charge. • Modification and satisfaction of charge. • Filing of details with the Information Utility Company i. e NESL under the Insolvency and Bankruptcy Code, 2016.

Penalty for default • Any default made in filing the particulars of any charge created by the Company with the Registrar of Companies for registration or payment or satisfaction of a debt in respect of which a charge has been registered, the Company and every officer of the Company or any other person who is in default shall be punishable with fine. • Further, if any Company makes default in complying with any of the requirements of Companies Act, 2013 and rules thereto, as to the registration of the charge created by Company or any fact connected therewith then the Company and every officer of the Company who is in default, shall, without prejudice to any other liability, be punishable with fine with the prescribed fine.

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