JAIIB PPB Paper-2 Module-B Unit 5: Different Modes of Charging Securities

15/03/2023

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JAIIB Paper 2 (PPB) Module B Unit 5: Different Modes of Charging Securities (New Syllabus)

The Institute of Indian Banking and Finance (IIBF) has recently announced the revised syllabus and exam format for the JAIIB Exam 2023. The upcoming exam will comprise of four papers, with Paper 2 (Principles & Practices of Banking) covering Unit 5: Different Modes of Charging Securities. This particular unit holds significant importance for candidates, as it will greatly impact their performance in the exam.

To assist candidates in comprehending the topic, we will provide all the necessary details related to Unit 5: Different Modes of Charging Securities of JAIIB Paper 2 (PPB) Module B: Functions of Banks. We strongly recommend candidates to refer to this article and also utilize our Online Mock Test Series to enhance their understanding of Foreign Currency Accounts for Residents and other related aspects.

For candidates appearing for the JAIIB Certification Examination 2023, it is essential to comprehend each unit in the syllabus, including the Marketing unit. This unit holds great importance in the banking industry, and candidates must prepare thoroughly to excel in the exam and establish a successful career in the banking sector.

Introduction

Bank tend to safeguard their advances by taking different kinds of securities . The main purpose of taking a security is to fall back on it in case the loan is defaulted. Bank take movable properties immovable properties or a debt as securities for a loan. The method of creating charge over a property depends upon the nature of property and nature of charge.

Types of charges

Bank charge over property confines itself to one or more of the following six types of charges.

Assignment
Lien
Set-off
Hypothecation
Pledge
Mortgage
Appropriation

Assignment

It is a mode of providing securities to a banker for an advance . It is transfer of a right , property or a debt .The transfer is called assignor and the transferee assignee.

Borrowers generally assign the actionable claims to the banker as security for an advance. It is transfer of right, Property or debt. The transferor is called assignor and the transferee assignee. Borrowers generally assign the actionable claims to the banker as securities for an advance.

Section 130 of the transfer of property Act: The transfer of an actionable claim can be effected only by the execution of an instrument in writing, signed by duly authorized agent.
Section 3 of the Transfer of property act: Defines an actionable claim to any debt other than a debt secured by mortgage of immovable property, or by hypothecation of or pledge of movable property or two beneficial interest in movable property, not in the possession of the claimant, which the civil courts recognize as affording grounds of relief.

All the rights and remedies of the transferor vest in the transferee .The transferee of an actionable claim takes it, subject to all the liabilities and equities to which the transferor was subject on the date of transfer.

Lien

Lien is the right of the banker to retain possession of the goods and securities owned by the debtor until the debt due from the latter is paid . The banker’s lien is an implied pledge. A banker acquires the right to sell the goods which came into its possession in the ordinary course of banking business, in case the debt is not paid.
Section 171 of the Indian contract act 1872 gives to the banker an absolute right of general lien on all goods and securities received by the banker.

Set-off

Set off means total or partial merging of a claim of one person against another in a counter claim by the latter against the former. It is in effect, the combining of accounts of the debtor and creditor, to arrive at the former. It is in effect, the combining of accounts of the debtors and creditors, to arrive at the met balance payable to one or the other .The right of set off is a statutory right and can also arise out of an agreement between parties.

Salient features of Set off

Both debts must be for certain sums. A debt accruing due to cannot be set off against the debt already due.
The banker cannot set off the credit balance in the account of guarantor till the liability of the guarantor is determined.
The credit balance in the current account cannot be set off against a contingent liability of a bill discounted but not yet due.
A banker cannot set off a debt due to him upon a loan account repayable on demand or at a specified date against a credit balance in the current account until the demand is made or due date arrives.
The parties must be mutually indebted in the same right.
The credit balance in the partner’s account can be set off against the debit balance of a partnership account since the liability of the partner is joint and several.
Right of set- off is exercisable between two firms , which have separate names but are composed of same set off is exercisable between two firms, which have separate names but are composed of same set of partners.
The credit balance in the personal account of a sole proprietor can be set off against the debit balance of the sole proprietary concern and vice versa.
When the right set off is available to the bank , lien right cannot apply .These two different rights cannot be exercised simultaneously at the same time.

Automatic right of set off arises in the following circumstances

On the death, insanity or insolvency of the customers.
On the insolvency of a partner of a firm or winding up of a company
On receipt of a garnishee order.
On receipt of notice of assignment of a customer’s credit balance.

Hypothecation

The term hypothecation means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor, without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization of such charge in to fixed charge on movable property. The mortgage of movable property is called hypothecation.

Pledge

Pledge means bailment of goods for purpose of providing security for payment of debt or performance of promise. (As per the section 172 of Indian Contract Act 1872).

The person, whose goods are bailed is called the Pawnor, the person who takes the goods as security is called the Pawnee.

The followings are the legal implications of a pledge:

The ownership of the property is retained by the pawnor, which is subject only to the qualified interest which passes to the pawnee by the bailment.
One of the main and most essential requirements of a pledge is the actual or constructive delivery of the goods to the pawnee. By constructive delivery, it is meant that there need be no physical transfer of goods from the custody of the pawnee or of the any person authorized to hold them on his behalf.

Goods may be delivered by one of the following ways

By handling over the key of the godown, in which the goods are kept.
By attornment I e if goods are in public warehouse, the warehouseman acknowledges to the pawnee that he will hold the goods thereafter on behalf of the pawnee.
Handling over the document of title to goods such as railway receipt, bill of lading , warehouse receipts etc.
Even if goods are in possession of the pawnor , he may acknowledge that he holds them thereafter for and on behalf of the pawnee.
An agreement of pledge may be implied from the nature of the transaction or the circumstances of the case . However, an agreement in writing clearly laying down the terms and conditions leaves no ambiguity.

Mortgage

Mortgage is a transfer of interest in immovable property to secure an advance loan oer an existing debt or a debt or performance of an obligation.

Transfer of property act contemplates six types of mortgage

Simple mortgage
Mortgage by conditional sale
Usuafructury mortgage
English mortgage
Mortgage by deposit of title deeds
Anomalous mortgage

In simple mortgage: the mortgage is by deposit of title des and in English mortgage , the possession of the mortgage properties is not given to the mortgage

In usufructuary mortgage and in mortgage by conditional sale , possession of the mortgaged properties is normally given to the mortgage

In the case of simple mortgage and mortgage by deposit of title deeds , the mortgagee has a right to proceed against the property mortgaged and also personally against the mortgagor.

Mortgage is to be created by way of deed and requires to be registered under the registration act.

Mortgage by deposit of title deeds is not required to be created by way of a deed and does nor require registration.

The rule of priority in case of successive mortgages is in the order of the time they are created.

Limitation period for filing a suit for foreclosure is thirty years that date mortgage debt becomes due.

Limitation period for filing a suit for sale of mortgages property is twelve years from the date mortgage debt become due.

Enforcement of mortgage is government by the code of civil procedure 1908 .suit for sale of mortgages properties should be filed in the court within whose jurisdiction the mortgage property is situated.

In a suit for sale of mortgaged properties, the court first passes a preliminary decree and thereafter final decree.

Right of Appropriation

When a debtor has several debt with a creditor, section 59, 60 and 61of the Indian Contract Act 1872, deal with appropriation of payment made by the debtor to the creditor. The principle also applies to the loans obtained from a bank. We should also understand clearly the different between right of appropriation and right of off. When a Fixed deposit receipt of appropriated before maturity it is under the right of appropriation and when it is appropriated after maturity the right of set off is exercised.

Registration Of Charges

What is a Charge?

It may be noted that the word ‘charge’ is used to mean any form of security for debt, unless the word is used otherwise. Sec. 77 of the Companies Act, 2013 provides that for the purpose of registration under the said Act, it includes all the following charges: − A charge for the purpose of securing debentures − A charge on uncalled capital of the company

A charge on any immoveable property, wherever situated, or any interest therein

A charge on any book debts of the company
A charge, not being a pledge, on any moveable property of the company
A floating charge on the undertaking or any property of the company including stock-in-trade
A charge on calls made but not paid
A charge on a ship or any share in a ship
A charge on goodwill, on a patent or a license under a patent, or a trademark, or on a copyright or a license under a copyright

Types of Charges

‘Charges’ registered under the Companies Act can be classified into two types:

Fixed Charge; and
Floating Charge.

Fixed charge: ‘Fixed charge’ is also called ‘specific charge’. It extends over a specific property or properties of the company. In other words, when a particular or a specific property of the company is given as a security for loan, then a ‘fixed charge’ is said to be created over the property. It may be noted, that charges specified in Sec. 77 of the Companies Act, 1956, created in conformity with the provisions of the said Act over a specific property gives right to the creditor so secured, to sell the said property and claim the proceeds towards the dues payable by the company.

Floating Charge: A ‘floating charge’ means a ‘charge’ that is general and not specific. It can be said to be a charge:

that floats over the present and future property of the company subject thereto, that means it does not fasten on or attach to any particular or specific property;
that does not restrict the company from assigning the property, subject to charge to third persons, whether by way of sale or security;
that on happening of an event or contingency, crystallises as a fixed charge. From the above, it can be noted that when the charge is floating, the company

JAIIB PPB Module B Unit 5 Different Modes of Charging Securities (Ambitious Baba) PDF