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Legal Issues Relating to Banking Credit AHMED & QAZI Advocates & Legal Consultants.

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Presentation on theme: "Legal Issues Relating to Banking Credit AHMED & QAZI Advocates & Legal Consultants."— Presentation transcript:

1 Legal Issues Relating to Banking Credit AHMED & QAZI Advocates & Legal Consultants

2 HISTORICAL BACKGROUND 1.Human History 2.Emergence of Civilization 3.Need to control collective human behavior 4.Emergence of (criminal) law and law enforcement agencies 5.Emergence of Courts

3 6.Industrial Revolution and development of commerce and trade 7.Emergence of Commercial Law such as contract, negotiable instruments etc. 8.Law and morality / religion

4 9.Legal Systems – Three main groups in the world United Kingdom, United States of America, Canada, Australia, New Zealand, India, Pakistan, Bangladesh etc. France, Germany, Italy, etc. Middle East, China, Iran, Afghanistan etc. 10.Legal and juristic persons 11.Juristic persons – companies – societies - trusts etc.

5 12.Pakistan has a Federal system of government– Constitution divides: a.Legislative Powers Legislative Powers between Federal Parliament (NA + Senate) and Provincial Assemblies in four Provinces (Article 142 of the Constitution) Examples - Federal - Foreign Policy, Defence, Monetary Policy etc. Provincial – Subjects dealt by provincial assemblies are Stamp-Registration-Police

6 b.Executive Powers Between Federal Government and Provincial Governments. 13.Hierarchy of legislation in Pakistan i.Constitution ii.Federal Act/Ordinance iii.Provincial Act/Ordinance iv.Sub Ordinate Legislation through Rules & Regulations notified/issued under powers granted by Act or Ordinance

7 14.Licensed Activities  Driving  Hunting  Insurance  Flying aero planes  Deposit taking from public (i.e. Banking)

8 BANKS 15.Banks are juristic person that in Pakistan are licensed by State Bank of Pakistan under Banking Companies Ordinance 1962 to engage in the licensed activity of banking. 16.As companies, they are subject to Companies Ordinance 1984 and as such are regulated by Securities and Exchange Commission of Pakistan. 17.With regard to their business of banking, they are subject to regulations of SBP under BCO and under hundreds of Rules and Regulations issued by SBP under the authority given to it by BCO

9 18.Most Legal disputes and issues that banks have to face are not related to deposit taking but to the extension of finance facilities (banking credit) 19.Banks are engaged in the business of financial intermediation (i.e. deposit taking, extension of finance facilities) and thereby seeking to generate profit from the difference between Mark-up rates between the two

10 20.SBP requires banks not to extend any unsecured facility over 0.5 M (R-4) 21.All facilities above Rs. 0.5 M have to be secured in accordance with the applicable Prudential Regulations


12 LAW OF PROPERTY 22.What is property – It has not been defined in any statute. 23.Movable and immovable property 24.Intangible assets and tangible assets 25.Fixed Assets and Current Assets and Receivables–Accounting terms–Not legal terms

13 OWNERSHIP OF MOVABLE PROPERTY 26.Mostly no record is kept of ownership –In some cases, record is maintained, e.g. cars etc.

14 OWNERSHIP OF IMMOVABLE PROPERTY 27.How ownership of immovable property is determined 28.The Transfer of Property Act (IV of 1882) 29.Sale – Lease – Assignment

15 30. The Registration Act (XVI of 1908) System of registrars of documents in all four provinces S. 17 gives list of documents that are compulsorily required to be registered (i.e. any document relating to transfer of or affecting any right in immovable property) All sale deeds and mortgage deeds are compulsorily registered

16  S. 18 makes the registration of all other documents at the option of parties (e.g. Service Contract)  Effect of non registration of a document that is to be registered compulsorily – S. 49

17 31. Registrar of documents – One Registrar in Karachi under whom there are 24 Sub- Registrars each dealing with specific area. 32.Process of registration of a document–3% registration fee and 1% stamp duty– Normal (takes more than one year) Urgent (takes about 45 days)

18 STAMP DUTY 33.What is stamp duty? Stamp Act - Provincial Statute 34.Stamp duty is payable on document not transaction 35.Stamp Duty on banking documents – Article 19 of the Schedule of Stamp Act 36. Sindh Board of Revenue – its powers and functions–All registrars function under this Board – Board is responsible for collection of registration fee and stamp duty

19 CHARGE 37.What is the purpose of obtaining a Charge? 38.Charges Over Movable Properties  Pledge  Hypothecation

20 CHARGES OVER IMMOVABLE PROPERTIES 39.Two Main Types of Mortgages Legal/Simple Mortgage (S. 58(b) TPA) Owner or his registered attorney signs a formal document expressly creating mortgage rights infavor of another party. This document is normally called Mortgage Deed and needs to be registered compulsorily.

21 Both registration fee and stamp duty are payable at the time of registration of Mortgage Deed. The above amounts are payable ad valorem (percentage) of the amount of Mortgage and NOT the value of property.

22 Advantages Universal Notice Owner may not deal with the property or sell it. Disadvantage It involves expense and hassle of time and effort

23 Equitable Mortgage (S. 58 (f) of TPA)  This mortgage is created by mere act of depositing original documents of property by the owner or his agent with the mortgagee or mortgagee’s agent  MODT – Purpose Advantages No document is required to be signed for creation of this mortgage No need to go to registrar No Stamp Duty – No Registration Fee

24 Disadvantage of Equitable Mortgage Being a silent mortgage, third parties have no knowledge of it and owners often obtain CTCs and then sell those properties or get mortgage deed registered in favor of third parties. Although such subsequent dealings are subordinate to earlier Equitable Mortgage, having such subsequent dealings set aside is always a big practical problem for equitable mortgagees

25 Prudent Practice of Banks In removing the problem, the banks have rightly developed the practice of obtaining 1% Token Registered Mortgage

26 Important Clarification 40.How can a large company create equitable mortgage in favor of more than one banks. Title deeds are deposited with one mortgagee bank which confirms to other subsequent equitable mortgagees that it is holding the said title deed on its own behalf as well as on behalf of other bank. Such confirmation meets the requirement of S. 58(f) of TPA

27 COMPANY LAW 41. Charge on the assets of a company – Creation of charge – S. 121 of Companies Ordinance 1984 (CO), requires that every charge created over the assets of the company should be reported/notified with SECP within 21 days of its creation – Charge created stands perfected upon registration

28 Important Clarification 42. Charges and mortgages over movable and immovable properties of companies are not created under CO. They are created in accordance with other provisions of law (i.e. TPA). S. 121 of CO only requires that the charges once created should be reported/notified with SECP.

29 A major error that bank officials often commit is to assume that just by obtaining a document from a company confirming creation of charge over all its “Fixed Assets, Land and Building, Plant and Machinery” and having that document duly registered through “Form-10” with SECP, the bank has also obtained charge over immovable property (Land and Building). This is incorrect. Charge on immovable properties can only be created under S 58 of TPA

30 43.Law provides for automatic ranking of charge (i.e. there is automatic queue of charge holders in accordance with date of reporting of their charge) 44.Practical and commercial consequences of ranking of charges (i.e. 1 st charge holder, 2 nd charge holder etc.) 45.The queue of charge holders can be broken if the charge holder standing ahead in the queue consents to junior charge holder enjoying the same rank of charge as that of its own. Such consent is normally given by senior charge holder issuing NOC to junior charge holder for pari passu ranking of charge

31 Practical Advantage For Junior Charge Holders in obtaining pari passu ranking of its charge is equal but proportionate sharing with senior charge holders of the sale proceeds of the assets of the company/borrower

32 46.What an NOC should contain: We have no objection to your charge upto an amount of Rs. _____ ranking pari passu to the charge that our bank is holding over ________ (assets of the company)

33 47.Important Clarification When obtaining NOC from a senior creditor for pari passu charge, in case such senior charge holder is also holding title document of the company, then you must ensure that such senior creditor either in the same NOC letter or in separate letter, clearly confirms to you that it is holding title deeds on your behalf also. Without this confirmation, there will be no equitable mortgage in your favor

34 Partnership as Bank’s Customer 48. Agency – Agent and Principal 49. Partnership Firms – partnership is not a separate legal entity 50.Relation Between Partners 51.Joint And Several Liability of Partners

35 52.Why partnerships should be avoided as customers – potential for dispute – modification/termination of partnership deed – inheritance dispute 53.Partner as agent of the Firm

36 54.Murabaha financing 55.Execution of IB documents – blanks – witnesses – dates 56.No markup on markup

37 57. Financial Institutions (Recovery of Finance) Ordinance, 2001 – Basic outlines of procedure, requirement and remedies available 58. Banking Courts – Five Banking Courts in Karachi – If recovery amount is above Rs. 50 M than High Court has the jurisdiction

38 59.The above Recoveries Ordinance provides the best possible mechanism for banks to obtain speedy remedies. There is need for banks to supervise and monitor the performance of their counsels. Except in rare cases, there is no reason why, at least interim decree, may not be obtained within 6 months to one year

39 60.Mandatory requirement to file Leave to Defend in 30 days 61.Mandatory requirement for customers to comply with S. 10(4) of the ordinance. If they failed to comply, the Ordinance require the court to reject Leave to Defend and proceed to pass decree in favor of banks

40 62.And if customers comply with (S. 10 (4)) in Leave to Defend, then court must pass interim decree for at least the undisputed amount

41 63.Considering all the ground and practical realities, we think it is banks’ interest to pay their counsels good professional fees and monitor their performance and instruct them not to obtain any adjournment or give consent to seeking adjournments by other sides without the consent of the bank’s dealing officer



44 Particular Day To Day Issues & Queries Raised By Banks 64.What are Title Deeds 65.Types of properties in Karachi – KMC properties – lease hold – Land Utilization properties – residential – commercial – industrial – amenity plots 66.What are main leasing authorities in Karachi – KDA (CDGK) – DHA – PECHS – SITE 67.Mukhtiarkars

45 68.Documents involved in different types of properties in Karachi. CDGK: Allotment/Transfer order- Possession order- Acknowledgment of Possession Lease Deed PECHS/DHA: Allotment/Transfer Order- Form A Sub- Lease, Form B Lease

46 69.Search Certificate. What is a Search Certificate – Its purpose 70.How to confirm genuineness of a title document – modes – central record – micro filming – leasing authority – duration

47 71.Certified True Copies (CTC) – Whether CTC is a title document – Whether a CTC may be accepted for the purpose of mortgage 72. PTM/NOC/NEC 73.What is chain of documents

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