Ch # 7.

Mortgages & Charges Page 63

BORROWING POWERS OF THE COMPANY

Inherent Borrowing Powers

MOA shall be deemed to contain the powers to borrow money as loans, advances or credit
(including powers to issue securities not based on interest) from scheduled banks or financial
institutions (even if such powers are not included in MOA)

A company having borrowing powers has also power to pledge or mortgage its property or
create a charge on its assets as security for the borrowing.

Companies cannot exercise any borrowing powers before obtaining a certificate of

commencement of business (if applicable)

Ultra-Vires borrowings

§ Company may restrict their powers to borrow through AOA

§ Company can mention that the borrowings exceeding a certain amount may be made only
with prior approval of members
§ If directors exceed their authority in such case and borrow in excess of limit, such
borrowing shall be “ultra-vires borrowings”

Forms of Borrowings

Borrowing by issuing debentures

§ Any security evidencing a debt shall effectively be a debenture

§ Public company may issue debentures to public or may issue debentures to any persons
privately.
§ Debentures may be secured or unsecured

Borrowings from credit institutions

E.g. commercial banks, investment banks, non-banking finance companies, modaraba and all
other business organisations providing facilities for loan against interest or against
participation in profits

Borrowing from other sources

May include sponsors or controlling shareholders of company. This type of financing is usually
unsecured, however, it may be secured against the assets of the company
Ch # 7. Mortgages & Charges Page 64

Types of Security

Pledge: ‘bailment’ of goods as security for the repayment of a debt or performance of a

promise.

Moveable assets => Physical possession with lender

Mortgage: ‘an interest or lien’ created on the property or assets of a company or any of its
undertakings or both as security.

Immoveable assets =>Transfer of Title to lender

Alternate definition of Mortgage (The Transfer of Property Act, ,1882)

Transfer of an interest in specific immoveable property for the purpose of securing payment
of money advanced or to be advanced by way of loan, an existing or future debt, or the
performance of an engagement which may give rise to a pecuniary liability”

Charge: Security for payment of a debt or other obligation that does not pass ‘title of
property’ or any right to its possession to the person to whom the charge is given.

Any asset => A right to take possession in event of company’s default to pay the loan

The two broad categories of charge are:

· Fixed charge: The charge which is created on identified assets like specific land
and building, specific plant and machinery, etc.
· Floating charge: The charge is created over class of assets which changes over
time like debtors, stock, etc. or the entire undertaking of the company.
Ch # 7. Mortgages & Charges Page 65

REGISTRATION, RECTIFICATION AND SATISFACTION OF MORTGAGES & CHARGES

Types of mortgage & charge liable for registration

Following mortgages & charges, including pledge, must be registered with registrar
§ On any immovable property wherever situate, or any interest therein; or
§ For the purposes of securing any issue of debentures;
§ On book debts of the company;
§ On the undertaking or property of the company, including stock-in-trade; or
§ On a ship or aircraft, or any share in a ship or aircraft;
§ On goodwill or on any intellectual property;
§ On any movable property of the company;
§ Based on agreement for the issue of any instrument in the nature of redeemable capital, or
any other interest therein; or
§ Based on conditional sale agreement, namely, lease financing, hire-purchase, sale and lease
back, and retention of title, for acquisition of machinery, equipment or other goods:
If a negotiable instrument has been given to secure payment of any debts, deposit of instrument
shall not be treated as a mortgage or charge on those book debts.

Procedure for registration of mortgage or charge

§ It is duty of company to get the particulars of charge registered with registrar within 30
days of creation
§ Registrar shall issue certificate of registration with his signatures or authenticated by his
official seal in specified manner.
§ The above provisions relating to registration shall apply to a company acquiring any
property subject to a mortgage or charge.
§ Any interested person (e.g. lender) can also register mortgage or charge with registrar
within 30 days of creation
- Interested person shall be reimbursed by company for costs properly incurred in
getting mortgage or charge registered.

Note: Every person buying any property of company shall be deemed to have a constructive
notice of the fact that asset is subject to mortgage or charge

Mortgage/charge created outside Pakistan on property outside Pak

Period of 30 days shall start from the day when the documents should reach Pakistan if sent
with due care from that other country.

Mortgage/charge created in Pakistan on property outside Pakistan

Registration of charge with the authorities of that other country shall also be required for
completion of registration of mortgage or charge.
Ch # 7. Mortgages & Charges Page 66

Consequences of non-registration

§ Mortgage or charge would become void and shall not be accepted as such by liquidator or
any creditor.
§ This shall not affect any contract or obligation for repayment of money thereby secured.

Modification in the particulars of mortgage or charge

§ Modification means the change in terms or conditions or operation of any instrument.

§ Company shall send to registrar the particulars of such modification with a copy of the
instrument evidencing such modification verified in the specified manner.
§ Provisions of registration of mortgage or charge shall apply to such modification as well

Payment or satisfaction of mortgage or charge

§ Particulars of payment/satisfaction shall be submitted to registrar within 30 days from the

date of payment/satisfaction.
§ Registrar shall register the same only after verifying from lender
- Shall grant him a time of 14 days to file any objection
- If no objection is filed by lender; he shall entre in register
- If any objection is filed by lender; he shall communicate the company regarding such
objection
§ Registrar may (even if no information is received from company) enter satisfaction of
mortgage or charge if he is aware that
- A particular mortgage or charge has been repaid; or
- Property no longer remains part of undertaking of company.
If company fails to file the particulars of such satisfaction within the 30 days’ period, the required
particulars may be submitted with additional fee and imposing a penalty as may be specified

Rectification of register of mortgages [Section 108]

§ SECP may (on application of Co/interested person) on terms and conditions seem just and
expedient, order for extension in time of registration or rectification on being satisfied that:
- Omission to register a mortgage/charge within 30 days, or
- Omission or mis-statement of any particular, or
was accidental or due to inadvertence or to some other sufficient cause, or is not
prejudicial to creditors/shareholders, or any other grounds just and equitable
§ SECP may order for extension in time and rectification on terms and conditions seems fit
§ Certified copy of order of SECP shall be filed with registrar within 7 days of such order
§ Extension in time shall not prejudice any rights acquired in respect of property concerned
prior to the time when the mortgage or charge is actually registered.
Ch # 7. Mortgages & Charges Page 67

RECORDS AND REGISTER

§ Every company shall maintain a register of mortgages and charges in specified manner
§ Register and copies of instrument, creating any mortgage and charge or modification
thereof, shall be open to inspection of:
- Any member or creditor of the company without fee; and
- Any other person on payment of such fee as may be fixed by company
§ Non compliance of this section shall attract a penalty of level 1
§ In addition to above penalty, registrar may by order compel an immediate inspection

Every company shall keep at registered office, a copy of every instrument creating any
mortgage or charge or evidencing modification of the terms or conditions thereof