SECURITIES FOR LOANS

SECURITY
Property or goods that you promise to give to someone if you
cannot pay them what you owe them
Example: She used her shares in the company as security
against a 2 million bank loan.
Example: The hotel held onto our baggage as security while
we went to the bank to get money to pay the bill.
SECURITY INTEREST
A security interest is a property interest created by
agreement or by operation of law over assets to secure the
performance of an obligation, usually the payment of a debt.
It gives the beneficiary of the security interest certain
preferential rights in the disposition of secured assets. Such
rights vary according to the type of security interest, but in
most cases, a holder of the security interest is entitled to
seize, and usually sell, the property to discharge the debt
that the security interest secures.
LIEN
Right of a creditor to hold possession of goods of debtor till
he discharges his debt.
CHARGE
When charge (control) is created in favor of a bank, it confers
a right on the bank over some tangible assets of the
borrower.
FIXED CHARGE
A fixed charge is one which attaches to specific immovable
properties such as land, buildings & machinery.
The borrower is prohibited in dealing with the assets in the
ordinary course of business.
FLOATING CHARGE
It is created on the assets which are constantly changingstocks
It is a charge on assets , present and future
The borrower can deal with the assets in normal course of
business
PLEDGE
Bailment (delivery) of goods as security for payment of a
debt or performance of a promise. The person who offers
the security is called the pledger or pawner or bailor . The
creditor is called the pledgee or pawnee or bailee.
Goods must be delivered by the pledger to the pledgee.
The delivery may be actual or constructive. Eg. Delivery of
the key of the ware house where the pledged goods are
stored is a constructive delivery and sufficient to create a
pledge.

A pledge involves a transfer of possession, not the title of

goods. Pledgee has only special interest in the property.
The general interest remains with the pledger.
The ownership of goods pledged remains with the pledger.
Pledge can only be made of moveable properties.
A contract of pledge must be supported by a valid
consideration.
Pledge is always created by a contract, whereas no
contract is necessary for a right of lien.
Pledgee has the right to sell the goods on default of
borrower. In case of lien, the creditor does not have in
general any right to sell the goods. Pledgee has the right
to sue through a court of law, whereas lien-holder cannot
enforce its claim through a court.
Pledgee is responsible to take reasonable care of the
goods pledged and not use them and cause damage to
them.

HYPOTHECATION
A mode of securing a loan by creating a charge on
moveable assets without surrender of possession or
ownership
The ownership and possession of assets charged remain
with the borrower
The borrower can deal with the assets (sell the assets such
as inventories)
This mode is used for loans for working capital (raw
materials and finished goods) and also for automobiles
(but the auto cannot be sold by the borrower)
The charge is created by means of a letter of
hypothecation
Thus hypothecation is a floating charge on the borrowers
assets, present and future
It is crystallized when the borrower defaults, and the
banker takes steps to enforce the security
MORTGAGE
A mortgage is a security interest in real property held by a
lender as a security for a debt, usually a loan of money. A
mortgage in itself is not a debt, it is the lender's security for
a debt. It is a transfer of an interest in land (or the
equivalent) from the owner to the mortgage lender, on the
condition that this interest will be returned to the owner
when the terms of the mortgage have been satisfied or
performed. In other words, the mortgage is a security for the
loan that the lender makes to the borrower.
ESSENTIAL FEATURES OF MORTGAGE
- There must be transfer of interest in an immovable
property

Transfer of interest means that the owner (mortgagor)

transfers some of his rights to the bank (mortgagee)
and some rights are still being retained by the owner.
The owner retains the right of redemption (acquire
back) of the mortgaged property
Thus mortgage differs from sale in which ownership of
the property is transferred
The immovable property intended to be mortgaged
must be specific, clearly identifiable and be described
Must be supported by a lawful consideration
The consideration may be either money advanced or to
be advanced by way of a loan or the performance of a
contract
But transfer of property for the discharge of debt is not
a mortgage

TYPES OF MORTGAGES
Transfer of property act of 1882 lists six (6) types of
mortgages.
Of these six the following two are widely used in Pakistan.
SIMPLE MORTGAGE
Also called Registered or Legal Mortgage
Legal title of the mortgaged property is transferred to
the mortgagee, but physical possession remains with
the mortgagor
Mortgagor binds himself personally to pay the mortgage
money, and get the property reconveyed to him
In case the mortgagor fails to pay, the mortgagee may
obtain a decree(court order) for sale of the mortgaged
property
The mortgage must be registered
The registration is very expensive and cumbersome as it
requires payment of stamp duty and other formalities
such as income tax clearance certificate and nonencumberance certificate
EQUITABLE MORTGAGE
Also called Mortgage by deposit of title deeds
It can be created in Karachi, Lahore and other specified
towns. At present all district headquarters are included
for this purpose.
There should be debt for mortgage
Title deeds of immovable property are to be deposited
with the bank (mortgagee)
Deposit should be made with the intention of creating a
security for a debt

The creation of equitable mortgage is time saving, less

expensive, and requires no registration or execution of
mortgage deed, it is quite common in Pakistan

GUARANTEE
A bank loan can also be granted against the security of a
guarantee. The borrower may provide the requisite
guarantee from:
An individual, called a personal guarantee
A company, called a corporate guarantee (caution: in its
ordinary course of business a company is not authorized
to issue guarantees)
A bank, called a bank guarantee. Other type of financial
institutions such as an insurance company can also
provide guarantees
Question: Can a partnership firm issue a guarantee?