The phrase “Appropriation of Security”** has a specific meaning in banking and law. Let me explain it in a structured way for you:
📘 Meaning
Appropriation of security refers to the right of a creditor (e.g., a bank) to apply or utilize the security provided by a debtor towards the repayment of a specific debt or liability.
* When a borrower owes multiple debts to a bank and has pledged security, the bank may decide to appropriate (apply) that security against a particular debt.
* If the borrower does not indicate which debt the security should cover, the lender can decide the appropriation, subject to legal principles and contractual terms.
⚖️ Legal Basis (in India)
1. Indian Contract Act, 1872 (Sections 59–61)– These sections deal with **appropriation of payments**, which is closely related to appropriation of securities.
* If the debtor specifies which debt the payment (or security) applies to, the creditor must follow that.
* If the debtor does not specify, the creditor can apply it to any lawful debt.
* If neither party specifies, the law applies the payment/security to debts in chronological order.
2. Banking Law – In case of multiple accounts, securities may be appropriated by the bank unless specifically earmarked for one account.
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🔑 Key Points
* Security can only be appropriated for a lawful debt.
* If a borrower has one loan secured and another unsecured loan, the bank cannot automatically use that security for the unsecured loan unless agreed.
* Courts generally uphold the principle that security should be applied fairly and in line with contractual terms.
Example
* A company gives a bank a mortgage on property for a term loan.
* Later, the same company takes a **working capital loan**.
* If the company defaults, and the mortgage deed specifies the property is for the term loan, the bank cannot appropriate that property for the working capital loan unless agreed.
A Charge means an interest or lien created on the property and assets of the company or any of its undertakings or both as security and includes a mortgage.
When a charge created on the property and assets of a company is registered by ROC, it is a notice of such charge to the public from the date of such registration. Any person dealing or acquiring such property or part thereof shall be deemed to have notice of such charge from the date of registration of the charge.
What happens to the lender if the charge created is not registered?
The charge created over security offered becomes void if it is not registered within the stipulated period prescribed under section 125 of companies’ acts. Where a charge is void for non-registration, no right of lien can be claimed by the creditor on the documents of title, as they were only supplementary to the charge and were delivered pursuant to the charge. Further, the unregistered charge becomes unenforceable on the date of winding up order; as the Official Liquidator would treat such creditor whose charge is not registered as an ordinary creditor instead of a secured creditor. Even in the case of going concern, the first charge holder loses the priority of a charge holder if the charge created by him has not been registered. For instance, if the subsequent charge is created on the same property by another lender, the subsequent charge holder who has registered the charge would enjoy priority of charge over such property or assets. In such cases, the second charge-holder (who registered the charge first) may at any time attach the exact property of the borrower and get the charge enforced by selling or disposing–off such property to recover his dues.
The important point to be noted here is that the borrower company is not discharged from its liability and obligations to the creditor just because the security offered for such liabilities turn out to be invalid. The consequence of non-registration of charge is that it badly hits the creditor as explained above i.e. the lender loses the security offered to him for the money financed and also he loses his secured creditor status against the liquidator and other creditors.
In terms of section 125(3) of companies acts, when a charge becomes void, the money secured thereby shall immediately become payable by the company. Further, the company, and every officer of the company or other people who are in default, shall be punishable for not registering the charge (section 142(2) of company acts).
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