(The article gives the insight of important points to be borne in mind at the time of execution of loan documents with a to z check-list.)
The system of obtaining proper documents as per sanction terms is called documentation. Without the proper documents, it is hard to create a legally enforceable charge for the security offered. The selection of proper documents, and the capacity, and competence of the parties to the execution of documents determine whether the document is legally valid and capable of enforceable under the law. The properly executed document also aids in identifying the borrower, guarantor, and security offered for the specific credit facility.
The role of loan documentation is to establish a legal relationship between the lender and the borrower when the dispute goes to a court of law. Therefore, the loan document shall cover the necessary covenants to create the rights and obligations of the lender bank, the borrower, and the guarantor. The document of a loan comprises agreements executed by the borrower and the guarantor of a particular loan transaction. The loan application received from the borrower, and sanction endorsement acknowledged by the borrower and the guarantor are also a part of the loan document.
The accurate execution is the bedrock of legally enforceable loan documents. The following are the important points to be borne in mind by the parties involved at the time of execution of loan documents;
a). Sanction terms and conditions shall be conveyed to the borrower, in writing, and acceptance of sanction terms and conditions obtained from the borrower and the guarantor shall be the part of documents.
b). A document should be stamped before or at the time it is executed. Therefore, the date of execution cannot be earlier than the date appearing on the stamp paper. c)Stamp duty is not uniform all over India. Proper stamp duty is to be paid according to the duty applicable to the state where
c). Stamp duty is not uniform all over India. Proper stamp duty is to be paid according to the duty applicable to the state where the document is executed. However, if some document is to be executed outside the state by an executant who resides in another state, the excess duty if applicable to that instrument in the other state shall be paid there.
d). The executant of documents should read the content of documents prior to execution. The executant ( both the borrower and the guarantor) of documents should sign in full on all the pages of the documents and not by initials. The cutting, overwriting, and interlineations must be authenticated by the full signature of the executants/s. e). While filling in blank spaces of a printed form of stamped paper, it is desirable to use the same pen
e). While filling in the blank space of a printed form of stamped paper, it is desirable to use the same pen, up to the end of the form. The different colour ink used to fill in the same form gives rise to the suspicion that the blank column was filled in later on without the knowledge of the executant, which is bad in law.
f). There is a possibility that the executant may sometimes not accept his liability arising out of a blank filled in by the others, under the pleas that it is filled in without his knowledge. To avoid such a situation wherever blank space is filled in by a person other than the executant, it is sensible to obtain the signature of the executant as proof that the executant has seen the contents filled in.
g). It is to be ensured that the person who is executing the document is competent to enter into the contract. For example, Minors, Lunatics, and un-discharged insolvent are not competent to enter into any contract under Indian Contract Act.
h). Due care has to be taken to confirm that the executant at the time of execution of the document is not under the influence of intoxication. This is because the executant of the document may reject his liability under the pleas that he was in a state of intoxication at the time of executing the document. Under the contract act, a valid contract takes place when parties to the contract are of sound mind. A person of sound mind means a person capable of understanding the content of the contract and of forming a rational judgment as to its effect upon his interest.
i). The husband of a married woman is not liable for debt incurred by his wife as a borrower or standing as a guarantor to the loan unless he has specifically undertaken to clear her liabilities. In the absence of a specific undertaking from the husband, she is liable only to the extent of her independent estate. It is, therefore, important to make sure that the concerned woman owns an independent estate, before accepting her in her individual capacity as a borrower or guarantor.
j). The stamp paper used for the documents should be purchased in the name of the parties to the execution of the contract. Due care has to be taken that the stamp paper which is purchased in the name of a third party who is not a party to the contract should not be used for the execution of the document.
k). The impressed stamp shall be used and written in such a manner that the stamp shall appear on the face of the instrument. l).Every stamp paper purchased should be used only for one instrument. No second instrument chargeable with duty shall be written upon a stamp paper on which an instrument chargeable with duty has already been written. Any instrument contrary to the above is deemed as unstamped under sections 13 and 14 of the stamp act.
m). Where two or more sheets of impressed (engraved/embossed) papers are used to make up the amount of duty chargeable in respect of any instrument, each sheet so used should have written or typed on the substantial portion of it. Affixing impressed stamp papers on printed forms is legally not proper and may not be admitted in the courts as prima facie evidence.
n). The loan document should be executed in the presence of an authorised officer of the bank. The documents should not be given to borrowers for obtaining signature/s from other borrowers or guarantors. The documents should be executed in one sitting.
o). Below the thumb impressions obtained from the illiterate person/s, it should be mentioned that L.T.I (Left Thumb Impression) or R.T.I (Right Thumb Impression) of so and so (write the name of the person/s) as the case may be.
p). If the borrower or guarantor is illiterate or a person signing in a vernacular language, it is necessary to have a certificate stating that the contents were read and explained to him/her and the document is executed on his/ her own will after understanding the contents of the agreement and terms and conditions of the limit sanctioned. This is in order to avoid any dispute regarding the awareness of the contents of the documents.
q). A sole proprietor should execute the documents with a property stamp (representative capacity). If the executant is a partnership firm, the documents should be signed by all the partners or a letter of authority should be obtained from absent partners in favour of selected partners to execute the documents.
r). In case the borrower is a partnership firm, it is desirable to obtain the personal guarantee of all major partners in their individual capacity. Whenever a limited company is a partner; the authority of the person signing on behalf of the company should be verified. When a minor is admitted to benefits of the partnership, the guardian’s signature should not be taken in loan documents on behalf of the minors.
s). In the case of Limited companies, proper care is to be taken that the executants of the document are authorized signatories to sign on behalf of the borrower company. The execution of documents should be as per the stipulation contained in the resolution passed at the meeting of the board of directors. The resolution passed in the meeting of the board of directors should also clearly specify who would execute the documents on behalf of the company. Documents executed by the company should be affixed with a common seal only if it is required under the common seal clause in the Articles of Association of the company. If a common seal is required to be affixed, then the board resolution should contain the names of the Directors and Officers in whose presence the seal is to be affixed.
t). In the case of a mortgage of properties the following documents should be obtained. (i) Mortgage deed executed on stamp paper (ii) if the memorandum of mortgage or mortgage deed itself is registered, receipt of the registration fee paid should also be attached to the mortgage deed (iii) boundaries and areas are shown in the title deed should be in conformity with the mortgage deed. (iv)Encumbrance certificates traced for the last 13 years should be held. (v) Up-to-date property tax paid receipt should be properly held (vi) All the original title deeds and other relevant documents as per legal opinion should be deposited to the bank (vii) authorized persons only to create mortgage (viii) Record of dates to be observed in case of the second charge, pari-passu charge, and NOCs should be obtained properly from first charge holder. (ix) Valuation of Properties & legal opinion should keep along with mortgage documents.
u). If the advance is of the nature of running an account where the balance in the account is in the nature of fluctuating or adjusted or revived, then the letter of continuity is to be obtained in addition to DPN. The letter of continuity is not required in the case of loan accounts.
v). The document should bear the place, date, month, and year of the execution as conclusive proof of where and when the document is executed. The above particular also determines the limitation period of the document and also confirms whether the proper stamp duty applicable to the particular place is paid.
w). Any instrument chargeable with stamp duty executed outside India must be stamped within 3 months after it has been first received in India. Example: When a power of attorney (POA) is executed outside India, such POA should be affixed with special adhesive stamps within 3 months from the date same is received in India and also an endorsement on it to be obtained from the authorized officer for the stamp duty collected. The Registrar of assurance (Sub-Registrar Office), Superintendent of Stamps, the office of the Collector, Financial Commissioner, etc. are generally designated as authorised officers for the above purpose under the stamp rules concerned.
x). The details of prime and collateral security offered must be mentioned in the debt contract. In the case of a mortgage deed or memorandum of title deeds to be registered the original deed must be presented for registration with the Registrar of Assurance (Commonly known as Sub-registrar’s office) under whose jurisdiction the property is situated. The registration should be done within four months of the execution of documents.
y). In the case of finance made to public or private limited companies, they have to register their charges with ROC. Section 77 of the companies act 2013 specifies that all types of charges be registered with ROC within 30 days of the creation of charges on its assets whether tangible or intangible within or outside India on its assets or any of its undertakings. Registration of charge acts as a notice to the public at large that the certain ‘Charge holder’ has a security interest in the specific property for the loans and advances made to the company.
z). Revival letters from borrowers and guarantors should be taken before the expiry of thirty-six months from the date of the demand promissory note. Confirmation of balance is to be obtained from borrowers and guarantors normally on a half-yearly basis.
Last but not the least, once the entire documentation process is completed, it is sensible to have a second look at the document obtained, preferably by another official who is conversant with the type of securities and legal nature of the charge to be created. Preserve the document neatly in a separate cover or folder in an identifiable manner. Before keeping the document in the safe room, check once again whether something is entered on the document in pencil or left blank and rectify the mistakes if any then and there. It may not be possible for you to rectify the mistake at a later stage when the borrower does not cooperate.