Modification of Charge

[Vivek Hegde]

Dear Members

Can anybody tell whether the following amounts to modification of charge:

There is an existing charge on the Stocks, Properties etc. The same lender is lending additional amount on the same property. New Loan Agreement/ Hypothecation agreement has been executed without any reference to the earlier agreements. 

The sanction letter (which is in kannada) states it is an additional term loan.

Thanks in advance.

Warm Regards

CS Vivek Hegde,B.com, ACS, CWA
Company Secretary in Practice
No. 405, 4th Block, 7th Cross
Koramangala, Bangalore-560034
Mob: 09019756940/09900898223

[Arvind Gupta,CS]

Dear Vivek,

Case 1: If new assets are created out of the additional new term loan, then the encumbrance through deed of hypothecation would be created on new assets created out of this additional term loan.

 

The charge on the already existing properties would rank pari passu with the earlier loan facilities (as per security conditions prescribed in sanction letter).

 

In this case there would be no modification and new FORM 8 needs to be filed.

 

Case 2: If the additional term loan is an “enhancement” in limits by the lender, then modification of earlier form 8 is required. In this case the earlier deed of hypothecation stands revised with total limits, i.e. earlier limits + enhanced limits.

Please share if this is ok as per my understanding. 

Regards,

Arvind

 

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[Vivek Hegde]

Dear Aravind

Thanks for your response.

In my case the new hypothecation deed/loan agreement does not talk of earlier facility. But the collaterals are the same. Will it amounts to modification? 

According to me "no".

What is "enhancement"?

Vivek Hegde

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[Arvind Gupta,CS]

Dear Vivek,

Yes, there is no modification in your case. New form 8 will be filed.

Collaterals are security cover for the bank. 

“Enhancement” means the increase in the amount of limits on the nature of facility already being used by the company.

 

In case you are availing working capital facilities for Rs.100 crores in year 2010 then form 8 would have been filed for the year 2010 with amount of Rs.100 crores.

 

In year 2011, when the limit of working capital increases from Rs.100 crores to Rs. 150 crores, then this excess Rs. 50 crores is “enhancement” by the Bank. In this case form 8 would be modified.

Regards,

Arvind

[Vivek Hegde]

Thank you Mr. Aravind. I am clear now.

Is it wrong to treat the "enhancement" as new loan and creating new charge instead of modification? Just had a thought..!

Vivek

[Arvind Gupta,CS]

Filing new form 8 for enhancement is wrong in my opinion due to two reasons as below: -

1. If the limit of borrowing secured by a charge duly registered with the concerned Registrar of Companies is enhanced or reduced, such a change will amount to modification. Consequently, requisite particulars shall be filed by modification in e-Form 8. 

2. Charge is created to safeguard the interest of the lender. When working capital facility is given by banks, they keep some margin on bookdebts & stocks (prime security)-- say 25%; Therefore if stocks + bookdebt is Rs.100 crores, then bank would give (75%) i.e. Rs.75 crores only.

 

Now when enhancement comes by Rs.50 crores then total limits become Rs.150 crores and bank finances 75%, i.e.Rs.112.50 crores.

 

The nature of prime security is same and due to enhancement only a proportionate increase comes in the bookdebts and stock. Therefore form 8 is modified in order to give effect to the nature of security identifiable at the time of winding up of the company/borrower.

Regards,

ARVIND

[Sakshi Vaid]

i have a very small ans. :there is change in  the amt of loan (on same prpty though) and it amts to modfn .that alone is sufficient reason

On Fri, Feb 4, 2011 at 11:10 AM, Vivek Hegde <vivekhe...@gmail.com> wrote:

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