Right of second charge holder

[Kaliappagounder Muthusamy]

Views solicited on the following:

 

Company A Ltd availed Term loan facilities from B Bank by creating equitable mortgage on the properties D,E, F.G & H

The company has also availed working captial facilities from C Bank by creating second charge on the above properties.

 

B Bank has ceeded second charge and holding the title deeds for itself and as a trustee for C Bank.

The funding pattern of B bank and C Bank is 92: 8

The company proposes to sell one of its properties  say D and settle a part of the loan of B Bank. C Bank insists that it should also be paid to the extent of 8% of the sale proceeds.

However B Bank is not willing to part any amount and says that the second charge holder will be paid only after the dues of first charge holder is fully settled and further says it is a going company and not a company under dissolution.  It further adds that the second charge holder is having other securities too.

However the C bank is not willing to modify the charge with ROC and because of that the buyer is reluctant to buy.

How to come out this situation.

Who right Bank B or C.

What is the legal position in this respect.

Is Marshalling of securities as contained in Transfer of Properties Act has any applicability here.

Please share your thoughts

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K.Muthusamy B.Com,FICWA,FCS

JMACS ASSOCIATES

Company Secretaries in Practice

Lakshya 2nd Floor, 1056/1 Avinashi Raod

Coimbatore-641018

0422-4391973, 0422-4204791

On move: 94433 -71791

[CS A Rengarajan]

The General rule is that first charge holder will get priority and  second charge holder only get when there is surplus. 

When you have pari passu charge then second charge holder claim is right. I am giving example of pari passu charge 

My view is that entire proceed will go to first charge holder unless and until pari passu charge will be created with both the charge holder

Normally when banks or financial institution funding to corporate they may insist for pari passu charge so that equal rights will be available to both the institutions.  

The use of "Pari Passu" when creating a charge means that when company Y goes into dissolution, the assets over which the charge has been created will be distributed in proportion to the creditors' respective holdings. Therefore, if the Bank X has tendered a loan facility of 60 million PKR while another creditor, say Z, has tendered 40 million PKR, the recovery after selling assets of Company Y to which joint pari passu charge attached, shall be distributed in the ratio of 6:4 amongst X and Z. Where preferential rights attach to assets of the company, the preferential creditors rank higher in the distribution stakes i.e. they are paid in priority to other creditors of the company

Best Regards

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csarengarajan
Company Secretary, Chennai
email csaren...@gmail.com
mobile 093810 11200
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