DOCUMENTATION

& LEGAL ASPECTS

Presented by,
Abinash Kr. Mandilwar
Chief Manager, Bank of India
 DOCUMENT IS AN
EVIDENCE OF CONTRACT
❖Banking relationship is a contract between the Bank
& the Customer. (Indian Contract Act, 1872).
❖Customer should be legally capable of entering into
a valid contract .
❖Application from customer to the Bank must be in
the proper form.
❖Above holds good for both Deposit & Borrower
accounts.
❖Banker needs to be conversant with legal provisions
of various Acts.
❖Banker should take care more caution in respect of
lending.
 WHAT IS DOCUMENT
❖ Document means any matter expressed or
described upon any substance by means of
letters, figures or by more than one of these
means intended to be used or which may be used
for the purpose of recording that matter with an
intention of producing the same as evidence.
(Sec.3 of Indian Evidence Act 1872)
❖ In common usage Documents are related to
written record created for the purpose of
evidence while lending the bank funds.
WHY DO WE NEED DOCUMENTS
For creation of charge on the securities.
Means of evidence acceptable to the Court of Law
under Section 61 and 62 of Indian Evidence Act and
Section 34 of Bankers’ Books Evidence Act 1872. To
provide acceptable evidence to the court of law for
enforcing securities charged to the Bank.
Under Negotiable Instruments Act 1881, Banker
acquires a right to file a money suit based on
Demand Promissory Note executed by the
borrower.
NEED & IMPORTANCE OF DOCUMENTS
It identifies borrower, guarantor, security, nature of
charge & creation of Bank’s charge on security.
Written evidence of transaction & hence can not be
disputed by the executant in future.
It is accepted as an evidence of fact in court of law in any
legal proceedings against defaulter. Documentary
evidence (Section 64 of the Indian Evidence Act).
Recording happening of an event/incident.
Helps Bank to safeguard it’s interest by incorporating
protective clauses as & when felt necessary.
Filing of money suit or suit for enforcement of securities.
Deciding period of limitation.
 PROCESS OF DOCUMENTATION
➢ Drafting \ Taking Proper Documents/ Formats
➢ Stamping
➢ Filling Up
➢ Signing/Execution
➢ Checking ( Vetting for limits of Rs. 50 lakhs & above)
➢ Recording
➢ Registration
➢ Documentation Charges collection
➢ Safe-keeping
➢ Keeping documents Alive
4-Mar-20 6
 PRECAUTIONS IN DOCUMENTATION
Obtain full set of documents depending upon the nature
of facilities.
Fill in the documents correctly as per the terms of
Sanction .
Never to deliver blank documents to the borrower for
execution in absentia as it may prove to be fatal.
Schedules of Securities should be properly filled in full
details.
As a principle, the security documents should always be
signed by the borrower/s himself/themselves and not by
their Constituted Attorneys otherwise it may lead to
several legal complications. However, in law such an
execution is not invalid if executed legally. Hence, ZO
legal Dept. Should be consulted in case of necessity.
REQUISITE OF SOUND DOCUMENTATION
➢ Correct name of borrower/guarantor,
➢ Proper Recital (Drafting part),
➢ Properly stamped. Documents with shortfall of stamp duty can
be validated after payment of shortfall in duty along with
penalty. Collector of Stamps is the authority to decide about the
correct amount of stamp duty payable.
➢ Description of security,
➢ Consideration amount, i.e. Amount of loan/limit,
➢ Terms of Repayment,
➢ Other Terms mutually agreed upon,
➢ Place of execution & date of execution,
➢ Duly registered wherever required,
➢ Valid & Legally enforceable.
 CARE TO BE TAKEN IN
DOCUMENTATION DURING EXECUTION
Documents should be properly filled in.
Alteration, if any to be authenticated by executants. Hence, we obtain
Borrower’s/Guarantor’s signatures/initials at every place wherever
‘blanks’ appear which are to be filled.
Execution should be in the presence of officer responsible for obtaining
them as he should be able to identify the executants personally.
Same handwriting, same ink for maintaining continuity and uniformity
in the fields.
Full signature (not initials) & each page to be signed at the end and at
also the places wherever blanks (information to be filled in) appear.
Date & Place of execution.
Date to coincide with first disbursement.
(Our Bank’s practice is to pass on at least nominal consideration on the
date of execution of documents)
 CARE TO BE TAKEN IN
DOCUMENTATION DURING EXECUTION
Word ‘ONLY” never to be put after the amount particularly in the
DP Note.
Power of Attorney (POA) should be registered one.
Documents checked stamp to be put on the reverse of the
documents & initialed by checking officer.
Documents to be entered in the security register under initial of
responsible officer.
Illiterate person – contents of the documents to be explained in
the language understood by him. Declaration to be obtained from
borrower duly countersigned by responsible officer to be kept on
record.
Normally we obtain Right Hand Thumb Impression (RHT) in case
of females & Left Hand Thumb Impression (LHT) in case of males.
 WITNESSING
U/S 3 of TP ACT If document is not duly witnessed
will be treated as not executed must be executed
first then witnessed by 2 or more persons not a
party to the transaction.
1. Mortgage Deed
2. Sale Deed
3. Guarantee Deed
4. POA
5. Assignment on Instrument
6. Will.
 SARFAESI ACT 2002
➢As per SARFAESI ACT 2002, GOI has formed
a Central Registry called CERSAI, HEADED
by the Central Registrar, to maintain a
central register in electronic form.
➢As per the rule framed under this act,
banks/FI must register the creation of
security interest within 30 days of such
creation.
➢It may be registered with penalty within
further 30 days.
 THE CHARGE IS OF THREE TYPES
Fixed Charge: This covers a legal on specific
property of the company and the company
can not deal with the property without
consent of the holder of the charge.
Floating Charge: This is an equitable charge
created on certain assets of the company,
which is continuously changing i.e. .Stock in
Trade.
Pari Passu Charge: This charge is created in
favour of several creditors with equal
priority in proportion to the amount of their
advances.
 STAMPING OF DOCUMENTS
❖The law relating to stamp duty in India is governed by
the Indian Stamp Act 1899, which extends to whole of
India except J&K.
❖ Any document which creates or relinquish or transfers
a right represented in the document needs to be
stamped as per Indian Stamp Act as otherwise, it will
not be admissible as evidence in the court.
❖DP note, Bill of exchange, Bill of lading, Letter of Credit,
Share Transfer Form Debenture, Proxy, Insurance policy
and money receipts need to be stamped as per Central
Act i.e. contained in union list.
❖The State Govt. can prescribe the rate of stamp duty
for instruments other than the one listed in Union list
above.
 STAMP DUTY
Central Government Stamps applicable on
a) DP Note
b) Bill of Exchange
c) Letter of Credit
d) Money Receipt
e) Share Certificate
f) Debenture
g) Proxy
h) Insurance Policy
 STAMP OF STATE GOVT.
State Government Stamps applicable on
a) Mortgage
b) Hypothecation
c) Guarantee
d) Pledge
e) Power of Attorney
f) Partnership Deed
g) Agreements
 TYPE OF STAMPS
[Link]
[Link] Judicial
Adhesive
Special Adhesive
Embossed/E-Stamp
[Link]
 VALUE/CANCELLATION OF STAMPS
➢As per section 17-Document should be
stamped on or before execution.
➢Value of the Stamp - sec 31 In case of doubt
collector stamp duty will decide the amount.
➢By executants in writing and across the stamp
so that it cannot be re used.
➢Non Cancellation or Improper Cancellation will
be deemed as unstamped.
➢One signature to be obtained outside the
stamp also.
 EXECUTION OUT OF STATE/ INDIA
INDIA
If documents executed out side India, then after
reaching to India again stamping is required within 3
months.
STATE
It should be stamped as per state act where it is
executed first then to be send to other state,
difference to be paid if duty is more in second state
(in 2nd state).
If documents are signed in one state end to be
enforced in other state difference to be paid within 3
months of receipt of document.
 EXECUTION OF DOCUMENTS
AS PER TYPE OF BORROWERS
➢ Individual;
➢ Joint Account holder;
➢ Hindu Undivided Family (HUF);
➢ Trusts;
➢ Executors & Administrators;
➢ Agent/Attorney;
➢ Firms – Proprietary & Partnership;
➢ Clubs & Associations;
➢ Limited companies;
➢ Legal provisions & Documentation differ for all above
customers.
DOCUMENTATION BY INDIVIDUAL
➢Individual should be major, i.e. of 18 years of
age in normal or 21 years in exceptional cases,
➢Should be of sound mind,
➢Should not be an undischarged insolvent,
➢Should be in good sense while executing
documents/entering into a contract,
➢Drunken person is not legally competent to
enter into a contract.
[Indian Contract Act, 1872].
CONTRACT WITH MINOR IS NULL & VOID
Person below the age of 18 is called as Minor.
Minor is not capable of entering into contract &
such contract entered into by minor is null &
void. It will not stand in law & the assets of the
minor are not available to the Bank for
appropriation.
Even if advance is granted to the minor against
the guarantee of third party who is legally
competent to execute guarantee, legal remedy
to recover the dues from guarantor is not
available to the Bank.
EXCEPTION – FINANCING TO MINOR
Normally Banks do not finance to the minors.
However, there is an exception where finance
can be made for the benefit of minor. Security
documents in such cases are executed by
Guardian of the minor.
Minor can draw, endorse, deliver & negotiate
instruments so as to bind all other parties
except himself.
Even minor can be a partner & may make an
agreement which will be binding on other
partners but will not be binding on himself.
 COMPANIES ACT (MODIFIED), 2013
REGISTRATION OF CHARGE UNDER THE COMPANIES ACT
➢ Under Section 77 of the Companies Act, the following
charges created by a company are required to be
registered with Registrar of Companies (ROC).
➢ A charge on any immovable property of the company.
➢ A charge on any book debt of the company.
➢ A charge, not being a charge of Pledge, on any movable
property of the company.
➢ A floating charge on the undertaking or any property of
the company including stock-in-trade.
➢ A charge on any issue of debenture, uncalled share, call
made but not paid, a charge on goodwill, patent etc.
4-Mar-20 24
 COMPANIES ACT, 2013
Rules for Charge of Registration:
➢ The applicable forms CHG-1 is required to be completed and
submitted, ON LINE, within 30 days of creation of charge, for
Registration of Charge with ROC.
➢ CHG series from CHG-1 to CHG-9 is to be used for various
purposes.
➢ Charge eligible for registration to be registered within 30 days of
date of execution of such Document, as per which charge is created.
➢ Registrar may condone the delay of another 270 days on payment
of additional fees not more than 10 times the amount of specified
fees.
➢ If not filed within 300 days – Govt. of India, Ministry of Corporate
Affairs, through Company Law Board, is to accord sanction, for
delayed registration.
4-Mar-20 25
 COMPANIES ACT (MODIFIED), 2013
➢ Consequence of non-filing of charge Form for
Registration with R.O.C.
➢ A charge, if not registered, is void against the
liquidator in case the company goes in liquidation and
against the creditor who has created & registered
charge on the same assets. However, a charge,
although not registered, is a valid charge against the
company as long as it is a going concern. Further, the
priority of charge is reckoned from the date of its
creation and not from its filing/registration, AS
HITHERTO.
4-Mar-20 26
 CASE LAW FOR RTO REGISTRATION
➢CONSEQUENCE OF NON-REGISTRATION OF
CHARGE OF A MOTOR VEHICLE WITH R.T.A.
➢Non – registration of charge on the vehicle
with Regional Transport Authority
discharges the guarantor under Sections
139 and 141 of Indian Contract Act (Jose
Inacio Lourence Vs. Syndicate Bank and
another – H.O. [Link]. 83/124 dated
29.05.89)
4-Mar-20 27
 FINANCING BY MULTIPLE BANKS &
CONSORTIUM FINANCE
❖Increasing frauds owing to lack of information about
credit history & conduct of account among banks.
❖Policy on Joint Lending Agreement prepared by
Ministry of Finance (GOI) & given to the PSBs.
❖Joint Lending Arrangement (JLA) is mandatory for PSBs
in case of borrowers seeking credit limits of Rs. 150
crore & above from multiple banks.
❖Financing banks also required to exchange information
on continuous basis for proper monitoring of the
accounts.
 LIMITATION PERIOD OF DOCUMENTS
➢Limitation Act prescribes max. period within
which Bank can enforce it’s right to recovery in
court of law. No suit is allowed after lapse of
limitation period.
➢DP Note – 3 years from the date of execution.
➢Mortgage – 12 years from the date of creation of
charge.
➢Guarantee – 3 years from the date of invocation
of guarantee.
➢Execution of Decree – 12 years from the date of
decree.
 LOAN ACCOUNT-WISE LIMITATION
❖DEMAND LOANS….3 Years from date of loan
❖DP Note 3 Years from the date of DPN
❖Term Loan … 3 Years from due date of
each installment
❖CC Hyp. of stock 3 Years from date of document.
❖Bills discounting 3 Years from due date of
respective bill
❖Bills purchase 3 Years from bill date
❖Execution of decree..12 Years from date of
decree
DOCUMENTATION IS A WIDER CONCEPT
Documentation is not restricted only to the security
documents.
Also includes every important document right from
Loan Application, CBD-23, Other supporting papers
submitted by the Borrower, Sanctioned Proposal,
sanction conveying letter to the borrower,
Inspection Reports, Statement of Account,
Important correspondence with the borrower &
every such important piece of document that
strengthens Bank’s case against the defaulter
borrower.
Hence, Documentation needs to be done in all
seriousness to protect Bank’s interest.
 FACILITY WISE DOCUMENTATION
❖Branches need to obtain prescribed stipulated
documents depending upon the nature/type of
loan/finance & terms of sanction.
❖Documents for Retail loans are stipulated in
respective Master Branch Circulars.
❖Details about the relevant Branch Circular Nos.
of Retail loans & other information about CHA
series documents is given by way of an
Annexure to this PPT. security [Link]
WHO WILL EXECUTE THE DOCUMENTS
Minor – Guardian to execute clearly stating
him as guardian for the minor.
Sole Proprietorship – Proprietor to sign
documents on behalf of the firm as well as
in his individual capacity. On DP Note “We”
to be written.
HUF – Documents to be executed by Karta.
All major coparceners to be made
guarantors.
 WHO WILL EXECUTE THE DOCUMENTS
Illiterate Borrower –Normally Left hand thumb
(LHT) impression in case of males in the presence
of Bank official. Wording to appear below LTI –
“Left Thumb Impression of Shri---------------------”.
This should not be attested on the document.
May be attested on a separate piece of paper
which may be kept with the documents.
Additionally, a letter stating that the contents of
the documents were explained to & understood
by him to be obtained and coutersigned by a
witness & kept on record.
 JOINT BORROWERS
➢Two or more persons or a group of individuals
who do not constitute a registered body of
association are called joint borrowers.
➢All documents are signed by all – jointly &
severally. It means all are jointly liable plus each
one of them is individually liable for repayment
of Bank’s dues.
➢In case of death or insolvency of any one or more
of joint borrowers, account showing debit
balance is broken to determine liability of
deceased joint account holder/s.
 WHO WILL EXECUTE THE DOCUMENTS
Partnership firm – Documents to be executed by all
partners on behalf of firm as well as in their individual
capacity. This is to make their individual estate liable for
bank’s dues.
Limited company – As per stipulation in Board
Resolution. Affixing of common seal of the company on
security documents. Registration of charge with
Registrar of Companies (ROC) under S.125 of Companies
Act 1956. Charge to be created within 30 days of the
date of documents.
Form 8 – For Registration & Modification of charge.
Form 17 – For satisfaction of charge.
HINDU UNDIVIDED FAMILY (HUF)
Creation of Hindu Law under which all male members of
the family get right by birth in the ancestral property of the
family.
Major male members are called coparceners.
All members of HUF are bound by community of interest
and unity of possession of property.
HUF property is managed by senior most male member
called Karta. Upon death of Karta, next senior male
coparcener becomes Karta.
Karta has authority to borrow money for the family
necessities & for ancestral family business.
In law, each coparcener’s liability is limited to his own
interest in the joint property. Hence, Bank insists that
security documents are signed by all the coparceners.
 PROPRIETORY FIRMS
➢Business wholly owned by an individual.
➢In law, there is no difference between
proprietor & the firm.
➢Creditors have recourse not only against assets
of the firm but also against private assets of the
proprietor.
➢Bank insist that proprietor should execute the
security documents in the capacity as Proprietor
on behalf of the firm as well as in his individual
capacity.
 LIMITED COMPANIES
➢ Company incorporated under Companies Act 1956.
➢ Company is a legal person with perpetual entity & is
distinct from it’s members.
➢ Company limited by shares.
➢ Public Limited Company – Whose shares are offered to the
public & are listed on stock exchange. Min 7members &
max. no limit.
➢ Private Limited Company – Members more than 2 but max.
200 members. Shares are not offered to public. Transfer of
shares is restricted. (Closely held shares).
➢ Public Limited Company – Certificate of commencement of
business must to commence business.
 DOCUMENTS TO BE OBTAINED
FROM LIMITED COMPANY
➢ Certificate of Incorporation & Certificate of
commencement of business – Issued by Registrar of
Companies. It is conclusive proof for incorporation of
the company & compliance of all formalities by
promoters. Certificate of commencement of business is
not required by Private Ltd. Co. as it’s shares are closely
held & it can commence business on it’s incorporation
➢ Memorandum of Association – Company’s fundamental
& unalterable law. Embodies Company’s name,
Authorized capital, Objectives of the company, Liability
of share holders, Borrowing powers etc. Any act done or
contract entered into by the company which is outside
the scope of Memorandum is ultra vires, i.e. Beyond the
powers of the company & not binding on it.
 DOCUMENTS TO BE OBTAINED
FROM LIMITED COMPANY
➢ Article of Association – Regulations controlling internal
management of the company. Rights & powers of the Directors,
rules about conduct of company meetings & business,
Procedure for borrowing & limit on borrowing etc.
➢ Borrowing powers of the company are restricted by the
Memorandum of Association. For borrowing in excess of the
ceiling set by Memorandum, a resolution needs to be passed by
shareholders at general meeting specifying limit upto which the
company may borrow.
➢ Copy of Board Resolution – Certified copy of Board Resolution
authorizing to borrow from the Bank with details of limit,
security etc., Persons who are authorized to sign the security
documents & operate the Bank Account, persons in whose
presence Seal of the company will be affixed to the security
documents.
 BEST PRACTICES BY BANKS
Photo copies of the documents to be
made available to the borrower on
demand.
Original documents (Title Deeds etc.) to
be returned to the borrower within max.
period of 15 days from the closure of the
account or else Bank will have to pay
penalty as per BCSBI code.
 DOCUMENTATION
ADDITIONAL DOCUMENTS TO BE OBTAINED AS PER CONSTITUTION OF THE
BORROWER:
Limited Company:
•Certificate of incorporation
•Certificate of commencement of business (in case of Public Ltd. Company only)
•Memorandum of Association
•Article of Association
•Board Resolution (True copy of the resolution duly certified by the Chairman of
the meeting at which resolution was passed)
Stage I: At the time of opening of account
Stage II: At the time of applying for advance facility
Stage III: At the time of documentation/disbursement: affixing of common
seal where required – for model resolution, please refer to Manual of Instructions
Vol. III Part II Page No. 184 to 186.
•Guarantee by the directors in their personal capacities (wherever being obtained)
•Stamped undertaking signed by the directors of the company/guarantors not to
receive any charges/commission/fee etc. (L490)
•Undertaking from the company not to pay any charge/commission/guarantee fee
to the directors
•Stamped undertaking from the company to the effect that in the event of
company turning sick, bank will be authorized to nominate director.
In case of Limited Company Borrowers following additional
precautions need to be taken:-
•Branch must have on its records the address of the Registered
Office of the Company, where all documents and notices need to be
served.
•Branches should ensure that Corporate Borrowers deal exclusively
with the Bank or Banks where credit limits are granted to them under
consortium. An undertaking to the effect that Company will not open
any account or approach any other Bank for facilities with prior
consent in writing from the Bank should be obtained.
•Branches must pursue the Memorandum of Association of Ltd. Co.
to ascertain that the purpose and the amount of facility are
authorized under it. It must be ascertained whether there is any
restriction on the Borrowing by the Company. If yes, that limit
should never be breached, since this excess borrowing will be
ultra-virus and such borrowing cannot be regularized by the
General Meeting. Thus Bank cannot avail itself of any security
held to cover such borrowing.
• The Board of Directors of a Company, is required, under
Section 292 of the Companies Act 1956 to exercise the
powers specified therein on behalf of the company only by
means of Resolutions passed at duly convened meetings
of the Board and such powers cannot be exercised by
means of a Circular Resolution passed without calling a
meeting of the Board.
•The Board of Directors cannot borrow in excess of Paid-
up Capital and Free Reserves (apart from temporary
limits) of the Company without consent of the Company in
General Meeting. A Certificate that total Borrowings of the
Co. together with the advance limit fixed by the Bank are
not in excess of the limits prescribed under Section 293(1)
should be incorporated in the Board Resolution.
(For detailed instructions on Temporary Limits please
refer to Page 71 Para 4.11.16 of Manual of Instructions
Volume 3 Part I Revised 31.07.2004)
➢Other Legal formalities in case of a Ltd. Co.
➢Search report in the office of Registrar of Companies to
the effect that there is no outstanding charge on the
security proposed.
➢Registration of charge u/s 125 of the Indian Companies
Act 1956. Form required to be filed in triplicate is 8 and 8.
➢Modification of charge u/s 135 of the Indian Companies
Act 1956. Form required to be filed in triplicate is 8 & 8
➢Satisfaction of charge u/s 138 of the Indian Companies
Act 1956. Form required to be filed is 17 & 8.
➢Charge with ROC must be registered immediately but
maximum within 30 days of the date of Creation of
Charge i.e. date of Execution of Documents
Partnership Firm:
1. Partnership Letter L-438
2. Copy of registration with Registrar of firms.
Hindu Undivided Family:
•HUF Letter OD-115A [HUF letter for trading
purposes (OD-115) at the time of opening account]
•Undertaking from major co-parceners of the family:
➢regarding business being their family business;
➢regarding liabilities on behalf of minor and new
co-parceners
➢regarding their continuance to the liability to the
bank in the capacity of co-parceners and
separately, both.
Trust:
•Copy of trust deed, verified from the original trust deed only
•Registration of trust with Charity Commissioner. Certificate of
registration under the Local Public Trust Act.
•Copy of resolution passed in the board of trustees duly signed by
all the trustees.
Checkpoints in Trust Accounts:
•Relevant extract from the instrument pertaining to the number of
trustees, operation of bank account, power of delegation etc.
would be entered in the register OD-127A.
•All the trustees should act together.
•Trustees cannot delegate their authority.
•Verify whether public or private trust.
•What is the objective of the trust and who are beneficiaries.
•Trust Deed should have a provision regarding availment of
advance.
•Advance to trust can be sanctioned by Zonal Manager and above.
•Personal guarantee of trustees should be obtained.
Clubs, Schools, Societies etc:
•Certified true copy of rules, regulations and
byelaws.
•Certificate of registration – certified true
copy.
•Certified true copy of the resolution, passed
by the Managing Committee of the society.
•List of members of Managing Committee
with true copy of the resolution electing them
as committee members.
Check Points for Accounts of Clubs, Schools, Societies etc:
➢Club, School, Society is compulsorily registered. In the accounts
of the unregistered body, even overdraft should not be allowed.
➢Bye Laws must include purpose for which an advance can be
made.
➢Ascertain borrowing powers.
➢As far as possible, personal guarantee of respectable members
of means of the Managing committee should be taken.
➢In case of need, advice from Law Department should be taken.
➢Mortgage ( Property in the name of Society} – Provisions of
Societies Registration Act of State to be observed and followed.
➢Powers to borrow
➢Limitation of the powers
➢Whether sanction from Government or any other authority is
required.
➢Whether any restriction on rate of interest and form of advance.
Accounts of Bodies/Authorities:
•Certified true copy of rules, regulations, if any.
•Verify the statute under which the local body is
created.
•Certified true copy of resolution passed by
local body in accordance with its constitution.
•Seek legal advice from the law department
before finalizing the proposal (It is to verify the
statute under which the local body is governed)