RECAP

• Transfer of shares• Transmission of shares• Refusal of transfer of shares• Appeal against refusal for registration of transfer• Transfer to nominee of a deceased member

BORROWING POWRES OF A COMPANY

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MODES OF BORROWING

A. SHORT TERM BORROWING

B. LONG TERM BORROWING

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SHORT TERM BORROWING1. RUNNING FINANCE2. BANK OVERDRAFT3. CASH CREDIT4. LOAN AGAINST PLEDGE5. HYPOTHECATION OR MORTAGE6. DISCOUNTING COMMERCIAL PAPERS7. PUBLIC DEPOSITS

MODES OF BORROWING

Short TermsRunning Finance:•It is an unsecured financing product issued by a financial institution to its customers on daily basis in order to meet their daily needs. •It is a finance offerings by financial institutions against mortgages and a credit facility established for a specific time limit at variable interest rates.

MODES OF BORROWING

Short Terms

Running Finance:

Running finance is nothing but the finance offerings by financial institutions against mortgages. •It works under the working capital finance. Specifically, the running finance is a credit facility established for a specific time limit at variable interest rates. •Housing Price Index (HPI) is a contributory agent for successful operation of the running finance scheme. The running finance is implemented by means of allowing the over draft facility and the corresponding amount is determined by the repaying capacity of the borrower.

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Running finance is more economical….• If an individual requires small amounts of money during

different periods of time, a running finance facility is more economical than a personal loan.

• It reduces the mark-up burden and gives the option of early repayments. – Currently three banks are aggressively marketing their running finance

facilities for consumers; – Faysal Bank Balance Transfer Facility, Silk bank ReadyLine and Standard

Chartered Revolving Credit Facility etc

• An overdraft is a loan arrangement between the borrower and the bank whereby the bank extends the credit to a maximum amount against which the customer can write cheque or make withdrawals.

• It is the amount of money borrowed that exceeds the deposits.

• An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. So, such facility offered by a bank is called bank overdraft.

BANK OVERDRAFT

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BANK OVERDRAFT• Overdraft is one sort of offering credit by the account providers, in that

withdrawals are permitted exceeding available balance of the bank account. It is nothing but an over-drawing leading to a negative balance. – The situation is more common with the credit card offerings by the

banks. • For enjoying overdraft facility, there should be some agreement or approval

in advance with the account provider. Generally, the over-draft facility is offered by the banks for some maximum amount and the same is required to be returned to them (in the respective account) within some specified time limit.

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PENALTY ON NON COMPIANCENon-compliance of these guidelines may impose heavy penalty

on the account holders. • In any case, drawing an overdraft necessitates paying interest.• Fees charged for providing the overdraft facility and in case of

going into unauthorized limits may vary from bank to bank, but the principle remains the same.

• It is a short term cash loan to a company. A bank provides this

type of funding but only after the required security is given to secure the loan.

• Once the security has been given, the business that receives the loan can continuously drawn from the bank upto a certain specified amount.

CASH CREDIT

•A delivery of personal property to a creditor as security for a debt or for the performance of an act. •Pledge is also called as pawn or security interest, is a piece of property used to secure financing. •It is any physical thing with liquid value. Thus the loan taken against pledge is called as loan against pledge.

Example: A lender extending a loan to a borrower for the purchase of a home will require the home as a pledge.

LOAN AGAINST PLEDGE

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LOAN AGAINST PLEDGE• Cash deposit or placing of owned property by a debtor (the

pledger) to a creditor (the pledgee) as a security for a loan or obligation.

• The pledgee has an implied right to confiscate and/or sell the pledged property to satisfy his or her claim in case of a default.

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PLEDGE• A Bailment or delivery of Personal Property to a creditor as security

for a debt or for the performance of an act.• Sometimes called bailment, pledges are a form of security to assure

that a person will repay a debt or perform an act under contract. In a pledge one person temporarily gives possession of property to another party. Pledges are typically used in securing loans, pawning property for cash, and guaranteeing that contracted work will be done.

• Every pledge has three parts: two separate parties, a debt or obligation, and a contract of pledge.

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PLEDGE and SALES• Pledges are different from sales. In a sale both possession and

ownership of property are permanently transferred to the buyer.• In a pledge only possession passes to a second party. The first

party retains ownership of the property in question, while the second party takes possession of the property until the terms of the contract are satisfied. The second party must also have a lien—or legal claim—upon the property in question. If the terms are not met, the second party can sell the property to satisfy the debt.

The established practice of a borrower pledging an asset as collateral for a loan, while retaining ownership of the assets and enjoying the benefits. With hypothecation, the lender has the right to seize the asset, if the borrower cannot service the loan as stipulated by the terms in the loan agreement.Example: mortgages are the most common example of hypothecation.

LOAN AGAINST HYPOTHECATION

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HYPOTHECATOION

• Hypothecation means the pledge of a property as security or collateral for a debt.

• Generally physical transfer or transfer of titles does not take place in hypothecation.

• Collateralizing arrangement in which neither the possession nor the title but only the right to sell an asset or property passes on to the creditor or lender (called a grantee). Arrangement where the grantee has the possession and right to sell, but not the title, is called pledging.

•It is a transfer of interest in specific immovable property. •It is a type of charge related to immovable property. •A security interest in a piece of real property, in exchange for the extension of loan.

MORTGAGE

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MORTGAGE• A loan to finance the purchase of real estate, usually with specified payment

periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.

• A debt instrument, secured by the security of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.

• Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front.

• Over a period of many years, the borrower repays the loan, plus interest, until he/she eventually owns the property free and clear.

•An unsecured short-term debt instrument issued by a corporation, typically for the financing of account receivable, inventories and meeting short-term liabilities. •Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at discount, reflecting prevailing market interest rates.

DISCOUNTING COMMECIAL PAPERS

Discounting Commercial papersA major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.

• It refers to the deposits that are attained by the numerous large and small firms from the public.

• It is a source of fund for private and non-banking companies. The interest on these deposits is more than the interest given by banks. “Public Deposit” refers to the money received by a company through deposit or loan collected from public, excluding the money received in the form of shares and debentures.

PUBLIC DEPOSITS

LONG TERM AND MEDIUM TERM

Loan against MortgageIt is a transfer of interest in specific immovable property. It is a type of charge related to immovable property. A security interest in apiece of real property, in exchange for the extension of loan. Loan against such property is called as loan against mortgage.

DFI stands for “Development Finance Institution”.

•It occupy the space between public and private investment. •The are financial institution which provide finance to the private sector for investment that promote development. •They are owned by the Governments of one or more developed countries.

LOAN FROM DFI

DFI,s• Dfi,s provide a broad range of financial services in developing

countries, such as loans or guarantees to investors and entrepreneurs, equity participation in firms or investment funds and financing for public infrastructure projects. DFIs will initiate or develop projects in industrial fields or in countries where commercial banks are reticent about investing without some form of official collateral.

• DFIs are also active in financing small and medium size enterprises, supporting micro loans to companies, often viewed as too risky by private sources of financing . A benefit of this approach is that DFIs often find themselves with first mover advantage in markets with strong growth potential.

NBFC’s stands for “Non-banking Financial Company”. • These are financial institutions that provide banking services,

but do not hold a banking license. • They are not allowed to take deposits from the public.

Nonetheless, all operations of these institutions are still covered under banking regulations.

LOAN FROM NBFC’s

Redeemable capital includes “ any other security or obligation not based on the interest other than an ordinary share of the company”.

REDEEMABLE CAPITAL

REDEEMABLE CAPITALA company may by public offer or upon terms and conditions contained in an agreement in writing, issue to one or more scheduled banks, financial institutions or such other persons either severally, jointly or through their syndicate, any instrument in the nature of redeemable capital in any or several forms in consideration of any funds, moneys or accommodations received or to be received by the company, whether in cash or against any promise, guarantee, undertaking or indemnity issued to or in favour of or for the benefit of the company.

REDEEMABLE CAPITALredeemable capital may provide for adopt or include in addition to others, (a) mode and basis of repayment by the company of the amount invested in redeemable capital within a certain period of time; (b) arrangement for sharing of profit and loss; (c) creation of a special reserve called the "participation reserve by the company in the manner provided in the agreement for the issue of participatory redeemable capital in which all providers of such capital shall participate for interim and final adjustment on the maturity date in accordance with the terms and conditions of such agreement.

It is a document issued by a company as an evidence of its debt. It is a security issued or allotted to the investor under the seal of the company. It contains a contract for the repayment of a debt and the interest thereon at a specified rate.

DEBENTURE

TFC’s stands for “Term finance Certificate”. It is a corporate debt instrument issued by companies to generate long and medium terms fund. Corporate TFC’s offer institutional investors, in particular provident funds, pension funds and insurance companies, with a viable high yield alternative to the bank deposits, They are also an essential complement to risk free, lower yielding Government bonds.

TFC’s

IMPLIED STATUTORY POWERS AND RESTRICTIONS ON BORROWINGS

1. Power to borrow Every company has an implied power to borrow irrespective of

any contrary provisions contained in the Companies ordinance, MOA, AOA or any other law enforced in Pakistan.

2. Articles provide the manner of borrowing power Articles usually provide the manner in which a company can

exercise its borrowing power i.e. whether in general meeting or it is to be vested to Board of directors.

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CONT’D

3.If powers are vested to board of directors then article may fix the limit of borrowing

4.Director may delegate their such power to sub committee or to a manager

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CONT’D

5.Money borrowed beyond limits may given under MOA without the approval of the company in general meeting is ultra vires (i.e. cant be recovered)

6. Restriction for a Public CompanyThe amount of borrowing of the company shall not, at any time,

without the sanction of the company in general meeting , exceed the paid-up capital of the company.

7. Restriction for a Public Company A public company cannot borrow money before obtaining the

certificate of commencement of business.8. PenaltyIf a company borrows money before obtaining certificate of

commencement of business then every officer and person who is responsible shall be liable to a fine of Rs. 1,000/- per day during which the default continues

CONT’D

If a company borrows money before obtaini8ng certificate of commencement of business then every officer and person who is responsible shall be liable to a fine of Rs 1000 per day during which the default continues.

FINE ON BORROWING

ULTRA-VIRES BORROWING

If a company borrows money without or in excess of the powers conferred on it by the memorandum of association, the borrowing is Ultra-Vires the company.

• Any borrowing which is intra vires the company but beyond the authority of directors is Ultra Vires the directors.

BORROWING ULTRA-VIRES THE DIRECTORS

Unlimited liability of members and directors

Unlimited Liability of Members

• Section 15(2) of the companies ordinance,1984 allows the incorporation of companies with unlimited liability of its members, such companies may or may not have share capital

• Section 109 of the ordinance allows the re-registration of a limited liability company into an unlimited liability company and vice versa

• If an unlimited company is re-registered into a limited company, the re-registration shall not affect the rights, debts, liabilities, obligations or contracts acquired, incurred or entered into by, to, with or on behalf of the company before registration

• Section 101 provides that on re-registration of an unlimited company as limited company ,if it has a share capital, it may pass a resolution to increment the nominal amount of the share capital by increasing the nominal amount of each of its shares

• The amount so increased can be called up only in the event of winding up of that company

Unlimited Liability of Directors• If provided in the memorandum of a company, the

liability of the directors or of any director may be unlimited [section 111(2)]

• If a person is proposed to be appointed as a director with unlimited liability, then that person should be given a notice of that fact by the directors and members proposing him for election as director

• Selected person should be given a notice in writing of that fact by the promoters and officers of the company, or by any one of them before he accepts the office of director with unlimited liability [section111(2)]

• If a company has power, under its articles, to alter its memorandum, it may then, by passing a special resolution, alter its memorandum to make limited liabilities of its directors

• Such alteration would be as valid as if it had been originally contained in the memorandum

• Liability of any existing director shall not be limited without his consent on passing the resolution

• It shall remain limited till the expiry of the term of office for which he was elected as director[section112]

• Limited company may have directors with unlimited liability

• 112 Special resolution of limited company making liability of directors unlimited

• DEBENTURES• Kinds of debentures• Register of debenture holders• Trust, Trust deed and Trustees

UPCOMING