er. The proprietary interest in the debtor’s assets allows the creditor to realize the secured assets to discharge the debtor’s obligation to the creditor” (2). Generally, securities include stocks, shares, debentures, bonds, instruments creating or acknowledging indebtedness, warrants and options (3). More typical term for a security against a debt is ‘collateral’. The document granting collateral or any other charge is called ‘debenture’. “Under the terms of a debenture, the secured creditor will usually have the power, upon default by the company, either to enter into possession of the assets and sell them to pay off the secured debt or to appoint a recINTRODUCTION:

This essay seeks to find out that in present day loan transactions what measures can ensure the repayments; and how effective they are. The essay looks at the customary way of protection: the security _ by way of mortgage and charge; the nontraditional and smart ways that have evolved with the passage of time: quasi-security _ retention of title, hire purchase and sale and lease back arrangements; and other safeguards like contractual covenants etc. Each of these measures of protection, except the covenants, has been discussed in proportion of their importance, particularly, for those who effectively fund companies. Thus the main focus remains on the banks.

CREDITORS’ PROTECTION:

Banks, individual or syndicates, are the entities that effectively fund companies and their operations. They receive deposits on one hand and advance these deposits as loans on the other; and thus make profits. However this process is very delicate, as if enough loans are not granted, little profit would be earned; and if too much loans are granted, ready cash may not suffice to satisfy the demands of the depositors. They have to keep a balance and focus equally on liquidity as well as profitability (1). In such a situation, they cannot afford to lose huge amounts of money advanced as loans. As long as a business, funded by the banks, continues working smoothly, every one associated with that business is benefited in one way or the other. But when it is unable to work anymore or defaults in discharging its liabilities, it goes bankrupt. In the event of bankruptcy these liabilities are paid out of the proceeds of sale of its assets.Creditors’ claims normally are more in value than the assets of the bankrupt. In such a situation a creditor needs to be in an advantageous position to realize his claims ahead of others. This, typically, can be done by being a secured creditor: who holds some security and is paid off ahead of the other creditors who don’t hold any securities. Banks, usually, while granting loans, obtain security and personal guarantee in addition to the other precautions to safeguard themselves in the event of such unfortunate happenings. Following are the ways to safeguard the position of the lending banks:

SECURITY (Collateral):

Security is an asset which a lender holds for money he has lent. “Under the Insolvency Act 1986 (the Act), security is defined by section 248 as ‘any mortgage, charge, lien or other security’. This definition is taken to mean that the rights the creditor have are proprietary in character. The proprietary interest in the debtor’s assets allows the creditor to realize the secured assets to discharge the debtor’s obligation to the creditor” (2). Generally, securities include stocks, shares, debentures, bonds, instruments creating or acknowledging indebtedness, warrants and options (3). More typical term for a security against a debt is ‘collateral’. The document granting collateral or any other charge is called ‘debenture’. “Under the terms of a debenture, the secured creditor will usually have the power, upon default by the company, either to enter into possession of the assets and sell them to pay off the secured debt or to appoint a rece

/em>. Thus the main focus remains on the banks.

CREDITORS’ PROTECTION:

Banks, individual or syndicates, are the entities that effectively fund companies and their operations. They receive deposits on one hand and advance these deposits as loans on the other; and thus make profits. However this process is very delicate, as if enough loans are not granted, little profit would be earned; and if too much loans are granted, ready cash may not suffice to satisfy the demands of the depositors. They have to keep a balance and focus equally on liquidity as well as profitability (1). In such a situation, they cannot afford to lose huge amounts of money advanced as loans. As long as a business, funded by the banks, continues working smoothly, every one associated with that business is benefited in one way or the other. But when it is unable to work anymore or defaults in discharging its liabilities, it goes bankrupt. In the event of bankruptcy these liabilities are paid out of the proceeds of sale of its assets.Creditors’ claims normally are more in value than the assets of the bankrupt. In such a situation a creditor needs to be in an advantageous position to realize his claims ahead of others. This, typically, can be done by being a secured creditor: who holds some security and is paid off ahead of the other creditors who don’t hold any securities. Banks, usually, while granting loans, obtain security and personal guarantee in addition to the other precautions to safeguard themselves in the event of such unfortunate happenings. Following are the ways to safeguard the position of the lending banks:

SECURITY (Collateral):

Security is an asset which a lender holds for money he has lent. “Under the Insolvency Act 1986 (the Act), security is defined by section 248 as ‘any mortgage, charge, lien or other security’. This definition is taken to mean that the rights the creditor have are proprietary in character. The proprietary interest in the debtor’s assets allows the creditor to realize the secured assets to discharge the debtor’s obligation to the creditor” (2). Generally, securities include stocks, shares, debentures, bonds, instruments creating or acknowledging indebtedness, warrants and options (3). More typical term for a security against a debt is ‘collateral’. The document granting collateral or any other charge is called ‘debenture’. “Under the terms of a debenture, the secured creditor will usually have the power, upon default by the company, either to enter into possession of the assets and sell them to pay off the secured debt or to appoint a rec

mounts of money advanced as loans. As long as a business, funded by the banks, continues working smoothly, every one associated with that business is benefited in one way or the other. But when it is unable to work anymore or defaults in discharging its liabilities, it goes bankrupt. In the event of bankruptcy these liabilities are paid out of the proceeds of sale of its assets.Creditors’ claims normally are more in value than the assets of the bankrupt. In such a situation a creditor needs to be in an advantageous position to realize his claims ahead of others. This, typically, can be done by being a secured creditor: who holds some security and is paid off ahead of the other creditors who don’t hold any securities. Banks, usually, while granting loans, obtain security and personal guarantee in addition to the other precautions to safeguard themselves in the event of such unfortunate happenings. Following are the ways to safeguard the position of the lending banks:

SECURITY (Collateral):

Security is an asset which a lender holds for money he has lent. “Under the Insolvency Act 1986 (the Act), security is defined by section 248 as ‘any mortgage, charge, lien or other security’. This definition is taken to mean that the rights the creditor have are proprietary in character. The proprietary interest in the debtor’s assets allows the creditor to realize the secured assets to discharge the debtor’s obligation to the creditor” (2). Generally, securities include stocks, shares, debentures, bonds, instruments creating or acknowledging indebtedness, warrants and options (3). More typical term for a security against a debt is ‘collateral’. The document granting collateral or any other charge is called ‘debenture’. “Under the terms of a debenture, the secured creditor will usually have the power, upon default by the company, either to enter into possession of the assets and sell them to pay off the secured debt or to appoint a rec

is paid off ahead of the other creditors who don’t hold any securities. Banks, usually, while granting loans, obtain security and personal guarantee in addition to the other precautions to safeguard themselves in the event of such unfortunate happenings. Following are the ways to safeguard the position of the lending banks:

SECURITY (Collateral):

Security is an asset which a lender holds for money he has lent. “Under the Insolvency Act 1986 (the Act), security is defined by section 248 as ‘any mortgage, charge, lien or other security’. This definition is taken to mean that the rights the creditor have are proprietary in character. The proprietary interest in the debtor’s assets allows the creditor to realize the secured assets to discharge the debtor’s obligation to the creditor” (2). Generally, securities include stocks, shares, debentures, bonds, instruments creating or acknowledging indebtedness, warrants and options (3). More typical term for a security against a debt is ‘collateral’. The document granting collateral or any other charge is called ‘debenture’. “Under the terms of a debenture, the secured creditor will usually have the power, upon default by the company, either to enter into possession of the assets and sell them to pay off the secured debt or to appoint a rec

er. The proprietary interest in the debtor’s assets allows the creditor to realize the secured assets to discharge the debtor’s obligation to the creditor” (2). Generally, securities include stocks, shares, debentures, bonds, instruments creating or acknowledging indebtedness, warrants and options (3). More typical term for a security against a debt is ‘collateral’. The document granting collateral or any other charge is called ‘debenture’. “Under the terms of a debenture, the secured creditor will usually have the power, upon default by the company, either to enter into possession of the assets and sell them to pay off the secured debt or to appoint a receiver with the power to manage and sell the company’s business as a going concern to raise the money”(4).That is why the collateral is granted as a routine for obtaining loans throughout the world; and it is the most common feature of commerce in every country (5). However, for financially strong companies, particularly the public corporations, secured loan is not usually an attractive option (6). That is why “large unsecured overdrafts are quite common for established companies” (7). But in most of the cases security is a common feature, as the secured credit is the “principal means of financing’ for ongoing ventures as well as expansion purposes (8). Security or Collateral, documented as debenture, is secured, usually, by way of mortgage or charge. Both these terms are sometimes used interchangeably, as every mortgage implies a charge, though every charge is not necessarily a mortgage.

MORTGAGE:

It is ‘an interest in property created as a form of security for a loan or payment of a debt and terminated on payment of the loan or debt’ (9). Mortgage is the most typical form of loan security. Through a mortgage, the title of the secured property is transferred in the name of the creditor (mortgagee), which is transferred back to the debtor (mortgager) when the loan is paid off. The most common fixed charge securities created by companies are legal mortgages over land (10). In the event of default in payment by the debtor, the creditor is entitled to realize his money by sale of the mortgaged property. Thus, a mortgage ensures the repayment of loan of the creditor at the end of the mortgaged period or in the event of bankruptcy.

CHARGE:

A charge is also ‘an interest in company property created in favour of a creditor (e.g. as a debenture holder) to secure the amount owing’ (11). It is different from mortgage in the sense that it does not require transfer of title like a mortgage. ‘It merely gives the chargee the right to have the charged assets realized in order to pay off the debt’ (12). As a result, a charge is a security that gives rise to the priority of the holder over unsecured creditors. A charge can either be a fixed charge or a floating charge. Every charge is a result of contract between the parties. A fixed charged is associated with specific assets and limits the debtor’s free dealing with such assets. These can be intangible assets, like shares in other companies (13). It, being a fixed security, is enforced prior to all other classes of creditors (14).On the other hand, a