Security Interest

© Moreniche

First & Ranking Charge Over Fixed Asset/moveable Assets

Charge, being a security interest to secure the performance of an obligation which may not necessarily be limited to debt repayment, secured party (e.g. bank) certain preferential rights in relation to the assets. These preferential rights can be ranked in seniority with rights of First/prior charge holders being senior of all (and rights of ranking charges rank after the 1st charge as they are inferior in seniority).

The main purpose charge, like any security instrument, is to enable the secured creditor priority of claim over unsecured creditors over the bankrupt party's assets in the event of insolvency.

First Parri Pasu Charge Over Fixed Asset/moveable Assets

The Latin phrase “Parri Pasu” literally means “with equal step”. In the context of security interests it means “proportionally: at an equal pace without prejudice” or more simply having equal right of claim at a given level of seniority.

The term ‘first parri pasu charge’ is used when there are more than one charge holders willing to proportionally share 1st charge over a borrower’s assets.

For instance Company A borrows from “Bank H” and loan is secured against 1st charge over fixed assets; Company A wishes to take out another loan from “Bank K” against secured against a 1st charge over fixed assets. In this case “Bank H” and “Bank K” may be willing to share the 1st charge over fixed assets on parri pasu (proportional) basis. “Company A” will have to obtain an NOC from “Bank H” before “Bank K” may register a charge of similar seniority.

Equitable Mortgage Charges Over Fixed Asset/moveable Assets

Equitable mortgage can be better understood by contrasting it with true / legal mortgage.

A legal mortgage arises when the assets are conveyed (conveyance means transfer of ownership or title) to the secured party (e.g. bank) as security for the obligations (e.g. debt repayments and other performance of associated covenants), but this is subject to a right to have the assets recovered when the obligations have been performed.

However equitable mortgage does not involve conveyance of asset but can arise from a mere deposit of title deeds with the lender. An equitable mortgage can arise out of an unperfected legal mortgage where legal title was never transferred or by specifically creating a equitable mortgage security over a loan.

An equitable mortgage is effectively similar to a legal mortgaged except that

· it can be extinguished (nullified) by selling the asset to a bona fide purchaser for value who did not have notice of the mortgage (or did not have information about the mortgage and entered in good faith)

· legal title to the mortgaged asset is not vested in the secured party; this implies additional steps in relation to the exercise of remedies like foreclosure.

In Pakistan, the mortgage by legal charge is most common way used by banks to secure the financing. After registration of legal charge; the bank's lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank. The borrower, however, remains the legal owner of the asset, but the creditor gains sufficient rights over it to enable them to enforce their security, such as a right to take possession of the property or sell it in the event that obligations have not been met by the debtor.