What kinds of contract documents are required for giving collateral?
For securing collateral in debt financing, security agreements are executed by the borrowing entity with the lenders alongside the financing contracts. These “security interests” are intended to be continuing securities until the finance amounts are paid off or settled.
Collateral can be secured in the form of the following security agreements:
- Equitable mortgages for immovable property, which involves the deposit of title deeds / ownership documents with the lender. The most preferred form of collateral in Pakistan is urban immovable property. For corporate borrowers, mortgages of immovable property are filed with the SECP under the Companies Act, 2017. For private individuals and firms, these equitable mortgages can be enforced through written agreement and the Banking Courts. Although registration is not mandatory, it is generally the case that lenders with equitable mortgages get their lien marked in the revenue record of the immovable property.
- “Simple” or registered mortgages that are registered with the Registrar of Conveyances & Assurances (under the Registration Act, 1908) of the area where the immovable property is located. This is the classic form of mortgage where debt financing is secured by a non-possessory security interest in favor of the lender. Upon payment of the debt finance, the borrower may clear the immovable property of the mortgage by registering a “redemption deed” with the same office.
- Pledges over goods, share capital and bank accounts, where possession and control is handed over to the lender, to be exercised on agreed terms and conditions as per the written agreement.
- Letters of lien and set off over bank accounts, which are equitable charges over some or all the bank accounts of a borrowing entity, with the specific bank, account number, and branch identified.
- Hypothecation of present, future, tangible and intangible assets, fixed and movable assets, but excluding immovable property. This is an equitable charge entitling a lender to take possession of and sell of collateral to satisfy the recovery of finance availed. Hypothecation can extend to future assets.
- Assignment of receivables, where a borrowing entity transfer right to the benefit of sales and revenue proceeds of its business (sales receivables accounts).
- Person guarantees and promissory notes, executed by private individuals in personal and/or official capacity (e.g. a director or CEO).
