LAW AND PRACTICE OF FINANCE ASSIGNMENT

Submitted To
Prof. Anil Kumar Rai

By-
Ravi Grover
61LLM22
Answer to Question 1

A) Kuber can assuage the concerns of the banks through Project Finance. As
money can be lent in stages with pre determined objectives/benchmarks for
each and every stage of the loan.

B) In event of success in the township project, Ashima’s prepayment of loan can

result in unexpected inflow of cash for bank. To address it Banks can include a
prepayment clause with a break cost fee.

C) If some of the lenders from the consortium back out when the time to lend
comes Ashima can bring new lenders or pay the loan itself. Additionally if
some of the lenders fail to pay, the rest of them can step in.

D) Ashima can create a new security in the newly acquired assets with Kuber
having a priority over it. A loan subordination agreement can be entered into
by Ashima with old creditors to infuse new capital.

E) To counter such situations, first of all we can link rate of interest to credit
rating of Ashima. Also the settlement can be transferred to another jurisdiction
where capital adequacy ratio is less

Answers to Questions 2

A) Secured property should be identifiable. What is subject to security should be

delineated with reasonable mechanism. As shares are indistinguishable,
another account needs to be created and the shares should be transferred to it.
In the present case as no separate depository account is created, no security
interest is created.

B) In this case X sold the equipment and there was a simultaneous lease
agreement with A. X’s personal liability has been resolved just like in the case
usufructuary mortgage. No recourse to the debtor, does not mean it is not a
secure transaction. It is a security interest.

C) It is a case of advance for future indebtness. As the money is not kept

separately and also there is no intention to treat the advance paid as security,
therefore no security interest is created.

D) In the present case, the covenant that requires for Azad Bank to be given
security if X Ltd supplies security to other lender forms a negative pledge
 clause. As the first creditor had not bargained for the security, he won’t be
entitled for the same. With that the contention of the creditor that he will get
security automatically is not correct as assets offered prospectively as future
security is not identifiable without an act of appropriation by the debtor after
the occurrence of the contingency. This can happen when the clause provide
for an equal and ratable security in the same asset or asset is identified by the
agreement, which was not done here. As security deposit for a licence fee
obligation does not create a security interest, Azad Bank does not require a
security interest.

Answers to Question 3

A) A security interest is not created when a debtor transfers all of their

outstanding debt to a creditor in one lump sum to settle the debt in question,
makes a non-recourse loan, sells and buys, sells and leases backs, or lends
stock. Stock lending serves the purpose to cover the borrower's short
position and place lender securities that are not immediately required. It
involves the transfer of ownership of shares, which the borrower will
retransfer after making an additional loan payment (here the extra payment
is debenture transfer). Since this is an illustration of stock lending, no
security interest is created. Contracts for the loan of securities are neither
mortgages or charges, according to Beconwood Securities v. Australia and
New Zealand Banking Group (2008 FCA 594). Therefore, no security
interest is established.

B) This is an example of setoff. As per Goode, setoff is quasi security and

hence no security interest is created here.

Answers to Question 4

(A)Here, the shipping company wants to buy two additional oil tankers and it
wants credit for the 10% advance money. Also its assets are already secured in
favour of another bank. So, if the subsequent bank gives it loan the shipping
company will have to give a charge on the oil tankers when purchased.
Additionally oil tanker’s hypothecation in favour of bank can be done.

(B) As the manufacturer already has the order for the school uniform and also
has a credit from the State Finance Corporation, there is merely need
working money to produce uniforms. As the manufacturer will produce sales
receipt, he can go to the bank with them and the bank will give him a sales
invoice discounting facility. The bank will provide the manufacturer credit and
discount the sales invoices. The bank can obtain sales proceeds from the NGO
with the use of sales receipt.

(C) The banks can take precautions before issuing Letter of

Undertaking (LoU) to the processor of diamonds. If satisfied by the client’s
economic viability, it can issue the LoU. The bank additionally can ask for
equivalent collateral before issuing the LoU. Since diamonds are an expensive
items, floating charge can be imposed on raw material and a fixed charge on
the processed ones.

(D) In some cases where statutory requirements are not fulfilled a security
may not be created in law but in equity. Here the land is leased out to Abhijeet
by the state government with a covenant not to lease, sell or mortgage the land
and a prior permission is required to create security on the builtup office. It is
a contract to give security. As per Halroyd v Marshell security over future
property is allowed. And the property should be in existence or should be
certain to come into existence.