Expert Advisory Committee

1.20 Query

Classification of Bank

Advances in Accounts.

Query No. 1 : Where advances against book debts by a bank should be classified as fully secured or secured by personal liability of the borrower or borrowers and others?

Opinion March 24, 1972

In the case of an advance against book debt, the borrower creates in favour of the bank a charge on his book debts due or to become due to him in future by executing a letter of hypothecation. There is no doubt that book debts are a tangible asset. No doubt, they keep on fluctuating from time to time but so also stock hypothecated with a bank also fluctuates from time to time. Therefore, unless there is reason to believe that the book debts which are hypothecated with the bank have been long overdue or are otherwise irrecoverable, an advance against hypothecation of book debts should be classified as a fully secured advance. An essential condition would be that debtors should have submitted a list of book debts as on the date of the financial closing, showing the age of each debt and there should not be any prima facie evidence to sow that the book debts are irrecoverable.

The above opinion would cover all advances against hypothecation of books debts even where there is no specific assignment of book debts in writing and notice of such assignment has not been given to the debtors concerned. The position of the bankers would be better in cases where there is a specific assignment of the book debt in writing and the notice of such assignment has been given to the debtor concerned. In such a case, the debtor concerned is apparently prevented from paying over the moneys due by him to the assignor (that is, the borrower of the bank) and from pleading a set-off or other defence between himself and the assignor which arises after he has received notice of assignment. A book debt is an “actionable claim” and under the Transfer of Property Act, actionable claims can be assigned.

The Committee understands that the Reserve Bank of India has also considered this matter and has expressed a view that advances against hypothecation of book debts can be classified as being in the nature of fully secured advances. The same view has been taken by some leading Counsels in the opinions given by them. The Committee is also of the view that subject to the conditions mentioned above advance against hypothecation of book debts should be classified as fully secured advance.

Query No. 2 : Whether advances against Motor Transport Receipts are to be classified as fully secured or personal?

Opinion March 24, 1972

In order to be able to give an answer to the above question it has first to be decided whether a Motor Transport Receipt can be described as a “document of title to the goods”. If it is a document of title, the pledge of the document should constitute a pledge of the goods represented by the Motor Transport Receipt. According to Section 2(4) of the Sale of Goods Act a “document of title to goods” includes any “document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented”. A Motor Transport Receipt answers to the above description and therefore advances against Motor Transport Receipt should be classified as fully secured.

However, if the auditor finds that the Motor Transport Company engaged for delivery of the goods is following the practice of delivering the goods to the consignees without production of the relevant Motor Transport Receipt obtained by them through Bank or if there is any other evidence to show that the bank has lost control over the goods, advances should be classified as unsecured advances for which the Bank holds no security other than the debtor’s personal security.

Query No. 3 : Whether advances against hire-purchase hundis deposited by financing companies should be classified as fully secured or personal?

Opinion March 24, 1972

In hire purchase, goods are sold on the condition that the purchaser will pay the price in specified installments and the property in the goods will pass to the purchaser only after the last installment is paid. In the cases of vehicles purchased on hire purchase terms, Banks do not usually make advances direct to the purchaser. Advances are made to financiers who pay off the dealer. The hire-purchase agreement is entered into between the financier and the hirer together with usually a guarantor. The financier obtains the finance from the Bank normally against the security of hire-purchase agreements, duly endorsed promissory notes (i.e., hundis) executed by the purchaser and hypothecation of the hired vehicles, In addition, a Bank always collects letters addressed to the Motor Vehicles registration authorities asking them to transfer the vehicles concerned to the person named therein. These are generally signed by the hirer in blank to be completed, at a later date either by the Bank or the financier depending on the circumstances of the case. Similar letters addressed to the Police authorities informing them of the transfer of the vehicles are also obtained from hirers. Further, notices of the hypothecation of the hired vehicles are given to hirers and their acknowledgements obtained. Besides the fact of the hypothecation is also almost always recorded in Registration Books.

The Committee is of the opinion that under the above circumstances it should be possible for a bank to take over a hypothecated vehicle from a hirer and to sell the same. In view of this, advances against hire-purchase hundis should, in the opinion of the Committee, be classified as fully secured if, simultaneously, the vehicle is also hypothecated to the bank.

However, if the vehicles against which the finances are given are not hypothecated to the bank, the advance cannot be classified as fully secured, merely because the hire-purchase hundis have been lodged with the bank. The hire purchase hundis do not constitute a security.

Query No. 4: Whether advances to hirers against deposit of hire-purchase hundis, where the vehicle has not been registered in the joint names of the borrower and the bank, are to be classified as fully secured or personal?

Opinion March 24, 1972

In the opinion of the Committee, merely because a vehicle has not been registered in the joint names of the borrower and the bank, the advance does not cease to be a secured advance. If the vehicle has been hypothecated to the bank and the hypothecation is legal, the advance is definitely a secured advance. Of course, for its own safety, it is advisable for the bank to make sure either that the vehicle is registered in the joint names of the borrower and the bank or the bank’s lien is registered with the regional transport authority. However, even in the absence of such registration, where a vehicle has been hypothecated to the bank, the advance should be classified as a secured advance.

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