Working capital:-

 Working capital
The difference between a company's current assets and current liabilities, which is the
amount of money available to pay short-term obligations. Working capital is made up of
current assets like cash, inventory, and accounts receivable, and current liabilities like
accounts payable, short-term loans, and accrued expenses. It's represented on the
balance sheet. A company with positive working capital can meet its short-term
liabilities and continue operations, and may be better able to withstand financial
challenges.

 Cash flow
The net amount of cash and cash equivalents coming in and out of a company over a
period of time. It's represented on the cash flow statement. A company with positive
cash flow has enough money to reinvest in the business, pay down debt, return money
to shareholders, and more

 Bank Guarantee
A bank guarantee (BG) is a financial instrument that a bank issues to cover a payment
obligation or performance guarantee on behalf of a customer. The bank acts as a
guarantor and is responsible for the customer if they are unable to fulfill their
obligations. BGs are commonly used outside the United States to help clients acquire
goods, buy equipment, or conduct international trade In the context of working capital,
a BG can be used to cover a customer's losses if they default on a loan. Working capital is
the amount of funds a company needs to maintain to support its production and supply
cycle. It's calculated by subtracting a company's current liabilities from its current
assets. Current assets include cash, accounts receivable, and inventory, while current
liabilities include accounts payable, short-term debt payments, and deferred revenue.
LETTER OF CREDIT

What is Letter of Credit –

 It is a document, guaranteeing the buyer’s payment to the sellers.
 It is issued by a bank and makes sure that the payment is done timely and fully to the
seller.
 It is issued against a pledge of securities or cash.
 If the buyer is unable to pay, then the bank covers the full or the remaining amount on
behalf of the buyer.

Parties to a Letter of Credit –

Applicant – requests Issuing Bank – bank

the bank to issue the which issues the Beneficiary
license credit license credit

Types of Credit –

1. Sight Credit :
 Under this LC, documents are payable at the sight/ upon presentation of the
correct documentation.
 For example, a businessman can present a bill of exchange to a lender along with a
sight letter of credit and take the necessary funds right away.

2. Acceptance Credit :
 The Bills of Exchange which are drawn and payable after a period, are called
usance bills.
 Under acceptance credit, these usance bills are accepted upon presentation and
eventually honoured on their respective due dates.
3. Revocable Credit :
 A revocable license credit is a credit, the terms and conditions of which can be
amended/ cancelled by the Issuing Bank.
 This cancellation can be done without prior notice to the beneficiaries.

4. Confirmed Credit :
 A confirmed license credit is one when a banker other than the Issuing bank, adds
its own confirmation to the credit.
 In case of confirmed license credits, the beneficiary’s bank would submit the
documents to the confirming banker.

5. Standby Letter of Credit

 A standby letters of credit work slightly different than most other types of letters
of credit.
 If a transaction fails and one party is not compensated as it should have been, the
standby letter is payable when the beneficiary can prove it did not receive what
was promised.

Importance of a Letter of Credit –

 A license credit acts as a bank's guarantee that the seller will receive payment as
long as they meet the specified conditions.

 Since payment is contingent on presenting the correct documents, sellers are less
susceptible to fraudulent practices by buyers who might try to receive goods
without paying.

 Letters of credit ensure timely payments upon shipment of goods, which helps
sellers manage their cash flow effectively

 Buyers gain peace of mind knowing they won't pay for goods unless they are
shipped according to the agreed-upon terms
 Sellers are motivated to provide goods that meet the specified standards because
payment is linked to presenting compliant documents.
Security:-

 Hypothecation:-

Hypothecation is a process where a lender receives an asset which is offered to him/her as

a collateral security, and it is largely done in the case of assets that are movable in nature
for the purpose of establishing the charge against collateral security for a particular loan.

Hypothecation :

 Hypothecation is a financial arrangement where an asset, such as securities or

property, is pledged as collateral to secure a loan or credit facility.
 The borrower retains ownership and possession of the hypothecated asset while
granting a security interest to the lender. This allows the lender to seize and sell the
asset to recover their funds if the borrower defaults.
 Hypothecation is commonly used in margin trading, where investors borrow funds
from a broker to buy securities. The securities purchased with the borrowed funds
serve as collateral for the loan.

Hypothecation Agreement :

 The hypothecation agreement between the borrower and the lender isn’t done in a
verbal agreement. Rather it is done through a document called hypothecation deed.
 Here is the list of things that are included in the hypothecation agreement : -
 Definitions
 Insurance to ensure that the asset is in great condition.
 The lender’s rights to check out the asset before giving her/his nod.
  The rights, conditions, and terms should be adhered to by both parties.

Moveable Asset:- Movable assets are items that can be transported from one place to
another and are not attached to real property or land.

Current Asset:- A current asset, also known as a liquid asset, is any resource a company
could use, turn into cash, or sell within a year. This includes cash in the bank, money that
customers owe (accounts receivable), goods ready to be sold (inventory), and other
investments that can be easily offloaded.

Movable Fixed Assets:- The movable fixed assets comprising all machinery, equipment
and furniture and all other movable fixed assets relating to the Target Business owned by
the Business Sellers on the Completion Date.

Mortgage:-

Introduction :

When property, land or any other commodity is used as collateral to borrow money or to
take a loan from a lender, it is known as Mortgage. In simpler terms, when a person
borrows money from a lender (bank loans) and signs up an agreement where he/she gets
cash in exchange for a real estate property as a guarantee with the bank until the entire
amount is repaid is called a mortgage.

 A mortgage is a type of loan used to purchase or maintain a home, plot of land,

or other type of real estate.
 The borrower agrees to pay the lender over time, typically in a series of regular
payments that are divided into principal and interest. The property then serves as
collateral to secure the loan.
 A borrower must apply for a mortgage through their preferred lender and ensure that
they meet several requirements, including minimum credit scores and down
payments.
 Mortgage applications go through a rigorous underwriting process before they reach
the closing phase. Mortgage types, such as conventional or fixed-rate loans, vary
based on the needs of the borrower.

MDOTD:-

 Stands for Memorandum of Deposit of Title Deed, which is a document that

a borrower gives to a lender when applying for a home loan. The MODT
states that the borrower has deposited their property's title document with the
lender as collateral in exchange for a loan. It's mandatory for most financial
institutions to receive the MODT before disbursing the final loan
installment.
 The MODT gives the lender the right to repossess the property if the
borrower defaults on the loan. It also records the lender's share of the
property until the loan is repaid in full.
 The MODT is considered a hidden charge and can range from 0.1% to 0.5%
of the total loan amount. The borrower must pay the MODT charges when
the property is registered in their name or when they receive the first
installment of their loan.

Pledge:-
In the context of borrowing and lending, a pledge is a form of security interest where the
borrower, known as the pledgor, provides an asset as collateral to the lender, referred to
as the pledgee. This arrangement ensures that the lender has a form of security in case the
borrower defaults on the loan.

Key Components of a Pledge :

Borrower : -
 The borrower is the individual or entity that requires a loan and pledges an asset to
secure it.

 The asset remains in the possession of the borrower, but the ownership rights are
transferred to the lender until the loan is repaid.

Lender : -
 The lender provides the loan to the borrower and holds a security interest in the
pledged asset.

 If the borrower defaults on the loan, the lender has the right to take possession of the
asset and sell it to recover the loan amount.

Pledged Asset:-

 This is the collateral provided by the borrower to secure the loan.

 The asset can be tangible (like property, equipment, or inventory) or intangible (like
stocks, bonds, or patents).

How a Pledge Works :

 Loan Agreement :
The borrower and lender enter into a loan agreement specifying the loan amount, interest
rate, repayment terms, and details of the pledged asset.

Pledge Agreement :
 Alongside the loan agreement, a pledge agreement is executed, detailing the terms
under which the asset is pledged as collateral.

 This agreement outlines the rights and responsibilities of both parties concerning the
pledged asset.

Security Interest :
The lender gains a security interest in the pledged asset, meaning they have a legal right
to seize and sell the asset if the borrower fails to meet the loan obligations.

Repayment and Release:

 Upon full repayment of the loan, the lender releases their security interest in the
pledged asset, and the borrower regains full ownership rights.

If the borrower defaults, the lender can enforce their security interest by taking
possession of the asset and selling it to recoup the loan balance.

Power of attorney:-

A power of attorney (POA) isn't directly used in the context of a pledge itself, but it can
be a supporting document. Here's how it might be involved:
  Security Agreement: Sometimes, a pledge is part of a larger loan agreement. The
lender might require a power of attorney included within the security agreement.
This POA would grant the lender specific authority related to the pledged
property.
 Account Access: In some cases, a POA might be used to grant someone the ability
to manage an account that holds the pledged property. This could be a brokerage
account where stocks are being pledged as collateral.

PERSONAL GUARANTEE

What is Personal Guarantee –

A personal guarantee is a commitment made by an individual to personally repay a debt if the

primary borrower defaults. This legal promise ensures that the lender has a secondary source of
repayment, which can be particularly important in lending to small businesses or start-ups where
the business itself may not have substantial assets or credit history.

Types of Personal Guarantee –

1. Unlimited Personal Guarantee

 An unlimited personal guarantee holds the guarantor personally responsible for the entire
debt, including any associated legal fees, interest, and collection costs.
 The guarantor is liable for the full amount of the debt.
 Lenders can pursue the guarantor's assets directly, without having to exhaust other means
of collecting from the borrower first.

2. Limited Personal Guarantee

 A limited personal guarantee restricts the guarantor’s liability to a specific amount or for
a certain time period.
  The guarantor's liability is limited to a pre-agreed amount, which can be less than the
total debt.
 The terms should clearly specify the limitations, such as a maximum amount or a specific
duration.

3. Specific Guarantee
 A specific guarantee is limited to a particular transaction or debt.
 The guarantee applies only to the specified obligation.
 This type offers more certainty and limits the guarantor’s exposure to one particular
instance.

Situations Requiring Personal Guarantees –

 Small Business Loans:

Banks and other lenders often require personal guarantees from business owners to secure
loans.
 Commercial Leases:
Landlords may require personal guarantees from business owners leasing commercial
property.
 Trade Credit:
Suppliers may require personal guarantees before extending credit to new or risky
business customers.

Importance of Personal Guarantee –

 Access to Credit :
A personal guarantee can help secure loans or lines of credit that would otherwise be
unavailable.

 Risk Mitigation for Lenders :

A personal guarantee provides lenders with an extra layer of security, reducing their risk
by giving them a claim on the guarantor's personal assets if the business defaults.
  Impact on Guarantors :
Signing a personal guarantee means that the guarantor's personal assets, such as savings,
real estate, and other properties, can be used to satisfy the debt if the business cannot.

 Business Accountability :
Knowing that personal assets are at risk, business owners and executives may be more
cautious and responsible in their financial and operational decisions.

Sec185:- Under section 185, Public and private companies are prohibited from making
loans, advances or guarantees to any of their directors or to any other individual in
which the director possesses interests. They are also prohibited from making
guarantees or offering security in connection with any loans that the director or
that other person may take out.
185(1) states that no company shall advance any loan directly or indirectly, taken
by

 any director of the Company, or director of a holding company or any partner or

relative of any such director; or
 in any such firm, the director or relative is a partner.

Section 185(2) says that a company may advance any loan, including any loan
represented by an offer any guarantee or security, but only on the following
conditions –

The following special resolution is adopted by the company’s general meeting

The borrowing corporation for its chief business operations uses the loans.

Exceptions –

i. Loan given to managing or whole-time directors.

ii. Loan to a Director Not Greater Than Certain Amount
iii. Loan to a Director for Meeting Expenses Incurred on Behalf of the Company
Resolutions –

i. Loans and Guarantees with Special Resolution

ii. Eligible borrower
iii. Purpose of the company
iv. Holding company exemption

Sec186:- The purpose behind articulating Section 186 of the Companies Act, 2013 is to
regulate the manner and limit of giving loans and making investments by one
company to another. This regulation was needed to prevent excessive loans or
investments and dilution of shares and to protect the stakeholders’ and owners’
interests in the market.

Section 186(1) of the Companies Act, 2013 talks about “layers” of investment.
The provision of Section 186(1) states that a company is not permitted to make
investments beyond two layers of investment companies.

Section 186 (2) puts a limit on loans, guarantees and investments to any person,
company or other body corporate, directly or indirectly.

Legal Requirements –

i. Approval of the board

ii. Approval of members
iii. Disclosure requirements
iv. Approval of public financial institutions

Resolutions –

i. Restrictions on loans, guarantees and investments

ii. Approving of threshold
iii. Approval of the board
iv. Transparency
 v. Exceptions such as the government companies

Charges:-

Section 77 of the Companies Act, 2013 deals with the duty to register charges created
by a company

 Companies must register charges: This applies to any charge created by a

company on its property or assets, regardless of location (within or outside India).
The charge can be tangible (like machinery) or intangible (like intellectual
property).
 Registration timeline: The company has 30 days from the date the charge is
created to register it with the Registrar of Companies. There's a provision for late
filing with an additional fee and justification required.
 Registration process: The registration involves filing specific details about the
charge with the Registrar. This typically includes a form signed by both the
company and the charge holder, along with any documents related to the charge
creation.
 Purpose of registration: Registering a charge creates public transparency
regarding the company's liabilities. This helps potential creditors assess the
financial health of the company.

CHARGES

What is a charge –

Under the Companies Act, a charge refers to an interest or lien created on the property or assets
of a company, or any of its undertakings or both, as security and includes a mortgage. Charges
are typically created to secure loans or other forms of credit from financial institutions.

Types of Charges –
Charges are primarily of two types –

 Fixed Charges
 Floating Charges

 Fixed Charges :
A fixed charge is a type of charge that is created on specific, identifiable, and immovable
assets of a company. These assets are tied to the charge, and the company cannot freely
dispose of them without the consent of the charge holder.

 Floating Charge :

A floating charge is a type of charge that covers a class of assets that are not specifically
identifiable at the time of creation and can change over time in the ordinary course of
business. This charge "floats" over the company's assets and only crystallizes into a fixed
charge upon certain events.

PARI PASSU CHARGES

Meaning –

Pari passu is a Latin term meaning "on equal footing" and is often used in finance and legal
contexts to denote that different creditors have equal rights or are treated equally with respect to
certain assets or claims.

Types of Pari Passu Charges –

1st Pari Passu Charge :
 A 1st pari passu charge refers to the first set of creditors who share an equal right to
repayment from a specific asset or pool of assets.

 The term "1st" indicates that this is the first level or tier of pari passu charges, implying that
these creditors have priority over any subsequent pari passu charges.

 Multiple creditors are granted an equal claim on the assets.

2nd Pari Passu Charge :

 A 2nd pari passu charge indicates a secondary level of equal ranking claims by creditors.

 Their claims are subordinate to the claims of the 1st pari passu charge creditors
 These creditors also have equal claims among themselves, similar to the 1st pari passu charge
creditors.

Deed

Deed is a binding document in a court of law only after it is filed in the public
record by a local government official who is tasked with maintaining documents.
The signing of a deed must be notarized. Some states also require witnesses.

If a deed is not written, notarized, and entered into the public record, it may be
referred to as an imperfect deed. The document and the transfer of title are valid,
but the related paperwork may need to be on file with the register of deeds to avoid
a delay if there is a legal challenge.

Other types of documents that confer privileges comparable to deeds

include commissions, academic degrees, licenses to practice, patents, and powers
of attorney.

Types of Deeds:-
A Grant deed:- Contains two guarantees: that the asset has not been sold to
someone else and that it is not burdened by any encumbrances that have not
been disclosed, such as outstanding liens or mortgages. That is, the deed is
"free and clear" of defects.1
Davis Upton & Palumbo. "What Are the Three Most Common Types of
Deeds?"

Grant deeds do not necessarily need to be recorded or notarized, but it is

generally in the best interests of the grantee to ensure that this is done.

A Warranty deed:- sometimes called a special warranty deed, declares that

the grantor has not caused any title defect while owning the property. 1 It
provides the greatest amount of protection to its holder. A warranty deed
offers the same guarantees as a grant deed plus a promise that
the grantor will warrant and defend the title against any claims.

A Quitclaim deed:- releases a person's interest in an asset without stating

the nature of their interest or rights. The grantor could be a legal owner or
not, and makes no promises. Quitclaims are often used in divorce
settlements and in transfers of property between family members.

The Indian Contract Act

SECTION 133 : Discharge of surety by variance in terms of contract –

This section of the Indian Contract Act, 1872 states that –
“Any variance, made without the surety’s consent, in the terms of the contract between the
principal 1[debtor] and the creditor, discharges the surety as to transactions subsequent to the
variance”.
This section protects a surety (someone who guarantees another's debt) if the original contract
between the creditor and the debtor is materially altered without the surety's consent. The surety
is then discharged from their guarantee.

 Surety's Role:
A surety is someone who guarantees the performance of a contract by another person, known as
the principal debtor. If the principal debtor fails to fulfill their obligations, the surety is liable to
the creditor.

 Contractual Relationship:
The surety’s liability is based on the original terms of the contract between the principal debtor
and the creditor. This means that the surety has agreed to guarantee the obligations under those
specific terms.

 Consent Requirement:
Consent from the surety must be explicit. If the surety does not agree to the new terms, they
cannot be held liable under those altered terms.
Implied consent or lack of objection does not constitute consent. The surety must explicitly agree
to any changes.

 Discharge of Surety:
The discharge of the surety is automatic if there is a variance in the contract without the surety’s
consent. This discharge applies to all transactions after the variance.
The surety remains liable for obligations that arose before the variance, but for any new
obligations under the modified terms, the surety is not liable.

SECTION 134 : Discharge of surety by release of Principal Debtor –

This section of the Indian Contract Act, 1872 states that –
"When the principal debtor is discharged by any contract with the creditor, or by any act or
omission of the creditor, the surety is discharged."
 In this section 2 types of release are mentioned :
i. Express release: This is a situation in where an express , between the credit and the principal
debtor results in discharge/release.

ii. Implied release: In the section the words “by any act or commission of the creditor, the legal
consequence of which is the discharge of the principal debtor” refers to an implied
release/discharge.

 Discharge by Contract with the Creditor :

If the principal debtor and the creditor enter into a contract that results in the discharge of the
principal debtor's obligation, the surety is also discharged from liability.

 Discharge by Act or Omission of the Creditor :

The surety can also be discharged if the creditor's actions or inactions result in the discharge of
the principal debtor.

 Mutual Consent :
The discharge of the principal debtor should be a result of mutual consent between the creditor
and the debtor. Unilateral actions by the debtor do not discharge the surety unless accepted by the
creditor.

SECTION 135 : Discharge of surety when creditor compounds with, gives time to, or
agrees not to sue, principal debtor :
This section of the Indian Contract Act, 1872 states that –
“A contract between the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue, the principal debtor, discharges the
surety, unless the surety assents to such contract”.

This section specifies three circumstances under which the surety can be discharged:
 Composition :
If there is a variation in the original contract, such as adding terms that were not present initially,
without the surety’s consent, it would discharge the surety’s liability.

 Promise to Give Time :

If there is an agreement between the principal debtor and the creditor where the creditor agrees to
give more time to repay the debt without considering the surety, the surety is discharged.

 Promise Not to Sue :

If there is an explicit contract stating that the creditor will not sue in case of default, it would
discharge the surety’s liability. However, mere forbearance to sue without an explicit contract
will not discharge the surety.

Section 139:- Section 139 of the Indian Contract Act of 1872 outlines the right of
a surety to be discharged from liability if a creditor acts in a way that impairs the
surety's ability to recover from the principal debtor. This can happen if the creditor:

 Does something that goes against the surety's rights

 Fails to do something that is required of them as a duty to the surety

Section 141:- Section 141 of the Indian Contract Act of 1872 covers a surety's
right to benefit from the creditor's securities. It states that a surety is entitled to the
benefits of any security that the creditor has against the principal debtor when the
contract of suretyship is entered into. This is true even if the surety doesn't know
about the security.

Why is it important for a Lender to waive these rights? (133, 134, 135, 139
and 141)

Lender generally wouldn't want to waive rights entirely. However, they might seek to limit the
application of these specific sections (133, 134, 135, 139, and 141) in the loan agreement. Here's
why these sections are important for a surety (the one guaranteeing the loan) and why a lender
might want some limitations:

The Relevant Sections (Indian Contract Act):

 133: Protects the surety if the terms of the loan agreement are changed without their
consent. This ensures the surety isn't on the hook for something they didn't agree to
originally.
 134: Limits the surety's liability to the amount mentioned in the agreement.
 135: Releases the surety if the creditor releases the primary borrower (the one taking out
the loan) from their obligations.
 139: Gives the surety the right to benefit from any security the lender holds for the loan
(like collateral). If the lender recovers some money through the security, it reduces the
surety's potential liability.
 141: Allows the surety to claim any security the lender held after they repay the loan.

Why a Lender Might Want Limitations:

 Flexibility in Loan Agreements: Lenders might want some flexibility to adjust the loan
terms (interest rate, repayment schedule) without needing the surety's consent for minor
changes. This can help with loan management.
 Security for Larger Loans: For larger loans, lenders might require stronger protections.
They might negotiate limits on the surety's ability to benefit from released security
(section 139) or claim it after repayment (section 141). This encourages the surety to
ensure the borrower repays.

 There are legal variations. While a lender can negotiate limitations, some sections
(like 133) might have limitations that can't be waived entirely. The specific enforceability
depends on your jurisdiction.

 Surety rights offer protection. Completely waiving these sections can leave the surety
overly exposed to risk. It's important for the surety to understand the implications before
agreeing to any limitations.