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Loan to a company

16 August 2017

Respected Forum,

I am a banker dealing in credit portfolio. I have been approached by a company for sanction of credit facilities. To collaterally secure the proposed loan company has offered the property standing in the name of one of the directors. Please guide me “can the property offered as collateral security be accepted or same shall be leased out to the company first”.

Regard

Gurdeep singh

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Michelle (Service) (297 Points)
Replied 17 August 2017

I dont think you can take director's property as collateral. Read the given case below :

"Recently, the Supreme Court in Karnataka State Financial Corpn. v. N. Narasimahaiah11 has observed as follows (in SCC pp. 188-89, para 24): 24. Banking practice may enable a financial corporation to ask for a collateral security. Such security, we would assume, may be furnished by the Directors of a Company but furnishing of such security or guarantee is not confined to the Directors or employees or their close relatives. They may be outsiders also. The rights and liabilities of a surety and the principal borrower are different and distinct. (emphasis supplied) Therefore, it stands concluded, without any doubt, that the banks have developed the practice to execute personal guarantee agreements with the directors of a company to secure the debts of the company without the authority of law. This practice is against the principle of limited liability of the shareholders as well as directors of the company as provided in the Companies Act, 1956. Accordingly, it is clearly against the letter and spirit of the Companies Act and therefore unlawful."

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