Following
are different types of entities who can be financed as borrower from Bank
INDIVIDUALS
As
per law, every individual to whom a credit facility is sanctioned must be
competent to contract. Minors, persons of unsound mind and un-discharged
insolvents are incompetent to enter into a valid contract.
2.
SOLE PROPRIETORSHIP FIRMS
When
an individual decides to venture into a business, then a simple form of
business to set up is a Sole Proprietor. To illustrate the difference between
sole proprietor and sole proprietorship, let us take an example Mr. Raman start
a business of readymade garment in the name of Fashion World. The sole
proprietor is Mr. Raman. The name of sole proprietorship business is Fashion
World. As per KYC guidelines, we are required to obtain documentary evidences
(i.e. including registration of firm with respective authority under Shop &
Establishment Act, VAT Registration etc.) to ensure that the proprietorship
firm is actually in existence. As far as signing or execution of loan documents
is concern, it is a common practice to sign and affix the rubber stamp in the
name of business (i.e. proprietor is to sign in the capacity of proprietor as
well as in individual capacity) .
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Hindu Undivided Family can be considered for granting the credit facilities.
However, providing any credit facilities where HUF is shown as a partner in a
partnership firm should not be considered at all.
This
is in connection with Hon'ble Supreme Court, in their Judgment, held that HUF
has no juristic personality and hence it cannot be called as a person (and not
being a person, cannot enter into an agreement with an individual or body
corporate or company, as the case may be), to form a partnership and carry on
the business of partnership firm.
Further,
section 5 of the Partnership Act provides that the relationship of a partner
arises by means of a contract and not from status. Further, the said Act also
excludes the members of HUF carrying on the family business as such from the
description of partners.
3.
PARTNERSHIP FIRM
A
Partnership is an association of two or more persons to do a business for profit,
like a sole proprietorship. It is a firm with no legal entity; however the
partnership business is governed by the Indian Partnership Act, 1932.
While the Act is in place, it is a common
practice for the firms to draw up their own Partnership Deed. In absence of
partnership deed, the Partnership Act will prevail.
To enter into a partnership, there has to be
a contract which may be oral or in writing. Being a legal contract, persons
having legal capacity to contract (minors, insolvents, alien enemy excluded)
only can enter into a partnership.
The number of partners in a partnership firm
should not exceed ten, if it is engaged in banking business and twenty in other
cases.
There are no restrictions on the borrowing
powers of a partnership firm.The firm need not be a registered one for granting
advance facilities.
No partner should be a lunatic or
un-discharged insolvent and no other partnership firm should be a partner in
another firm.
As per Section 32 of Indian Partnership
Act 1932, a minor can be admitted to the benefits of a partnership with the
consent of all the partners but he will not be liable for losses of the firm.
Within six months after he attains the majority, the minor has an option to
repudiate his liability as a partner otherwise will be held liable as a partner
of the firm, from the date he was admitted for the benefits of partnership. As
such the minor should not be mentioned as a full-fledged partner and neither
his nor his guardian's signature obtained on security documents.
Joint Stock Company/ Trust can become the
partner in a firm and in such cases the bankers need to ensure that they are
eligible to become the partner.
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Action
on the part of Lending Bank in case of Admission of a new partner/ Dissolution
of the firm (Mutually, Death/insolvency/ retirement/ operation of law) when
the account is showing debit balance- Case
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Action
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Admission
of new partner
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balance
confirmation letter, signatures and record date of admission before allowing
operations
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Death,
insolvency or lunacy
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Stop
operations to avoid rule in Clayton‘s case. LAD/Balance confirmation to be
obtained from legal heirs in case of death to make them liable.
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Retirement
of partner
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If
it is decided to permit the loan facility to the firm with remaining
partners, LAD/balance confirmation letter to be obtained from them.
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Action
on the part of Lending Bank in case of reconstitution of the firm On receipt of
notice of death, retirement or insolvency, exclusion or inclusion of a partner
the branches should treat the limit granted to the old firm as cancelled and
extension of credit facilities to the new (reconstituted) firm be considered
afresh after reviewing the credit worthiness of the reconstituted partners and
all other relevant factors having a bearing on the grant of advances.
When the account of the reconstituted
firm is opened, fresh documents should be
obtained
and thereafter the outstanding balance in the old account be adjusted by a
cheque drawn on the new account and signed jointly by all the partners of the
reconstituted firm or by obtaining a letter of authority signed by all the
partners.
Change in the constitution of the firm
should invariably be brought to the notice of the sanctioning authority and
instructions sought for the continuance of the facilities to the reconstituted
firm along with full details and the position of the firm consequent to the
death/retirement of a partner. Impact of reconstitution of the firm on its capital
structure and management should be studied carefully.
However, with a view to ensuring that
the activities of the firm, are not affected and that they continue to have
dealings with the bank till all the formalities are completed, the firm may be
allowed to operate on their existing accounts after obtaining a stamped
indemnity signed by all the partners including the partners who has/have
joined/retired along with the confirmation from the guarantor/s; if any.
4.
LIMITED COMPANIES
The
companies Act, 1956 recognizes a joint stock company as a legal person, due to
which it is a separate legal entity and bankers have to deal with such
organization more carefully- Different types of companies- Generally, the
bankers deal with two types of companies- PRIVATE LIMITED COMPANIES
Such companies
have minimum 2 and maximum 50 shareholders.
There should be
minimum 2 directors and its name must end with the words ―private limited‖.
A private
Limited company can start business on receiving certificate of incorporation
and need not to wait for certificate of commencement of business.
The shares of
private limited companies are not quoted in the stock market and there is
restriction on right of transfer of the shares. The public is not invited to
subscribe the shares.
The minimum paid up capital is Rs.1.00
lacs.
PUBLIC
LIMITED COMPANIES Public company" is defined in section 3(1) (iv) of the
Act and it means a company which —
a. is not a private company;
b. has a minimum paid-up capital of
five lakh rupees or such higher paid-up capital, as may be prescribed;
c.
is a private company which is a subsidiary of a company which is not a private
company.
Public limited
companies must have minimum 3 directors and seven shareholders.
Public Limited can invite/transfer
shares to or from public and such shares are quoted in stock market.
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PRIVILEGES
ENJOYED BY A PRIVATE LIMITED COMPANY OVER PUBLIC LIMITED COMPANY Section
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Description
of the matter
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3(1)(iii)
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A
Private Company (Pvt. Co.) can operate with Minimum paid-up capital of Rs. 1
lakh as against Rs. 5 lakhs for Public Company.
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12(1)
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A
Pvt. Co. can be formed by only two persons as against requirement of at least
seven persons in case of Public Company.
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58A
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Deposit
taken by Pvt. Co. from members enjoys total exemption from the clutches of
this section. Kindly note that as per the provisions of sec. 58A read with
rule 2(b) of the Companies (Acceptance of Deposits) Rules, 1975 — amount
received from its shareholders by a private company (provided the shareholder
concerned furnishes at the time of giving the money to the company, a
declaration that the amount is not being given out of funds acquired by him
by borrowing or accepting from others) is not included in the meaning of
deposit. If the depositor ceases to be a shareholder, the deposits made by
him cease to qualify for exemption from the date of such cessation
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70(3)
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A
Pvt. Co. need not file Statement in lieu of Prospectus with ROC.
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77(2
& 3)
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There
is no restriction for Pvt. Co. which is not a subsidiary of a public company
to provide financial assistance to anyone for purchasing or subscribing for
its own shares or of its holding company.
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81
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A
Pvt. Co. can issue further shares in any manner; i.e., rights shares to the
existing shareholders need not be offered.
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85
to 90
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The
restrictions relating to kinds of share capital, issue of shares with
differential voting rights, etc. do not apply to Pvt. Co.
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111
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Appeal
against refusal to register a transfer or transmission of shares.
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149
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Procedures
for obtaining certificate of commencement of business do not apply to Pvt.
Co. A Pvt. Co. can commence its business as soon as the certificate of
incorporation is issued.
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165
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Pvt.
Co. is not required to hold statutory meeting or prepare any statutory
report.
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170
to 186
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Relaxation
in the length of Notice for calling General Meeting, contents and manner of
Service of Notices, Explanatory Statements, Quorum for meeting, Chairman of
meeting, Restrictions of voting rights etc. to the extent to which the
company makes its own provisions by its articles..
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192A
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Passing
of resolution by Postal Ballot not relevant for Pvt. Co.
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