Re: Legal Opinion on account of Company 1, a customer of Bank 1, offshore Banking Unit, DEPZ
We refer to your letter-dated 09.03.2008 on the above subject.
Upon perusal of your letter, it appears that Bank 1 has sanctioned a composite credit facility for USD 63,50,000.00 only (the “Facility”) in favour of Company 1 (COMPANY 1). BANK 1 has required the following securities to be executed by the Borrower:
1. Registered Mortgage with Sub Registry Office on factory building located at DEPZ, Dhaka with charge registered with R.J.S.C.
2. Registered Irrevocable General Power of Attorney authorizing BANK 1 to sell the Mortgaged property without reference to the court in case of default.
3. Registered Hypothecation with RJSC on
- factory plant & machinery and other assets located at DEPZ, Dhaka.
- raw materials, work-in-process & finished goods covering the credit facility of the Company.
- Book Debts covering the credit facility of the Company.
4. Registered Irrevocable General Power of. Attorney to be executed by the Company duly notarized authorizing BANK 1 to sell the hypothecated assets.
It also appears from your letter that COMPANY 1 is also availing credit facilities from BANK 2Branch against the following securities:
1. Reg. Mortgage of all factory Buildings, infrastructure and other structures already constructed or to be constructed on the existing project area of the company.
2. Registered Hypothecation (after B.E.P.Z.A.) on Plants, Machineries, Equipments and other assets of the Company already imported or to be imported through BANK 2
3. Registered Hypothecation (after B.E.P.Z.A.) on Stock of Raw Material, work in process and finished goods of the Company to be imported through BANK 2.
We understand that upon request of BANK 1, BANK 2has issued a “No Objection Certificate” in favour of BANK 1 for creating charge over the assets except on which BANK 2has charges. COMPANY 1 has provided BANK 1 with a list of machinery and stocks, which are allegedly purchased by COMPANY 1 by their own resource and hence are unencumbered assets. COMPANY 1 has proposed to create charge over them as security for the Facility.
In these circumstances, you have requested us to provide our legal opinion on the following issues:
1. Whether BANK 1 will be able to take control over the machineries, equipments, stocks (if hypothecated with BANK 1) or will be able to sell those machineries/ equipments upon liquidation of COMPANY 1 for the purpose of realising the COMPANY 1’s liability with BANK 1;
2. What recourse shall be available to BANK 1 if COMPANY 1 goes into liquidation?
3. Whether BANK 1 will face any difficulty (if so what are those difficulties), if BANK 1 desires to go for legal action for sell/ disposal of those machineries, equipments, which are installed/ stored in the factory premises which is mortgaged with BANK 2;
Queries No. 1, 2 and 3 being relevant issues are dealt in together.
We have not been provided with any information/documents as to whether the nature of the charge created in favour of BANK 2is fixed or floating.
As regards to floating charge, please note that a floating charge covers all present and future assets so hypothecated until the liabilities of the charge is fully discharged. As such, if the charge created in favour of BANK 2is floating charge then the charge of BANK 2shall also extend to future assets as well. In such situation, the status of BANK 1 over the said assets shall be of second chargee provided that there are no other prior charges other than BANK 2.
If the charge of BANK 2over the fixed assets is fixed charge, then the charge of BANK 2will extend to only the listed fixed assets as set forth in the hypothecation instrument. In such situation, BANK 1 may create charge over the factory plant & machinery and other assets located at DEPZ, Dhaka that are not included in the registered deed of hypothecation created in favour of BANK 2after being confirmed that the said assets are unencumbered.
We have been provided with a copy of NOC provide by BANK 2in favour of BANK 1 wherein they have stated that BANK 2has charge over the specific fixed and floating assets already or to be imported by the same. We have not been provided with copies of the charge documents of BANK 2.
However, if such specific assets over which BANK 2has charge are segregated, properly described and specified in the hypothecation instrument, then BANK 1 may have first priority valid charge over the other assets of COMPANY 1 provided that there is no other prior chargee. If the hypothecation instrument does not specify the assets, we suggest obtaining of a modification to the deed of hypothecation thereby curving out the assets over which they allow BANK 1 to create charge. In such situation, BANK 1 can create charge over the assets for which BANK 2has allowed BANK 1 to create charge and thereby the status of BANK 1 shall be of first chargee in relation to the curved out assets provided that there are no other prior chargees.
The ability of BANK 1 to take control over/sell the hypothecated assets will depend upon the status of BANK 1 in relation to the charged assets.
If the status of BANK 1 is that of a subsequent chargee, then the interest of BANK 1 to take control over/ sell the charged assets may be prejudiced because in case of liquidation the sale proceeds of the charged assets shall first be used to adjust the liability owed by COMPANY 1 to the first/prior chargee(s), the excess amount, if any, shall be paid to BANK 1 for adjustment of liability owed by COMPANY 1 to BANK 1.
Please note that, generally in case of plots in DEPZ and CEPZ, the DEPZ and CEPZ authorities imposes a first charge over the assets of the lessees for securing unpaid rents and other payments under the lease agreement with DEPZ and CEPZ.
Therefore, even if there is no charge of BANK 2or any other banks/financial institutions over the assets of COMPANY 1 situated in the EPZ, the charge of BANK 1 over the said assets may be subject to the first charge imposed by BEPZA.
Provided that no prior charge exists over the assets to be charged with BANK 1, if BANK 1 wishes to sell/dispose of the said assets then BANK 1 will be entitled to sell/dispose of the same notwithstanding the fact that the assets are stored in the factory premises, which is encumbered with BANK 2.
All papers/documents referred to us are returned herewith.
If you have any further query, please do not hesitate to contact us.
For: “The Lawyers & Jurists”