Opinion on providing Loan Facilities to the members of the Company 1 against lien of membership of the said Company.

Mr. Z

Address….

Dear Sir,

Re:      Opinion on providing Loan Facilities to the members of the Company 1 against lien of membership of the said Company.

Please refer to your letter dated January 10, 2008 on the above subject.

From perusal of your letter it appears that, a number of brokerage houses have approached Bank 1 (“the Bank”) to extend loan facility to them against lien of their membership with Company 1 (“COMPANY 1”).

In such situation, you require our legal opinion as to whether the Memorandum and Articles of Association of COMPANY 1 permits its members/brokerage houses to avail loan facilities against lien of their membership with COMPANY 1 and our opinion as to what the Bank requires to do to protect their interest.

OUR OPINION:

Please note that, the membership of COMPANY 1 depends on the ownership of shares in COMPANY 1 and the membership is not directly transferable (first, brokerage house has to transfer the share of COMPANY 1 to another, then the new owner of the share has to apply to the Council of COMPANY 1 for its membership). As such, even if the Bank creates lien on the membership of COMPANY 1 of the brokerage houses, the Bank will not be able to sell/transfer the membership and therefore, taking such lien will not serve the purpose of the Bank.

Therefore, it would be a better option for the Bank to take lien on the shares of COMPANY 1 owned by the brokerage houses subject to our comments below:

The Memorandum and Articles of Association of COMPANY 1 does not prohibit its members from creating lien on their shares, provided that, according to Article 11(a) of the Articles of Association of COMPANY 1, a no objection certificate is obtained from COMPANY 1 prior to such creation of lien.

However, it also appears from Article 11(a) of the Articles of Association of COMPANY 1 that:

  • COMPANY 1 shall have first and paramount lien upon the shares registered in the name of each member and upon the proceeds of sale thereof for his debts, liabilities and engagement solely or jointly with any other person to or with the exchange, whether the period for the payment fulfilment or discharge thereof shall have actually arrived or not;

Therefore, if the Bank creates lien on the shares of COMPANY 1, such lien shall be subordinate to COMPANY 1’s first and paramount lien on the shares.

The Bank may take lien on the shares of COMPANY 1 subject to the risks and impediments to enforcement highlighted above. If the Bank creates lien on the shares, it will have the right to retain possession of Shares until the holder discharges the debt or obligation to the Bank. It is a possessory right only. The Bank will not be able to sell the Shares in case of default by the Borrower without going to court and even if a court order is obtained, COMPANY 1 will have a first right over the sale proceeds of the shares.

In view of the above, other securities should also be taken in additional to the lien on the shares of COMPANY 1 in order to protect the interest of the Bank.

Should you have any further query, please revert back to us.

The papers/documents referred to us are returned herewith.

Thanking you.

Yours faithfully,

………………….

For: “The Lawyers & Jurists”

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