Security over Collateral

PAKISTAN
Rizvi, Isa, Afridi & Angell

CONTACT INFORMATION
Rizvi, Isa, Afridi & Angell
D-67, Block 4,
Clifton, Karachi-75600, Pakistan
UAN: 111-LAWYER
Karachi@riaalaw.com
www.riaalaw.com

1. Can assets be charged, liened and/or encumbered in your jurisdiction? Please

insert any exemptions, if any.

Assets in Pakistan can be charged, liened and/or encumbered.

The exceptions to this general rule are:

(a) Rights under personal contracts of employment or service;

(b) Rights granted by the Federal or Provincial Government (for example civic
awards)
(c) Licenses issued by regulatory authorities; and
(d) Statutory rights restricting ability to charge or encumber such right.

2. In your jurisdiction, under what circumstances may security arrangements be

subjected to choice of law and/or choice of forum clauses (does it matter,
whether the security itself is located abroad and/or governed by foreign law
[e.g. a pledged claim])? What is the market practice in your jurisdiction? Is
there a treaty on this in your jurisdiction, whether bilateral or multi-lateral?
Are there any requirements for enforcement in your jurisdiction?

Freedom of contract enables the parties to choose the law by which they would
desire thir contract to be governed. Location of the security is irrelevant for such
determination. However, the jurisdiction of Pakistani courts can not be ousted if
they otherwise have jurisdiction. Pakistani courts have jurisdiction if the defendant
resides or carries on business in Pakistan, if the cause of action partially or entirely
 accrued in Pakistan or if the immoveble property whcih is the subject matter of the
dispute is located in Pakistan.

The market practise is to provide for English Law and to grant jurisdiction to courts
in England.

Under Section 44-A of the Civil Procedure Code the monetary decrees of superior
courts of England are enforceable in Pakistan as if they were a decree of a Pakistani
court. Pakistan has also promulgated domestic law to give effect to the international
conventions on enforcement of foreign arbitral awards.

3. In your jurisdiction, are floating charges or security over the overall assets of
an entity accepted, and if so in what terms?

In Pakistan floating charges or security over the overall assets of an entity are
accepted. However, banking companies licensed under the Banking Companies
Ordinance, 1962, can only create a floating charge on their assets after certification
from the State Bank of Pakistan that the creation of such a charge is not detrimental
to the interest of the depositors of such banking company.

The usual terms of a floating charge is that it is converted in to a fixed charge on the
occurrence of an Event of Default.

Charges (including floating charges) on the undertaking or property of a corporate

entity (a “Company”), incorporated under the Company Ordinance 1984 (the
“Ordinance”), are required to be registered with the Registrar of Companies under
Section 121 of the Ordinance. Section 121 of the Ordinance requires prescribed
particulars of the mortgage or charge, together with a copy of the instrument, if any,
verified in the prescribed manner, by which the mortgage or charge is created or
evidenced to be filed with the Registrar for registration within twenty-one days after
the date of its creation (the “Section 121 Registration”). Failure to register renders
the charge void against the liquidator and any creditor of the company.

4. In relation to the following types of assets, please explain in your jurisdiction

the types of security that can be created or granted, if the security requires any
type of registration or perfection requirements, an estimate of cost (including
applicable taxes and any other duties/ costs) and timing for granting such
security, and any special considerations regarding the asset type:

(a) Aircraft:

Aircrafts can be hypothecated and if the same belongs to Company Section 121
Registration is required. Minimal fee (less than US$5) is payable to the Registrar.

(b) Bank Accounts:

A banker can have a lien on the amounts in a bank account. The amounts in credit
of such bank account may be charged and the receiveable from such account can be
assigned. If it belongs to the Company a Section 121 Registration is required to be
effected. Hypothecation (charge) of the amounts in a bank account do not require
ad valorem stamp duty, but a deed of assignment relating to the receivable from the
bank account requires to be bear ad valorem stamp duty of 3% of the value of the
receivable.

(c) Animals, Crops (in ground and severed) and Timber:

Animals, Crops whether in ground or severed and Timber can be hypothecated.

Section 121 Registration will be required if they belong to a Company.

(d) Equipment:

Equipment which is movable property and is not embedded on or attached to the

earth, can be charged, hypothecated and/or pledged. However, if it is embedded in
or attached to the earth it is immovable property and can be mortgaged. The
instrument creating such mortgage requires to be registered with the Registrar of
Assurances. Such instrument require to bear stamp duty of 3% of the value of the
amount for which it is being mortgaged. If such asset belongs to a Company,
whether it is hypothecated or mortgaged, the Section 121 Registration will be
required.

(e) Intellectual Property;

Intellectual properties are movable properties and the same be hypothecated or

otherwise charged. Special statutory requirements need to be complied with in order
to enable such rights to be charged or assigned.

(f) Inventory:

Inventories are movable property and the same can be charged, hypothecated and/or
pledged. For a charge on the equipment of a Company, not being pledge, Section
121 Registration is required.

(g) Leases:

Mortgages are allowed to be created over the leases of immovable properties and
require Section 17 Registration. In case of a lease belonging to a Company Section
121 Registration is also required.

(h) Mineral Interests, including Hydrocarbons:

Mineral interest in a license can be charged and a interest in a mineral or petroleum

lease can be mortgaged. However, the relevant statutory rules restrict the ability to
chargew or assign such rights without the approval of the relevant government
(Federal Government for petroleum rights and provincial government for mineral
rights).

(i) Promissory Notes and Chattel Paper:

Any negotiable instrument can be assigned by endorsement and delivery.

(j) Real Estate:

The following types of Mortgages can be created on an immovable property:

i. “simple mortgage” when “without delivering possession of the

mortgaged property, the mortgagor binds himself personally to pay
the mortgage money, and agrees expressly or implied, that, in the
event of his failing to pay according to his contract, the mortgagee
shall have a right to cause the mortgaged property to be sold and the
proceeds of sale to be applied, so far as may be necessary, in
payment of the mortgage-money”.

ii. “Mortgage by conditional sale” when “the mortgagor ostensibly

sells the mortgaged property on condition that on default of payment
of the mortgage money on a certain date the sale shall become
absolute, or on condition not on such payment being made the sale
shall become void, or on condition that on such payment being made
the buyer shall transfer the property to the seller.

Provided that no such transaction shall be deemed to be a mortgage,

unless the condition is embodied in the document which effects or
purports to effect the sale”.

iii. “Usufructurary mortgage” when, “the mortgagor delivers possession

or expressly or by implication binds himself to deliver possession of
the mortgaged property to mortgagee, and authorizes him to retain
such possession until payment of the mortgage-money, and to receive
the rents and profits accruing from the property or any part of such
rents and profits and to appropriate the same in lieu of interest, or in
payment of the mortgage-money, or part in lieu of interest or partly
in payment of the mortgage-money”.

iv. “English mortgage” when “the mortgagor binds himself to repay the
mortgage-money on a certain date, and transfers the mortgaged
property absolutely to the mortgagee, but subject to a proviso that he
will re-transfer it to the mortgagor upon payment of the
mortgage-money as agreed”.

v. “Mortgage by deposit of title-deeds” when “a person in the town of

Karachi, delivers to a creditor or his agent documents of title to
immovable property, with intent to create a security thereon, the
transaction is called a mortgage by deposit of title-deeds”

“Provided that, where a mortgage by deposit of title deeds is to be

created in favour of a banking company as defined in the Banking
Tribunals Ordinance, 1984 (LVIII of 1984), the same may also be
created by an entry in the record of rights against the entry relating
to such immovable property”.
vi. “Anomalous mortgage” is “a mortgage which is not a simple
mortgage, a mortgage by conditional sale, a usufructuary mortgage,
an English mortgage or a mortgage by deposit of title -deeds within
the meaning of this section”.

All instruments creating a mortgage on immovable property require to be registered

with the Registrar of Assurances

If the real estate belongs to a company, the mortgage will also require Section 121
Registration.

(k) Receivables (credit rights under contracts or invoices);

Receivables can be assigned. Such assignment is required to be in writing.

(l) Rights under Contracts (excluding Receivables);

A beneficial right or interest of a party under a contract and the right to recover
benefits created thereby are assignable provided that (a) all the interest of the
assignor under the contract must be transferred and conveyed to the assignee, (b) the
benefits are not coupled with any liability or obligation that the assignor is bound to
discharge, (c) the contract has not been induced by personal qualifications or
consideration as regards the parties to it and (d) the assignment is not “mere right to
sue”. For example the right to recover damages for breach of contract is mere right
to sue and is not assignable.

(m) Shares (in book-entry and certificate form and other securities):

Shares certificate in physical form can be pledged. For the shares in scrip-less form
Central Depository Company of Pakistan Limited (the “CDC”) maintains book-
entry system in Pakistan and the Central Depository Company of Pakistan Limited
Regulations (the “Regulations”) provide for and allow the pledge of such
securities.

Creation of a security interest in shares of Pakistani company in favour of a non-

resident requires permission of the State Bank of Pakistan.

(n) Vessels:

If the vessel, upon which the charge is created, is registered under Merchant
Shipping Act, 1894, or under Act XIX of 1838 or the Registration of Ships Act,
1841, as amended by subsequent Acts, then the charge is required to registered in
the same register.

(o) Vehicles:

Vehicles (like any other movable asset) can be hypothecated or pledged.

5. Please explain briefly for each type of assets the procedure for enforcement
(judicial and extra-judicial). Is it possible to enforce security governed by
another jurisdiction? If yes, what is the procedure?

Enforcement of each nature of charge depends upon the terms on which the charge
is created and the entity in whose favour such charge is created. Due to special
stautory provisions, financial institutions are provided special considerations. As
such, an asset which is hypothecated can be taken into possession and sold, a
pledged asset can be sold after giving notice to the pledgor, a mortgage can be
enforced by sale. Financial institutions do not need to go to court to enforce their
security: they can sell the mortgaged or charged assets by virtue of special
provisions in statutes relating to recovery of loans.

6. Can a trustee or security agent be used in your jurisdiction, or must security be

granted in favour of all lenders?

A trustee or security agent is often used to hold the security on behalf of a number
of lenders.

7. In bankruptcy or insolvency scenarios, what are the suspect periods, is claw-

back possible, and what other types of rights (tax debts, employees, etc.) have
preference over security granted?

Suspect Period is one year prior to the date of the filing of the Petition for winding
up. Claw-back is possible. There is no statutory preference over fixed security.

8. In your jurisdiction, can borrowers or guarantors subordinate their claims and

if so in what terms?

Subordination can be both in terms of security as well as in terms of cash flows.

The terms can be mutually agreed between the lender and the borrower.

9. What are the consequences of a transfer, assignment or novation of an

underlying credit in your jurisdiction (is new security necessary, is the security
automatically transferred, etc.)

If the security is given to the lender, then a new securrity will have to be created. If
the security is given to a trustee, then new security documentation is not required.
The new lender is brought within the beneficiaries by an accession memorandum.

10. Can you have on top of a security in your jurisdiction, another layer consisting
of an assignment of the collateral concerned conditional upon default by the
debtor?

An assignment in Pakistan is a conveyance. As such, in certain events of default,

the charged asset can be required to be assigned. However, such asssignment
requires to be by an instrument and writing. Effectively, the charge operates as a
conditional assignment and the assignment is effectuated upon the occurrence of a
specified event.
11. Are step-in rights lawful in your jurisdiction or does any action to take control
require the creditors to go through a court process?

Step in right are lawful and recognised. It is only if the borrower prevents such step
in rights from being exercised that the recourse to courts is necessitated.