A loan agreement is a legal contract between a borrower and a lender regulating the mutual promises made by each party. It is a formal document that evidences a loan. A loan agreement is a legal document and a written promise to repay the money that is described by the Agreement between the lender and the borrower. This document is used to record the terms between the parties, including the method and amount of repayment of loan and also the penalty in case of default of such payment.
An agreement for loan with security is essentially a loan agreement in which terms and conditions regarding collateral/security given against the loan, are also mentioned. A document that provides a lender, a security interest in a specified asset or property that is pledged as collateral. In the event that the borrower defaults, the pledged collateral can be seized and sold. A security agreement mitigates the default risk the lender faces.
A loan agreement (for a secured loan - with security/collateral) is required in order to determine the terms and condition between the lender and borrower. The agreement is binding on both the parties. It is an important step as all the rights and liabilities of the parties are stated clearly and thus avoids future legal trouble and confusion. Its main purpose is to serve as written evidence of the amount of a debt, the terms under which the loan money shall be repaid - including the rate of interest if involved. It details the particulars regarding collateral/security which is given against the loan by the borrower. It is a legal document and is enforceable in the Court of law.
It should consist of all the necessary terms and conditions. The following are important terms that must be included in a loan agreement among others:
DRAFT OF LOAN AGREEMENT WITH SECURITY
THIS AGREEMENT is made at ________on this ____ day of _______, 200__
BETWEEN
___________LTD, a Company incorporated under the Companies Act, 1956 or Companies Act ,2013 having its Registered Office at ___________________________ (hereinafter referred to as "The Lender") which term or expression shall unless excluded by or repugnant to the subject or context hereof shall mean and include its heirs, successors and assigns of the One Part
i. M/S ABC LIMITED, a Company incorporated under the Companies Act, 1956 or Companies Act ,2013 having its Registered Office at ____________________ (hereinafter referred to as "The Borrower") which terms or expression shall unless excluded by or repugnant to the subject or context hereof shall mean and include its heirs, successors and assigns of the SECOND PART and
ii. M/S CDE LIMITED, a Company incorporated under the Companies Act, 1956 or Companies Act ,2013 having its Registered Office at __________________ (hereinafter referred to as "The Lender") which terms or expression shall unless excluded by or repugnant to the subject or context hereof shall mean and include its heirs, successors and assigns of the THIRD PART.
WHEREAS
A. The Borrower is one of the entities in the group of Companies, ABC LIMITED, a Company incorporated under the provisions of the Companies Act, 1956 or Companies Act, 2013 having its Registered Office at ___________________________ hereinafter referred to as "The Borrower" has a paid up capital of Rs. ______ lacs as on _________ (date).
B. The Borrowers has approached "The Lender" for grant of inter corporate deposit of Rs. _______/- (Rupees __________ only) for a period of _____ days beginning from the date of disbursal of loan i.e._________.
C. The Lender has favourably considered the request of the Borrower and has agreed to lend and advance a secured interest carrying inter-corporate deposit of Rs. _________ (Rupees _________ only) to the Borrower on the terms and conditions and covenants as follows.
D. The Lender has agreed to secure the timely repayment of the loan along with interest by creating in favour of the Lender Pledge with the securities fully stated in the Annexure Annexed hereto and treated as an integral part of this Agreement.
NOW THIS AGREEMENT WITNESSETH AS FOLLOWS:
1. At the request of the Borrower the Lender lends an advance to the Borrower an inter corporate deposit of Rs. ____________ (Rupees ___________only) for a period of _______ days beginning from the date of disbursal i.e.________
2. The said inter corporate deposit shall carry an interest @ _____% per annum payable with ________ rests. In case of delay or default in payment, whether of the principal or of the interest or any part thereof the Lender shall be entitled and the borrower shall be liable to pay a penal interest @ _% per annum over and above the interest mentioned hereinabove.
3. As a security towards timely repayment of loan along with interest, the Lender has agreed to pledge in favour of the Lender, fully paid up equity shares, standing in the name of Lender as stated in the Annexure annexed hereto and treated as an integral part of the agreement in the equity capital of ABC Limited, a company incorporated under the provisions of the Companies Act, 1956 or Companies Act, 2013 having its Registered Office at _____________________________. The Equity shares of Equity International Ltd are listed at _______ Stock Exchange and the current market price of shares is agreed to be Rs. ____/- per share.
4. In case the Lender sends the notice to the Borrower to make good the margin in the securities (_____% in this case) and the Borrower fails and/or neglects to make good the margin within the stipulated period as mentioned in the notice the Borrower shall be deemed to have committed default of the terms of this agreement and in that event it shall be lawful for the Lender (but not compulsory) to demand from the Borrower repayment of the loan along with the interest then outstanding and the Borrower shall be liable to repay the loan in full along with interest thereon without any objection and/or demur.
5. It is expressly agreed by and between the parties hereto that in case of downward revision in the market price of the equity shares of ABC LTD, the Borrower/ Lender shall on its own, pledge in favour of the Lender such other shares of ABC LTD so as to ensure ______ % margin between the amount of loan along with interest and the securities.
6. In case the Borrower fails and/or neglects to repay the amount of loan or the amount of interest on the due date it shall be lawful for the Lender to sell or dispose off, at the cost and expenses of the borrower, all or some of the equity shares of ABC LTD either by way of private arrangement or in the open market and to apply the net proceeds thereof towards satisfaction of the amount of loan or the interest, then outstanding.
7. The Borrower agrees that any accretion the securities pledged with the Lender by way of dividend, bonus/rights issue etc. accruing from time to time shall be deemed to be pledged with the Lender and the Borrower shall, on its own take expeditious steps to create a pledge in favour of the Lender.
8. It is agreed that the Borrower shall execute a Demand Promissory Note in favour of the Lender.
9. The Borrower/ Lender agree and undertake to execute in favour of the Lender all such documents/papers, including fresh transfer deeds, as may be required by the Lender from time to time.
10.The Borrower/ Lender have agreed to constitute nominate and appoint the Lenders as its true and lawful attorney to do all such deeds and things in respect of the said ______(No. of Shares) Equity Shares of ABC LTD as may be pledged/hypothecated by the Borrower to the Lender.
11. It is agreed that the liability of the Lender is jointly and severally along with the liabilities of the Borrower and the same is co-extensive.
IN WITNESS WHEREOF the parties herein have signed this agreement in acceptance of all terms stated above on the date and place mentioned hereinabove.
There are no specific documents required for the drafting and execution of a loan agreement with security. However, since there is security involved - papers evidencing the same would be required. For example if the security is an immovable property of the borrower, ownership papers for the same must be scrutinized. Other than this, ID proofs of the parties in order to confirm the names and permanent addresses of the lender and borrower shall be scrutinized.
No set procedure is applicable in the making of a loan agreement with security. However, once the agreement has been drafted by a lawyer, it should be specifically and carefully read by both the parties to the agreement. Any necessary changes required to be made shall be carried out and once the agreement is finalised, it shall be signed by both the parties along with the requisite witnesses. The loan agreement has evidentiary value when it is printed on stamp paper/e-stamp paper and signed by both the parties. The stamp paper value depends on the particular State in which it is executed. Each party should thereafter keep a signed copy of the Loan Agreement.
A loan agreement with security is a legal document which includes clauses stating the terms and conditions between the parties - regarding the giving of loan, the security/collateral involved, repayment of loan, etc.. It needs to be printed on stamp paper of the correct value and signed by both parties. It can be modified or amended as per the terms of the agreement.
One of the first and the most important steps that you must undertake is to hire a good documentation lawyer as he/she is aware of the nitty gritty of the legal procedures and necessary requirements involved in drafting of loan agreements(which involve security). A lawyer would draft a loan agreement, better than you can yourself, for obvious reasons. A lawyer has the necessary legal knowledge and experience to handle and draft such documents. He/She will be able to guide you and draft for you according to your particular situation - the facts, circumstances and needs involved. A documentation lawyer is aware of good drafting technique and the clauses that must be included in your agreement. Hiring a good lawyer in order to draft such important legal documents is a prerequisite and will help you in more ways than one.