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Cash credit

Posted on October 15, 2025 by user

Introduction
A cash credit (CC) facility is the archetypal working-capital product of Indian banks and non-banking financial companies (NBFCs). It is a revolving short-term credit line against securities (typically hypothecation of inventories and receivables, sometimes supported by mortgage and guarantees) that allows a borrower to draw, repay and redraw up to a sanctioned limit. Though commercially simple, a cash credit gives rise to a dense bundle of contractual, property and insolvency-enforcement issues. For lawyers advising lenders, borrowers, insolvency professionals or litigating in recovery suits, mastering the legal anatomy of a CC account — documentation, perfection of security, enforcement routes and limitation problems — is essential.

Core Legal Framework
– Banking regulation and supervisory framework
– Banking Regulation Act, 1949 (framework for banks; RBI master directions and circulars govern prudential treatment of advances, classification of NPAs and maintenance of margins on cash credit).
– Reserve Bank of India master directions and prudential norms (circulars on classification, provisioning, working capital finance and conduct of CC accounts).

  • Contractual and property law
  • Indian Contract Act, 1872 — governs the basic contract obligations between lender and borrower, facility letters, hypothecation and pledge-type obligations (contractual duties, breach and remedies).
  • Transfer of Property Act, 1882 — applicable where mortgage is taken as security (sections defining mortgage and incident rights when immovable property is charged).
  • Companies Act, 2013 — Sections 77–87 (Registration of charges): where a company creates or modifies a charge on its assets, particulars must be filed with the Registrar within the statutory period (forms CHG‑1 etc.). Non‑registration has consequences in insolvency and liquidation.
  • Indian Stamp Act / state stamp laws — stamping of loan documents, mortgage deeds and guarantees; inadequate stamping may render documents inadmissible or liable to penalties.

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  • Enforcement and special recovery statutes

  • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) — Sections 13 et seq. empower secured creditors to take possession of secured assets, appoint managers and realise security without court intervention (subject to procedure and challenge). SARFAESI is the principal statutory route for enforcement of CC securities.
  • Insolvency and Bankruptcy Code, 2016 (IBC) — Section 5(8) (definition of financial debt) and Section 7 (initiation of corporate insolvency resolution process by a financial creditor): classification of CC dues as financial debt, ability of banks/NBFCs to initiate CIRP in case of default.
  • Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) — alternative forum for bank recovery by way of applications to Debts Recovery Tribunals (DRTs).
  • Negotiable Instruments Act, 1881 — Section 138 (dishonour of cheque) is often invoked where post-dated cheques or cheques given as security in a lending arrangement bounce.
  • Limitation Act, 1963 — limitation for suits on money claims (practical issues arise because CC accounts are revolving; cause of action accrues on each drawing/statement).

Practical Application and Nuances
How a cash credit operates day-to-day in litigation and banking practice
– Facility documentation and its practical consequences
– The sanction letter / limit letter sets out the amount, rate, tenor (usually renewable), conditions precedent, and the primary security package. Core ancillary documents usually include: hypothecation agreement (current assets), mortgage deed (immovables), assignment of receivables, pledge agreements (where applicable), personal guarantees and corporate board resolutions.
– Practitioners must insist on express, unambiguous clauses on drawing power, margin maintenance, stock-verification protocols, continuing representations and events of default. Vague or open-ended clauses invite borrower challenges to enforcement.

  • Nature and perfection of security
  • Hypothecation (current assets) versus mortgage (immovables) versus pledge (goods/securities): hypothecation gives the bank a contractual charge over movables without transfer of title and is commonly used for CC. Mortgages require registration and stamping; pledges give the bank physical custody and are stronger for movable goods.
  • For companies, registration of charges with the Registrar of Companies (ROC) within the statutory period (forms CHG‑1/CHG‑9 etc.) is critical — unregistered charges may be void against a liquidator or preferential creditors. Practically, banks require proof of CHG‑1 filing as a condition precedent to advances and will insist on legal opinions confirming perfection.

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  • Monitoring and evidence: stock statements and drawing powers

  • Banks control CC exposure by defining Drawing Power (DP) = (Value of stock × Margin %) + Realisable receivables − ineligible items. Monthly/quarterly stock-and-debtors statements, physical verification memos, and margin calls form the documentary basis for changes in DP.
  • In recovery proceedings, the bank must produce sanction letters, regular stock statements signed by authorized signatories, verification reports, and notices evidencing defaults. Disputes often turn on whether the borrower manipulated stock statements, whether margins were not maintained, or whether bank failed to carry out promised verifications.

  • Default and enforcement routes

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  • Contractual remedies: recall of facility, demand notices, suit for recovery (money suit), invocation of guarantees, and appropriation of funds. Limitation nuances: CC is a continuing facility — courts have treated the monthly statement as creating fresh cause of action; consequently, recovery suits should be filed within limitation from the date of last debit/closing statement or when the facility is finally called and not met.
  • SARFAESI: available to a secured creditor where security is a “security interest” as defined; requires a statutory notice (Section 13(2)), opportunity to pay/repay, and then steps to take possession/sale. Compliance with procedural requirements is essential; any defect in the security’s perfection (e.g., unregistered charge where registration is required) can impair SARFAESI remedy.
  • RDDBFI/DRT: alternate forum for banks to recover debts; pendency before DRTs often overlaps with SARFAESI action.
  • IBC: if the debt qualifies as “financial debt” and default is established, a bank can initiate CIRP under Section 7. In practice, the decision to go the IBC route vs SARFAESI/DRT is strategic and fact-driven (speed, value of security, possibility of resolution, public/stakeholder consequences).

Concrete examples of courtroom argumentation
– Suit against corporate borrower for balance on CC
– Lender’s proof: sanction letter; ledger/account-sheet showing debits/credits and closing balance; account opening form; hypothecation/mortgage/guarantee; statutory notices; ROC charge-registration proof; audited statements corroborating balances.
– Borrower’s defenses: (i) Crediting errors, (ii) Miscalculation of drawing power, (iii) Alleged clearing of dues by set-off or prior payment, (iv) Improper or invalid notices, (v) Lack of perfection of security — e.g., charge not registered leading to challenge to SARFAESI.
– Tactical judge-pleadings: maintain contemporaneous reconciliations; attach monthly statements certified by borrower where possible; produce audit trails for stock verifications.

  • Invocation of SARFAESI and challenge under Section 17
  • Lender must show a secured debt, valid security interest, and default. Bank must have issued notice under Section 13(2) giving 60 days to pay (subject to case law and amendments). Borrower’s typical challenge: absence of debt, invalid charge, procedural irregularity, or relief under interim measures — courts scrutinise the perfection of security and the bank’s compliance with statutory notice.

Landmark Judgments
– Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311
– While addressing the constitutionality and procedural contours of SARFAESI, Mardia clarified the inter-play between possession under SARFAESI and the rights of borrowers, laying down that the statute confers extensive powers on secured creditors subject to judicial review only on limited grounds. For CC creditors relying on SARFAESI, Mardia is a touchstone for procedural compliance and the limited scope of interim interference.

  • Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 (and K. Sashidhar v. Indian Overseas Bank)
  • Swiss Ribbons upheld the constitutional validity of key IBC provisions, thereby confirming that banks/NBFCs holding CC exposures can seek CIRP as a recovery route where default qualifies. K. Sashidhar clarified the meaning of “financial creditor” and the characterisation of debts — central to determining whether a CC claim can trigger IBC proceedings.

(Practitioners should read these decisions alongside later pronouncements that fine-tune SARFAESI and IBC thresholds and procedures.)

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Strategic Considerations for Practitioners
For lenders (banks/NBFCs)
– Documentation checklist (pre-lending and before enforcement)
– Sanction/limit letter with clear DP formula, margin %, events of default and acceleration clause.
– Properly stamped and signed hypothecation/mortgage/assignment agreements; board resolutions; certified copies of title deeds where immovable assets are charged.
– Guarantees (signed and stamped), PDCs (post-dated cheques) as additional security, and escrow or account freezing mechanisms for receivables.
– ROC filings (CHG forms) for charges created by companies — evidence of registration and certified copies of entries. Ensure CHG‑1 filing within statutory window and keep back‑up ROC search reports.
– Internal compliance: stock verification reports, margins shortfall notices, and email trail of reminders/letters.

  • Enforcement strategy matrix
  • Low-value, uncontested debt: demand notice + civil suit or summary procedure before DRT.
  • Good security, high likelihood of default resolution: consider negotiated restructuring, one-time settlements (with legal safeguards).
  • Insolvent/failed borrower: SARFAESI to enforce security quickly; if security cannot cover debt or speed needed: file claim under IBC to crystallise interests and participate in resolution/realisation.
  • Preserve evidence for SARFAESI and IBC: interval notices, reasons for classifying as NPA, and board approvals.

For borrowers/defendants
– Technical but practical defences
– Scrutinise sanction letter and DP calculations; obtain independent forensic stock verification if bank’s verifications are suspect.
– Attack perfection: challenge non-registration of charges (if applicable), improper stamping, or defects in guarantee execution — but be mindful that courts permit remedial steps if failures are procedural.
– Negotiate immediately on receipt of Section 13(2) notice; seek interim injunctions only where strong prima facie violations exist because appellate interference is limited.
– In IBC context, explore litigation/settlement before filing is converted into insolvency where stakeholder consequences are severe.

Common pitfalls and how to avoid them
– For lenders:
– Poorly drafted sanction letters or ambiguous DP clauses — fix with clear formulas and examples.
– Failure to register charges timely — causes SARFAESI/IBC vulnerabilities; ensure ROC filings and take reset approvals where necessary.
– Lax monitoring: avoid relying solely on borrower-signed stock statements; conduct regular physical verifications and preserve contemporaneous reports.
– For borrowers:
– Do not ignore statutory notices; non-action increases banks’ leverage and reduces chances of favourable settlement.
– Avoid technical challenges purely to delay; courts are unsympathetic to dilatory tactics once substantive default is shown.

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Practical courtroom and transactional tips
– Always produce a reconciled account statement in the pleading: an intelligible ledger that separates sanctioned drawings, redrawings, interest rates, penal charges and payments.
– Preserve electronic records and emails; courts accept bank server records but authentication is easier with structured backups and audit logs.
– Stamp duty: ensure guarantees, deeds and mortgages are properly stamped and, where required, registered; banks routinely require indemnities for any tax/stamp defaults.
– Consider seeking injunctive relief sparingly; interim relief against SARFAESI is exceptional and requires showing manifest illegality or procedural non-compliance.

Conclusion
A cash credit is commercially straightforward but legally complex: it sits at the intersection of contract, property and insolvency law and is governed by bank prudential rules and special recovery statutes. For practitioners, the practical battle is won or lost on documentation, perfection of security and contemporaneous monitoring records (stock statements, verifications, ROC filings). Enforcement choices — SARFAESI, DRT, civil suit or IBC — should be chosen after a forensic review of perfection, recoverability and litigation risk. Attention to drafting (clear DP formulas, margins, default clauses), timely registration of charges, and preservation of evidence are the decisive practical levers for both lenders seeking recovery and borrowers defending or negotiating resolution.

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