CS Professional · Banking and Insurance - Laws and Practice · Advances, Securities and Documentation
A bank holds a mortgage over Vikram's factory securing a running account with a stated maximum of Rs. 12,00,000. At the time Vikram created a second mortgage to Lakshmi (who knew of the bank's mortgage) to secure Rs. 5,00,000, the bank balance was Rs. 3,00,000. Lakshmi informed the bank of her mortgage. The bank later allowed the balance to reach Rs. 11,00,000. What is the amount over which the bank is entitled to priority?
The bank has priority for Rs. 11,00,000. Later advances within the expressed maximum of Rs. 12,00,000 rank ahead of a subsequent mortgagee with notice, even after notice of her mortgage, but priority covers only the amount actually due.
- ARs. 3,00,000, being the balance when notice was given
- BRs. 7,00,000, being the difference between the maximum and the balance at notice
- CRs. 11,00,000, as it does not exceed the maximumCorrect
- DRs. 12,00,000, being the maximum in all cases
Explanation
Following Section 79 and its illustration, the bank has priority for advances up to the maximum even if made after notice of the second mortgage. The balance of Rs. 11,00,000 is within Rs. 12,00,000, so priority covers all of it. Rs. 12,00,000 is wrong because only the amount actually due, not the ceiling, is secured.
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