Difference between first charge and second charge
Difference between first Charge and 2nd Charge and pari passu charge has been explained in this article.
Meaning of Charge in Banking: Evidence of a lien or mortgage that secures the repayment of a loan. So when we say, charged asset, it refers to the assets mortgaged or under lien with bank. For example, if a house is held as collateral security in a loan account, the house is charged with bank or say, bank has charge on the property. So, when charge is created on an asset, bank has the right to dispose-off that particular asset for recovering its dues, principal and interest, in case of default by the borrower.
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What is 1st Charge? What is difference between first charge and second charge?
The bank/ lender in whose favour charge on particular asset is created first, holds first charge on those assets. If subsequent charge is created on that asset by another lender, that lender would have second charge on those assets. Suppose, SBI sanctions a term loan for purchase of a machinery, SBI would have 1st Charge on the machinery. Subsequently, BoB sanctions a working capital facility to the borrower and extends 2nd Charge on the machinery as collateral security. In this case BoB has primary security of stocks and book debts.
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In the event of default, 1st Charge holder has the 1st right to recover its dues from the realisation proceeds of the asset. 2nd charge holder’s right comes into picture only when first charge holder’s charge is satisfied. Suppose, in the above example, borrower default in repayment of term loan as well as working capital, SBI will have the first right of recovery by selling the machinery, if there is residual amount of all dues of SBI are recovered, BoB will have the right on that residual amount, being second charge holder.
What is the difference between first charge and pari passu charge?
1st charge holder has preference over the other charge holder, whereas, in case of pari-pasu charge, there is no preference to any lender and all the charge-holders have equivalent rights.
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