Concept analysis Encumbered Assets

Concept Analysis By Amit Mittal FPM 15003 Date: 10/13/2015 Submitted to: Prof. S Chakraborty Indian Institute of Management Lucknow CERTIFICATE OF AUTHENTICITY This is to certify that the summer project and term paper entitled Concept Analysis: Encumbered Assets by Amit Mittal is an original work and has not been submitted earlier either to Indian Institute of Management Lucknow or any other Institutions in PARTIAL or complete fulfillment of the requirements for the Term paper/Assignment report for a Doctoral Degree. None of the material here is presented or approved for any other purpose than a report on the subject matter of Philosophy of Management undertaken by him in Term V of the FPM program at Indian Institute of Management, Lucknow. Sd/- AMIT MITTAL 13-10-2015 Lucknow  Table of Contents Origin of the concept 4 Essence of the concept 4 Distinctiveness 4 In what context was it used in the beginning? 5 Origins in Jewish religion 5 Origins in Banking and Moneylending 5 A special mention of Irish/English Mortgage courts and loans in estate 5 What are the different contexts in which it came to be used subsequently? 6 What are the few other concepts which are close to the one under analysis? 6 Did the use in different contexts expand the boundary of the concept? (both answers are aligned and separate sections were not needed) 6 Did this alter the essence in any way? 7 On different attributes how do these differ? 8 A Hierarchy of claims 8 Any specific recommendations of its use vis-à-vis the other ones? 8 Special note on current usage 8  Encumbered Assets Origin of the concept How and when the concept under analysis came into existence? The word asset is universally accepted as a reference to an item of property owned by a person or company, originating in the mid-16th century from a popular Anglo French word asetz that denotes sufficient estate and originates in old French assez, standing for sufficiency, satisfaction or compensation. The term, as used in Finance, from its early days, frequently includes in its definition not just any economic resource capable of being owned or of value that can be converted into cash, but closer to its origin, that is of value sufficient to pay its debts, that is also in the sense that its economic use recovers its costs. The word encumbrance is listed in the same Oxford dictionary as a valid antonym of the word asset, and its origins are a tad older in 14th century French, encombrer in its form encumbrance and commonly till date refers to its original meaning of blocking up, a hindrance or burden and even today in usage it can refer to any dependent or a child as an extension of its primary implication of an onerous or difficult concern. By itself, the dictionary lists encumbrance as a charge or a lien against the asset, that has to be discharged or paid off before the proceeds of sale of the asset can be consummated. What makes an asset valuable, as is frequently its use for even intangible features of value, is that it has more positives than it has negatives. The term, very close to Financial Accountants, does in fact precede its most frequently using domain of law, as Common Law itself was set in place in the world a couple of centuries later, and the word of kings and despots used to be law, when the term first came into existence. The term encumbered asset refers to not just property or mortgaged assets but in simple terms even to cash, on which a payment claim has already been made. If you make a travel claim or an expense claim that is approved, or ask for payment from parties, due to you, that much cash, would be encumbered in the books of the party that pays you till that payment is made. Essence of the concept Thus in essence, even as we delve further into the myriad origins of the concept, the term in general means a claim, and thus a claim is due on the assets before its value can be realized in a sale. If such a claim is indeed recorded on the asset, the asset becomes an encumbered asset Distinctiveness Encumbrance applies to cash for which assigned payments exist, in educational/endowment management extended to capital that is reserved for specific budgeted uses and to help with and effect hard budget constraints Encumbrance can apply to any level of asset including cash, and to non-cash uses when dues are not paid by a student at college, to his educational achievements. The use of encumbrances is pretty widespread in the field of education, as a means to ensure budget constraints are adhered to, all payments must be made from encumbrances made for those payments unless no such encumbrance is made. In endowments, budgets are also constrained with funds gifted specifically assigned to uses those gifts can be used for, not unlike encumbrances but in use encumbered assets include such cash and other assets on which a due claim is yet to be paid, not necessarily delayed or past due from payments pending on loans as in a collateral or mortgage. In what context was it used in the beginning? Origins in Jewish religion The first such claim were on lands. These can probably be traced to the origin of religion itself, in the Anglo Saxon domain, where in Jewish religion, all lands and properties were considered to be owned by God and thus by agency by the temple. All property belongs to the temple by virtue of its ‘encumbrance’ to god and the temple being the decision making power holds the rights to disposal or use of any assets. Origins in Banking and Moneylending 14th century French origins are likely aligning with the etymological origins of the words because of disputes regarding due payments that were passed on from father to son, making the estate or any willed items of value in his inheritance, encumbered assets. In a world history, or even in popular fiction such as “Pirates of the Carribean” one notices the only enterprise of money was in financing and moneylending to adventurers and property for barter was sooner encumbered than left an asset for the moderates who stayed back on land, moneylenders owning the ‘encumbrance’ on all such assets, while sea voyages to the far east and the Americas and the unknown were financed , the rare one financed by a King’s ransom from taxes that generated more encumbrances on assets. The adventurers left on treasure hunts and quests for tradeable goods that relied on encumbered ships and even human assets known as slaves with local crop and food even in the then discovered Americas, in sufficient to carry on trade and requiring financing with encumbrances of vast tracts of land and immovable and movable property as such available to create more money to expand and grow in man’s vanity. A special mention of Irish/English Mortgage courts and loans in estate In mid-18th century, in Ireland, one finds well documented mentions of Encumbrances , in usage similar to its current use, where special courts were set up to improve governance as many were made poor by such encumbrances on their property by usurious moneylenders and many parties due payment did not have recourse to payments after the death of the original borrower and the term probably, very faintly probably maybe without further research, yet probably did more to get us a framework of law per se, as documentation frequently undertaken today to trace the ownership of the assets was likely made such an important part of the process by the preponderance of encumbered assets and the requirement of adjudicating ownership and payments defined by the extent of encumbrance on any asset or family and whether encumbrances could be absolute. The Wall Street banks of the 1800s created discount bills, in the name and style of jewish traders and American businessmen who founded banks like Goldman Sachs and JP Morgan on the tenets of financing trades with advance bills, but bill discounting in those terms was almost always chased by phantom security of assets that physically created the trade, with chances of law favouring the bills discounter in lieu of his lent monies, though no such encumbrance was created by the traded bills. This was one of the major evolutionary reasons a defined encumbered asset was soon replaced by some different yet closely aligned terms to ‘clarify’ the decision making for the courts and to obfuscate for the common people, the assignation of their claims and claims against them. What are the different contexts in which it came to be used subsequently? The most instructive change of context and more likely to be a surmise on my part without access to the archives of historical knowledge and time resources for the inquisition, is the use of the term in education. Technically one does not use encumbered assets per se in the field of education or in the Industry in consonance with the nomenclature of business. Before that clouds the discussion in any manner, the argument for its use in education, is perhaps in line with the nature of the business of education in the 17th and 18th century or more closer to where definitive records are known to myself in the 19th and 20th century in Americas, where it is so that education is financed by large gifts and with the bequeathed gifts, the conditions or encumbrances of the endowment made. Each endowment fund needs to track all such encumbrances, thus carrying more in pure form the usage of the term almost unchanged to modern times. Each payment in an educational budget for a higher educational institution and one surmises for all education per se, each payment to be made is tracked as a pre-encumbrance at the time of requisition to the final actualising of such payment from a budget or a revenue head allowed to make the payment and so assigned to the due period and allowed to control the otherwise slow moving process to the discipline of being appropriated from the right budget of the right time period and ensuring no over budget payments are allowed or due payments on orders made lost by due encumbrances on such amounts. Being in the nature of gifts at the origin and being in the nature of accounting discipline , the word encumbrances lingers and manages to stay current. A hurrah for encumbered assets! What are the few other concepts which are close to the one under analysis? Did the use in different contexts expand the boundary of the concept? (both answers are aligned and separate sections were not needed) The historical narrowness of use of the concept is in the nature of the meaning of the word, and there has not been any change in its meaning as obstacles or burdens over the same period as also probably in the business of accounting. However means of financing have moved into new domains entirely and much before adventurism came to the heart of Finance per se, there were due changes in nomenclature in certain periods of not so far ago history. Collateral is a far more popular usage today. It is a necessity for the regulated financing of autos, cars and homes and it has a much more sure footed list of synonyms in the dictionary and in the Encyclopaedia for the Business of Finance as security, surety, guarantee, pledge, bond, assurance, insurance, indemnity, pawn and simply backing. This is so because it certifies the forfeit of your asset in the event of default, the technical term for non-payment of dues. Of course, most unsecured credit like personal loans and credit cards from your neighbourhood bank do not have access to any collateral on their loan, yet a few encumbrances, but such encumbrances if you have means of payment, you legally owe them first, yet are not transferable to or inherited by your heirs. In fact through the years the system has evolved with checks and balances that are in tune with the evolution of Coase’s property laws and the common Law or the principles of natural justice per se, that allow property to be seen through the eyes of others like industry in your neighbourhood or public land for roads and railway transport. While Coase’s property law brought in the negotiating of and allowing of such easements into domains like allowed limits of pollution and what must be the compensation for such as railway tracks passing through your backyard, that was also following on parallel constructions of concepts in easements that could be on the other side of encumbrances in being temporary rights of way thru a property without any ownership rights for a world with sharing and rights for all, definitely a chance for matters to be settled out of court and in a remote yet tangible way affected things that could and could not be encumbered. It allowed a rational limit on interests of the lending parties in your property and in the inheritance of encumbrances with the property, while making sure in using the encumbrances, courts of law and other resources of such benefaction of rule of law that banking, moneylending and trade and manufacturing remained profitable businesses. It is probably more romantic and socialist to think of our claims on such business, as they represent the efforts of a few and the toil and labour of the poor masses, but even if these claims were proved in a court of law they will also be encumbrances on product and services businesses of the modern world. Similarly, the concept of mortgage is one that has lasted, and in a few jurisdictions such as ours affected by the British Commonwealth, the usage of the term, almost surprisingly, still engenders the recognition of encumbrances. However while there are payment blocks on your account from the lending way there are payment mechanisms and transaction methods that have ensured that most modern bankers do not have to use the term in the consumer bank or business bank except in some mercantile terms because of the use of documents from more than 100 such jurisdictions around the world as goods are shipped as raw material from Southern ports and then shipped back as finished goods after moving through the world and getting sold more in India and China than anywhere else. Did this alter the essence in any way? Returning to the term that has replaced the usage of encumbrances or encumbered assets, the mortgage in fact uniquely refers to the loan made and the lien of the property(real estate) based on which assessed value the loan was granted and that remains lien or mortgaged to the bank or finance business that made the loan and documented it as its own before selling it to the others in turn to make other loans. Your lien is usually not transferred if you take such a loan, and while the word lien has also gained in repute and usage with the use of the instrument of home loans and mortgages, there is almost no whispered use of encumbered assets in this jargon riddled business, done strictly for the benefit of law abiding citizens who must pay their dues. Collateral replaces the word mortgage and mortgaged in the business and commerce world when loans are made against property plant and equipment to industry to represent the available security that guarantees payment to the lender by first rights to the proceeds of its sale and its change of ownership in case of non-payment, while lien becomes the family of such claims that replace the erstwhile encumbrances. Lien is a loosely built term that refers to all legal claims due on any property of value, including shares, cars, homes or others. Encumbrances, yet are in vogue and their currency is even stricter in that the transaction at any stage and of any value can be defeated by any small or big encumbrance on the funds that one expected to use for the transaction. This strict use of the word however is thus not even a claim to be made, it is a claim already recognised and one that cannot be rolled over moved or sold and bought anywhere, and stays on the funds or cash in loose parlance /regular use as one may prefer. Thus encumbered assets are more implemented in a technical process in which they do not reach any due discussions in courts of law today, as they are technically put in place to use accounting systems and companywide ERPs in a robust manners, unlike the modern day use of mortgages and collateral in civil or industrial use. In a recent ‘international’ tv series, “The Practice” one sees a lawyer recovering his dues from a traffic court client by walking to his client’s office to garnish his wages. i.e. by encumbering his client’s wages to the due amount produced on an invoice, he can avoid courts of law and get due payments for his labours. This is a current use of encumbered assets, and this usage is not commonplace only because of lack of knowledge of the common people. On different attributes how do these differ? An encumbrance as it turns out is almost never fought in a court of law, it never reaches such claims that can be argued, because it is recognised by any transaction system , be it accounting or ERP or Project systems in place, automated or otherwise that they are first paid off from the cash so encumbered and in the presence of which further transactions are not admitted in the system, those funds ‘earmarked’ and gone for all purposes from available funds till the payment is made on or after or the due date. However, that gives rise to a conception of fraud, which need not be discussed in the argument for and against encumbrances, a folly of man’s nature that he misjudges his control and fails the system that relies on his trust and faith A Hierarchy of claims It would seem to an observer, that now there is a tiered use of such claims or liens as explained in the hitherto discussion, there is a hierarchy which in strictness terms would be encumbered assets on the top, through technical triggers that preclude all arguments and must be adhered to to transact. Thus their usage is now an application of the due process and of law. Mortgages are strict assignation of property to the name of the lender. Assignations of your Life Insurance Policy to the loan, is closer to the use of the original concept of encumbered assets, where cash payments will directly be made to the lenders, but ownership of the assets is not transferred. In all such cases, the assets of value are referred as collateral, more so in contractual arrangements in business where the bank takes collateral of equivalent value after haircuts (downward adjustments in value for realisable value from the asset) before extending the loan and monitors the value of collateral. Liens refer to the overall family of such claims, referring to mortgages, collateral, assignations and even blocks in your savings accounts and lien on the shares and stocks held in personal and business accounts. Encumbered assets from this legal perspective become the execution leg of the hierarchy where all liens lead to an encumbrance on the final cash in your accounts if the cash is indeed legally your claim residual of all claims by your lenders and your estate including fees to lawyers and such. Any specific recommendations of its use vis-à-vis the other ones? Special note on current usage In fact all liens may give rise to encumbered assets but all encumbrances that include even the amount for your electricity bill payment, that is not a lien, are not liens. Encumbered assets will continue to be of use to deformalize the process and speed up execution of transactions, a uniform implementation on the ground to enable business to carry on fairly for individuals and society as a whole, not just a jumble of legal claims that must be contested and argued. It arose in social use for ensuring amounts due were paid to the parties to which they belonged and continue to be in use for that specific purpose, ensuring legal processes and arguments do not stop society from its future work.