The important methods of charging securities are the following:
Lien is the right of a creditor to retain the properties belonging to the debtor until the debt due to him is repaid. Lien gives a person only a right to retain the possession of the goods and not the power to sell them. A banker’s lien is a general lien which tantamount to an implied pledge. It confers upon the banker the right to sell the securities after serving reasonable notice to the borrower.
Section 172 of the Indian Contract Act, 1872, defines a pledge as, the ‘bailment of goods as securities for payment of a debt or performance of a promise’.
From the above definition, it is clear that:
- A pledge occurs when goods are delivered for getting advance
- The goods pledged will be returned to the owner on repayment of the debt and
- The goods serve as security for the debt.
A pledge may be in respect of goods, stocks, shares, document of title to goods and any other movable property. The person who transfers the goods is called Pledger and to whom it is transferred is called the pledge.
Essentials of pledge
- Delivery of goods: delivery of goods is essential to complete a pledge point the delivery maybe physical or symbolic. Physical delivery refers to Physical transfer of goods from a Pledger to the pledgee. Symbolic deliveries require no actual delivery of goods. But the position of Gods Must Be transferred to a pledgee. This may be done in any one of the following ways: A. Delivery of the key of the warehouse in which the goods are stored. B. Delivery of the document of title to goods like bill of lading, Railway receipt, warehouse warrant, etc. C. Delivery of Transferable warehouse warrant if the goods are kept in a public warehouse.
- Transfer of ownership: the ownership of goods remains with the pleasure. The position of the goods vests with the pledgee till the loan is repaid.
- Right in case of failure to repay: If the Pledger fails to repay within the stipulated time, the pledgee may: A. Sell the goods pledged after giving a reasonable notice. B. File a civil suit against the Pledger for the amount due. C. File a suit for the sale of the goods pledged and the realization of money due to him.
When the pledgee decides to exercise the right to sale, he must issue a clear, specific and reasonable notice.
Advantages of pledge – Of all the methods of charging a security, pledge is the most satisfactory method.
- The goods under pledge being in possession of the bank, it is easy, to dispose them off, if necessary.
- There is no possibility of the same in Goats being charged subsequently if periodical inspections are conducted.
- Manipulation of stock is difficult as the stock is under full possession of the bank.
- In the event of loss or damage to the pledged goods, the banker can recover the amount under insurance policy.
Rights of a Banker as a pledgee
- The pledgee has a right to retain the goods pledged till he obtains payment of his debt, interest on the debt and other expenses incurred in respect of possession or for preservation of the goods pledged.
- The pledgee has the right to retain his possession over the goods only for the particular debt and not for any other debt, unless the contract provides otherwise.
- The pledgee can claim for any extraordinary expenses incurred by him for the preservation of the goods.
- If the Pledger makes a default in payments, the following courses are open to the pledgee. A. He may file a suit for the recovery of the amount. B. He may sue for the sale of the goods. C. He may himself sell the goods after giving a reasonable notice. If the sale proceeds are insufficient to meet his dues, He may recover the balance from the Pledger, if there is surplus, it will be paid to him.
- If a third person wrongfully deprives the pledgee of the use of the possession of the goods bailed, he has the remedies against the third person as the owner would have had. The pledgee may file a suit for conversion or damages.
- If the pledgee suffers any damage as a result of non disclosure of any fault by the Pledger, the latter is responsible for it.
- If the pledgee suffers laws, when the title of the pledger to the goods pledged is defective, the Pledger shall be responsible.
Duties of the pledgee
- The pledgee is bound to take that much care if the goods pledged which an ordinary prudent man would take of his own goods under similar circumstances.
- The pledgee must make use of the goods pledged according to the agreement between the two parties. If he makes any unauthorized use, the Pledger is entitled to terminate the contract and claim damages, if any.
- The pledgee must deliver the goods to the Pledger on repayment of the debt. It is the duty of the pledgee to deliver the goods according to the direction of the pledger.
- The pledgee must deliver to the Pledger any increase or profit which may have occurred from the goods.
- The pledgee is responsible to the Pledger for any loss, destruction or deterioration of the goods, if the goods are not returned at the proper time.
A mortgage is a method of certain charge on immovable properties like land and building. Section 58 of the transfer of property Act, 1882, defines a mortgage as follows:
A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by the way of loans, an existing or future Debt, or the performance of an engagement which may give rise to a pecuniary liability.
In terms of the definition, the following are the characteristics of a mortgage:
- A mortgage can be affected only on immovable property. Immovable property includes land, benefits that arise out of land and things attached to earth like trees, buildings and machinery. But a machine which is not permanently fixed to the earth and is shift able from one place to another is not considered to be an immovable property.
- A mortgage is the transfer of an interest in the specific immovable property. This means the owner transfers some of his rights to the mortgagee. For example, a property transferred to liquidate prior debt will constitute a mortgage.
- The object of transfer of interest in the property must be to secure a loan or performance of a contract which results in monetary obligation. Transfer of property for purpose other than the above will not amount to mortgage. For example, a property transferred to liquidate prior debt will not constitute a mortgage.
- The property to be mortgaged must be a specific one, I.e. It can be identified by its size, location, boundaries, etc.
- The actual possession of the mortgaged property is generally with the mortgager.
- The interest in the mortgaged property is reconvened to the mortgager on repayment of the loan with interest due there on.
- In case, the mortgager fails to repay the loan, the mortgagee gets the right to recover the debt out of the sale proceeds of the mortgaged property.
Rights of mortgager
- Rights of redemption: the mortgager has a right to redeem the mortgaged property provided: A. He pays the mortgagee money on due date at the proper place and time. B. The right of redemption has not been terminated by an act of the parties or by decree of a court.
- Accession to the mortgaged property: during the position of the property, if the mortgagee has voluntarily made any improvement in the property, the Mortgager, on redeeming the property, is entitled to such additions on improvements, unless there is a contract to the contrary.
- Rights to transfer to the third party the mortgager may require the mortgagee to transfer the mortgaged property to a third party instead of Re transfer to him
- Rights of inspection and production of documents the mortgager has the right to inspect and make copies of all Documents of Title in the custody of mortgagee
Assignment means transfer of any existing or future right, property or debt by one person to another person. The person who assigns the property is called assignor and the person to whom it is transferred is called assignee. Usually, assignments are made of actionable claims such as book debts, insurance claims, etc. In banking business, a borrower may assign to the banker (i) the book debts, (ii) money due from government department and (iii) insurance policies.
Assignment may be of two types
- Legal assignment
- Equitable assignment
A legal assignment is an absolute transfer of actionable claim. It must be in writing signed by the assignor. The assignor informs his debtor in writing intimating the assignee’s name and address. The assignee also gives a notice to the debtor and seeks a confirmation of the balance due. An equitable assignment is one which does not fulfil all the above requirements. In the case of legal assignment, the assignee can sue in his own name. A legal assignee can also give a good discharge for the debt without the concurrence of the assignor.
The mortgage of movable property for securing a loan is called hypothecation. In other words, hypothecation, a charge over movable properties like goods, raw materials, goods-in-progress is created. Hart defines hypothecation as ‘A charge against property for an amount where neither ownership nor possession is passed to the creditor’
According to Hart when goods are made available as security for a debt without transferring the possession of property to the lender, the transaction is a hypothecation. The goods remain with the borrower and under a hypothecation agreement he undertakes to transfer the possession whenever required to do so. Thus, hypothecation is only an extended idea of pledge, the creditor permitting the debtor to retain the possession either on behalf of or in a trust for himself. The creditor possesses the rights of a pledgee.