Lien is the right of a creditor to retain the properties belonging to the debtor until the debt due to him is repaid. A pledge occurs when goods are delivered for getting advance.
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 unless such a right is expressly conferred by statute or by custom or by usage,
A banker’s lien is a general lien which is tantamount to an implied pledge. It confers upon the banker the right to sell the securities after serving reasonable notice to the borrower.
Bailment of goods as security for payment of a debt or performance of a promise.” The person who offers the security is called the ‘pawnor’ or ‘pledger’ and the bailee is called the ‘pawnee’ or the ‘pledgee’.
Delivery of goods from one person to another for some purpose upon the contract that the goods will be returned back when the purpose is accomplished or otherwise disposed of according to the instructions of the bailor.
From the above definitions, we observe 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.
- The goods serve as a security for the debt.
Essentials of Pledge
Delivery of goods: Delivery’ of goods is essential to complete a pledge. The delivery may be physical or symbolic. Physical delivery refers to the physical transfer of goods from a pledger to the pledgee.
Symbolic delivery requires no actual delivery of goods. But the possession of goods must be transferred to a pledgee. This may be done in any one of the following ways:
- Delivery of the key of the warehouse in which the goods are stored.
- Delivery of the document of title to goods like a bill of lading, railway receipt, warehouse warrants etc.
- Delivery of transferable warehouse warrant if the goods are kept in a public warehouse.
- Transfer of ownership: The ownership of goods remains with the pledger. The possession of the goods vests with pledgee till the loan is repaid.
Right in case of failure to repay: If the pledger fails to repay within the stipulated time, pledgee may,
- Sell the goods pledged after giving reasonable notice,
- File a civil suit against the pledger for the amount due,
- 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 of sale, he must issue a clear, specific, and reasonable notice.
Rights of a banker as a Pledgee
- The pledgee has the right to retain the goods pledged until he is paid the debt along with the interest thereon and all other necessary expenses incurred for the possession and preservation of the goods.
- The pledgee has the right to retain the goods pledged only for the particular debt and not for any other debt unless the contract provides otherwise.
- The pledgee is entitled to receive from the pledger extraordinary expenses incurred by him for the preservation of the goods pledged.
- If the pledger makes a default in payment, the following courses are open to the pledgee:
- He may file a suit for the recovery of the amount.
- He may sue for the sale of the goods.
- He may himself sell the goods after giving reasonable notice.
- If the proceeds of such sale are less than the amount due in respect of the debt or performance, the pledger is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pledgee shall pay over the surplus to the pledger.
- If a third person wrongfully deprives the pledgee of the use or the possession of the goods pledged, he has the remedies against the third person as the owner would have had. The pledgee may file a suit for damages.
- If the pledgee suffers any damage as a result of non-disclosure of any fault by the pledger, the hitter is responsible for it.
- If the pledgee suffers a loss 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 of 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 lie/she 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 pledged. For example, dividend on shares.
- 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.
Difference between Lien and pledge
In case of lien, the lender has the right to retain but not to sell the asset. For banks, a lien is an implied pledge, i.e. the bank has the right to sell the asset if the borrower defaults.
But in case of a pledge, the lender has the right to retain as well as sell the pledged asset if the borrower defaults.