Lien is the right of a creditor to retain the properties belonging to the debtor until 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 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 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 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 pledge, the lender has the right to retain as well as sell the pledged asset if the borrower defaults.
A mortgage is the transfer of ail interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, 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 things attached to the 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 immovable property.
- A mortgage is the transfer of an interest in the specific immovable property and differs from sale wherein the ownership of the property is transferred. Transfer of an interest in the property means that the owner transfers some of the rights of ownership to the mortgagee and retains the remaining rights with himself. For example, a mortgagor retains the right to redeem the property mortgaged.
- 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 purposes 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 need not always be transferred to the mortgagee.
- The interest in the mortgaged property is re-conveyed to the mortgager on repayment of the loan with interest due 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.
The mortgage of movable property for securing loan is called hypothecation. In other words, in case of hypothecation, a charge over movable properties like goods, raw materials, goods-in-process 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 or she undertakes to transfer the possession whenever required to do so.
Hypothecation facility is also called ‘open loan facility’. Hypothecation is a convenient method of borrowing for some concerns.
For instance, a manufacturing concern cannot pledge its raw materials which are required for production every day. By hypothecating them, the company can continue the production and also avail the credit facility.
Being only an equitable charge on movable property without possession, hypothecation facility is risky as clean advances. So it is granted only to parties if undoubted means with the highest integrity.
As goods under hypothecation remain in the possession of the borrower, extra care has to be exercised to see that the bank’s security is complete, adequate, safe, and available at times when required.
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,
(iii) insurance policies.
Assignments may be of two types:
- 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 names and address. The assignee also gives a notice to the debtor and seeks a confirmation to the balance due.
- An equitable assignment is one which does not fulfill all the above requirements. In case of legal assignment, the assignee can sue in his own name. A legal assignee can also give a good discharge for l lie debt without the concurrence of the assignor.
Differentiate between hypothecation and mortgage
Hypothecation means keeping movable assets e.g. machinery, goods, raw materials etc. as security for taking loan. Mortgage means keeping immovable assets such as land, building etc. as security for taking loan.
Difference between Hypothecation and pledge
in case of hypothecation, the asset is not transferred to lender. Rather, possession of the asset remains with the borrower. In case of pledge, possession of the asset/goods remains with the lender.