Define Ple Pledge, dge, Hy Hypoth potheca eca tion a nd Mortgage. (1) Pledge is used when the lender (pledgee) (pledgee) takes actual possessi on of asse ts (i.e. ce rtificates, rtificates, goods goods ). Such securities securities or good goods s are mova ble securities. securities. In this this case the the pledgee retains the possession of the goods until the pledgor (i.e. borrower) repays the entire debt debt amount. In case there is default by the borrower, the pledgee has a right to sell the goods goods in his posses sion and adj ust its proceeds towards the amount due (i.e. principal and interest amount). Some examples of pledge pledge are Gold /Jew /Je w ellery ell ery Loans, Adv ance against agains t goods,/stock, goods,/stock, Adv Adv ances against National National Sav ing Certificates Certificates e tc.
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(2) Hypothecation is used for creating charge against the security of mova ble ass ets, but here here the possession of the security remains w ith the the borrow borrow er itsel f. Thus, in case of default by by the borrow borrow er, the the lender (i.e. to w hom the goods goods / sec urity has been bee n hypot hypotheca hecated) ted) wil l hav e to first first take poss ess ion of the security and then then sell the same . The best example of this type type of of arrangeme nt are Car Loans. In this case Car / Vehicl Vehicl e remains w ith the the borrow borrow er but the same is hypoth hypotheca eca ted to to the the bank / finance finance r. In case the borrower, defaults, banks take possess ion of the v ehicle a fter fter giv ing notice notice and then then sell the the sa me and credit the the proceeds to the loan account. Other example s of these hypoth hypothec ecation ation are loans agains t stock stock and debtors. [Sometimes, borrowers cheat the banker by partly selling goods hypothecated to bank and not keeping the desired amount of stock of goods. goods. In such case s, if bank feels that borrow borrow er is trying to cheat, chea t, then then it can conv ert hypot hypotheca hecation tion to to pledge i.e. i t take take s ov er possessi posse ssion on of of the the goods and kee ps the same under lock and key of the bank]. (3) Mortgage : is used for creating charge against immov able property property which includes land, buildings buildings or anything anything that is attac hed to the earth or perma nently fastene fastened d to anything anything attached to the earth (Howe v er, it does not include grow ing crops or grass grass as they can be eas ily detached from the earth). The best example w hen mortage mortage is created is w hen someone someone takes a Housing Loan Loan / Home Home Loan. In this this ca se house is mortgaged in fav fav our of of the the bank / financer but remains in posse ssion ssi on of of the the borrower, borrowe r, whic h he uses for himself or ev en may give on rent. rent.
Difference Between Pledge, Hypothecation and Mortgage at a Glance: Ple dge Type of Security M o va bl e Posse Possessi ssio on the security
Hypothec ation M o vab l e
of Remains with lender Rem ai ns ns (pledgee) Borrower
M ortga ge Im m o vab l e Usually wi th th Remains with Borrower
Gold Loan, Loan, Advanc Advance e Car / Veh i l ce Exa mple s of agains againstt NSCs SCs, Adv Adv L oa ns, Ad v Housing Loa n w he he re against against goods goods (also also again st stock and Loans used gi ven un de r debtors
hypothecation)
Pledge, Hypothecation and Mortgage Under Indian Law Pledge : Section 172 of the Indian Contract Act defines pledge as "The bailment of goods as a security for the payment of a debt or performance of a pro mise" The bail or in thi s case is called a Pawnor and the bailee is called Pawnee
To create a v alid pledge in the eyes of Law, the three im portant points needs to be noted : (a) Deliv ery of Possessi on : As in bailment, in pledge too deliv ery of possessi on is required. For exmaple, in Rev enue Authority vs Sundarsanam Pic tures, AIR 196 8, it w as held NOT to be pledge because the film producer borrow ed a sum of money from a financier and agreed to deliv er the final prints of the film w hen ready. Thus, there wa s no deliv ery of the goods at the time of agreement; (b) Deliv ery is in return of a loan or promise to perform something. Therefore, if your friend giv es you his Motor-cycle to go to colle ge, it is not pledge but can be cal led simple bailment; (c) It should be in pursuance of a contract : The deliv ery must be done under a contract (oral or w ritten). Howev er, it is not necessary that deliv ery and loan take place a t the same time. Deliv ery can be made eve n after the loan is receiv ed.
Hypothecation: was not defined under Indian Law for long time and was used more on the basis of practice. Howev er, now under the Secruitisation and Reconstruction of Financial Asse ts and Enforcement of Security Interes t Act, hypothecation is defined as "a charge in or upon any mov able property, existing or future, created by a borrowe r in fav our of a secured creditor without deliv ery of posses sion of the mova ble property to such creditor, as a sec urity for financial a ssi stance, and includes floating charge and crystallization into fixe d charge on mov able property". .
Mortgage : is defined in Sec tion 58 of the "Transfer of Property Act 1882". It is the transfer of an interest in specific immov able property for the purpose of securing payment of money advanced by wa y of loan.
What is an Assignment ? There is another term (i.e. Assignment) w hich is sometimes confused w ith abov e terms. An assignment constitutes an action taken w ith a contract. Assignment occurs w hen the ow ner of a contract, known as the ass ignor, giv es a contract to another party, known as the assignee . The assignee a ssumes a ll responsibilities and benefits of the contract. When it comes to loans, assignment can relate to life insurance polici es and mortgage contract from one party to another. Mortgages and other contracts sometimes contain prov isions limiting or stipulating conditions for assi gnment.
One example of assignment is 'transfer by the hol der of a life insurance policy (the assignor) of the bene fits or proce eds of the poli cy to a lender (the assignee), as a collateral for a loan'. In such case in the event of the death of the assignor, the assignee is paid first and the balance (if any) is paid to the polic y's bene ficiary. However, insurance policies other than life insurance, may not be used for this purpose.
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