HYPOTHECATION & PLEDGE - ALL YOU NEED TO KNOW
Essential for All Upcoming Bank Exams
As per Securitisation and Reconstruction pf Financial Assets and Enforcement of Security Interest Act, 2002 (Section 2(n)), hypothecation has been defined as a charge in or upon any movable property, existing or future, created by a borrower in favour of a secure creditor without delivery od possession of the movable property to such creditor, as security for financial assistance and includes floating charge and crystallization of such charge into fixed on movable property.
Legal Aspects in Hypothecation:
If there is shortage of securities, the bank can bring criminal proceeding under Section 405 of Indian Penal Code.
Ownership and possession and sale –
Hypothecation is an equitable charge, where the borrower is owner and keeps the possession of the security on behalf of the creditor.
Default of borrower –
If the borrower fails to return the advance, the bank can take possession of the securities with consent of the borrower (by the giving a notice). If possession is given the, Hypothecation becomes pledge and bank gets all the rights of the pledgee including the right to sell security, without intervention of the court.
Where bank is unable to get possession, the sale of securities is possible through the court only.
Under Securitisation Act also, the bank has got the right to sell the hypothecation securities without intervention of the court, subject to compliance of certain legal families.
In pledge, the legal rights are different from hypothecation as the possession of the securities remains with the bank while the ownership remains with the borrower. Delivery of goods pledged by the pledger to the pledgee is essential for creating a pledge, which may be actual or constructive.
Under Section 172 of Indian Contracts Act, pledge is bailment (delivery) of goods as security for payment of a loan. Only goods (movable assets excluding actionable claims (Section 2(7) of sales of goods Act) can be pledged.
Rights of Pledgee:
- The pledgee gets the rights of Bailee which include -
- These rights are not limited by Law of Limitation.
- Sell the goods by giving a due notice (notice is must even when specifically waived) to the pledger in case the pledger fails to make the payment of the debt (Section 176) (to sell perishable goods is not the obligation of the pledgee).
- Banks right to pledge prevails over any other dues including Government dues (Supreme Court State OF Bihar vs Bank of Bihar) except worker’s wages.
- He may retain the goods until the payment of the debt or performance of the promise is fulfilled. Goods can be retained for subsequent advances also of there is no contract to the contrary, but not for any other existing debt which is not covered by the pledge (Section 174)
- To recover charges incurred for preservation of the goods pledged.
Duties of the Pledgee:
- To take that much care of the goods, which he would have been taking, had the goods belonged to him.
- To return the goods (along with accretion to good if any) once the money is paid back by the pledger.