Discuss different modes of creation of charges on securities

 Charging Securities: Bank tend to safeguard their advances by taking different kinds of securities .The main purpose of taking a security is to fall back on it in case the loan is defaulted. Bank take movable properties immovable properties or a debt as securities for a loan .The method of creating charge over a property depends upon the nature of property and nature of charge.

Bank charge over property confines itself to one or more of the following seven types of charges.

·         Hypothecation

·         Pledge

·         Assignment

·         Lien

·         Set-off

·         Mortgage

 

Hypothecation:

Hypothecation is a charge against property for an amount of debt where neither ownership nor possession is passed to the creditor. Though the borrower is an actual physical possession but the constructive possession remains with the bank as per ‘Deed of Hypothecation’. The borrower holds the possession not in his own right as owner of the goods but as the agent of the bank.

Features of Hypothecation

 

·         Charge against property for an amount of debt

·         Goods remain with the possession of the borrower

·         Ownership remains with the borrower

·         Borrower binds himself to give possession of the hypothecated goods to the bank when called up on to do so

·         It is a floating charge

·         It is rather precarious.

 

 

Pledge:

Pledge is said to be a bailment of goods as security for payment of a debt or performance of a promise. Pledged is the borrower who pledges the property and pledgee is the person with whom the property in pledged. Two important features of pledge are delivery of goods and return of goods.

 

Ownership of goods is not given and only possession over the goods is given, when goods are pledged. The pledger remains the owner of the property. This method is said to be very popular and simple in order to secure a charge on the property. The bank has the right to retain the security only in case of a particular debt for which goods are pledged.

Features of Pledge:

 

·         Goods bailed / pledged must be movable property (borrower)

·         Ownership remains with pledger (borrower)

·         Possession retains with pledgee (bank).

 

Assignment:

An assignment means a transfer by one person of a right, property or debt (existing or future) to another person. The person, who assigns is ’Assignor’ & to whom, is called ‘Assignee’. In banking the usual subject of assignment is “Actionable Claim”. It is permissible under sec.130 & 136 of Transfer of Property Act-1882 to assign “Actionable Claim” to anyone except to a          

(a)  Judge

(b)  A legal practitioner, &

(c)  An office of court of justice.

There are some defects on Assignment as security. So, Bank always creates Legal Assignment.

 Features of Legal Assignment

 ·         Must be in writing

·         Must be assigned by the assignor

·         Must be absolute

·         Notice is mandatory.

 

Lien:

Lien is the right of the Creditor in possession of the goods and securities belonging to a debtor, to retain them until a debt due from the latter is paid. (Sec-171 of Cont. Act-1872)

 

Presupposes: Before creation of charge Lien, the following conditions must be fulfilled:

 1)    Goods must be in the possession of the creditor in the ordinary course of business.

2)    Lawful debt.

3)    There must not have any contract to the contrary.

Types of Lien

 In terms of possession of security to the Creditor, Lien is of two types:

a) Particular Lien: - This is the right of the creditor to retain the particular commodity in respect of particular debt.

 b)    General Lien: - This is the right to retain goods & security not only in respect of particular debt incurred with the connection with them but in respect of general balance of account due by owner of the goods & securities, to the person in possession with them i.e. Creditor. The right of general lien is specially given by law to a) banker, b) wharfinger, c) Attorney of High Court, d)Factor & e) Policy broker     ( Contract Act-1872, sec-171).

 Features of General Lien:

 ·         Right for general balance,

·         Does not right to sell the property,

·         Simply the right to retain.

 Bankers lien is more then a general lien. Convention & legal decision have further extended the implication & scope of this right. In Brando vs. Barnett (1846) 12C1. And Fin.787, Lord Campbell stated that “Bankers have a general lien on all securities deposited with them as banker by customer, unless there be an expressed contract, inconsistent with lien. A bankers’ lien is more than a general lien; it is an implied pledge”.

  Set-off :

Set-off is combining accounts between a debtor & creditor as to arrive in net balance payable to one or other. Set-off means the total or partial merging of a claim of one person against another by counter claim by the latter against the former.

  Ingredients of Set-off

        i.   Mutual debt be for sums certain (two accounts of same persons)

      ii.   Debts to be due immediately

    iii.   Debts in same right

    iv.   No agreement to the contrary

      v.   Letter of Set-off Or Notice is required.

 

Automatic right of Set-off

 

(a)  On death, insanity or insolvency of the customer

(b)  On insolvency of a partner of a firm

(c)   On winding-up a company

(d)  On received a Garnishee order

(e)  On received a notice of assignment.

 

 

Mortgage:

A mortgage is the transfer of an interest in specific immovable property for the purpose of securing:-

 

1.    The payment of money advanced or to be advanced by way of loan

2.    An existing or future debt, or

3.    The performance of an engagement which may give raise to a pecuniary liability.  [T.P.act-1882 sec-58(a)]

 The transferor is called ‘Mortgagor’ & the transferee is called ‘Mortgagee’. The principal money & the interest of which payment is secured is called ‘Mortgage money’ & the instrument by which the transfer is effect called ‘Mortgage Deed’.

 Types of mortgage

1.    Simple Mortgage

2.    Mortgage by conditional sale

3.    Usufructuary mortgage

4.    English mortgage

5.    Equitable mortgage, &

6.    Anomalous mortgage.