CHANAKYA NATIONAL

LAW UNIVERSITY

TOPIC- PLEDGE AND HYPOTHECATION

SUBJECT- LAW OF CONTRACT II

SUBMITTED TO
SUBMITTED BY
Dr.V.K.Vimal
ASHISH ARYA

1118,BALLB

Acknowledgement
Its a fact that any research work
prepared, compiled or formulated in
isolation is inexplicable to an extent.
This research work, although prepared
by me, is a culmination of efforts of a lot
of people.
Firstly, I would like to thank our
CONTRACT teacher, Dr. V.K.VIMAL for
giving such a topic to research. I would
like to thank him for his valuable
suggestions towards the making of this
project.
Thereafter, I would also like to express
my gratitude towards our seniors who
played a vital role in the compilation of
this research work.
I cannot ignore the contributions made
by my classmates and friends towards
the completion of this project work .And
I would also like to express my gratitude
towards the library staff of my college
which assisted me in acquiring the

sources necessary for the compilation of

my project.
--ASHISH ARYA

CHAPTERS
1) INTRODUCTION
2) PLEDGE AND HYPOTHECATION
3) JUDICIAL REFORM
4) CONCLUSION

BIBLIOGRAPHY

INTRODUCTION
Companies and individuals borrow funds for a number of reasons
including, home loans, vehicle loans, education loans, loans for
investment, expansion, business development and operational
requirements. In order for banks and financial institutions to grant
funds to borrowers, there needs to be some form of assurance
that the borrowed funds will be repaid to the lender. This
assurance is obtained when borrowers offer an asset (as
collateral) of equivalent or higher value than the loan amount to
the lender. In the event the borrower fails to meet his obligations,
the lender then has means to recover any losses.
Pledge is a special kind of bailment in which a person transfers
the possession of his property to another for securing the
loan taken from the other. It only differs from bailment in the
matter of purpose. When the purpose of the bailment is to secure
a loan or a promise, it is called a pledge. Section 172 of Indian
Contract Act 1872 defines Pledge as follows - The bailment of
goods as a security for the payment of a debt or performance of a
promise is called Pledge. The bailor in this case is called a Pawnor
and the bailee is called Pawnee.
Hypothecation is used for creating charge against the security of
movable assets, but here the possession of the security remains
with the borrower itself. Thus, in case of default by the borrower,
the lender (i.e. to whom the goods / security has been
hypothecated) will have to first take possession of the security
and then sell the same. The best example of this type of
arrangement are Car Loans. In this case Car / Vehicle remains
with the borrower but the same is hypothecated to the bank /
financer. In case the borrower, defaults, banks take possession of
the vehicle after giving notice and then sell the same and credit
the proceeds to the loan account. Other examples of these
hypothecation are loans against 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. In
such cases, if bank feels that borrower is trying to cheat, then it

can convert hypothecation to pledge i.e. it takes over possession

of the goods and keeps the same under lock and key of the bank].

PLEDGE AND HYPOTHECATION

The following are essential ingredients of a pledge 1. Delivery of possession - As in bailment, the delivery of
possession is essential in a pledge. Thus, in Revenue Authority
vs Sudarsanam Pictures, AIR 1968, a film producer borrowed
a sum of money from a financier and agreed to deliver the final
prints of the film when ready. This was held not to be a pledge
because there was no delivery of possession at the time of the
agreement.
It is possible to do delivery by atonement in which case a third
person who has the possession of the property agrees to hold it
on behalf of the pledgee upon direction of the pledger.
2. In return of a loan or a promise - The delivery must be in
return of a loan or of acceptance of a promise to perform
something. Thus, if A gives his bicycle to B in friendship, it is not a
pledge but a simple bailment. However, if A gives his bicycle to B
as a security for a debt of 100Rs it will be a pledge.
3. In pursuance of a contract - The delivery must be done
under a contract though it is not necessary that the delivery and
the payment of loan be at the same time. Delivery can be made
even after the loan is received.
Rights of a Pawnee
1. Right of retainer (Section 173- 174) - As per section 173,
the pawnee may retain the goods pledged, not only for a payment
of a debt or the performance of the promise, but also for the
interest of the debt, and all necessary expenses incurred by him
in respect of the possession or for the preservation of the goods

pledged. Further, as per section 174, in absence of any contract

to the contrary, the pawner shall not retain the goods pledged for
debt or promise other than the debt or promise for which they
have been pledged. However, such contract shall be presumed in
absence of any contract to the contrary with respect to any
subsequent advances made by the pawnee.
This means that if A pledges his gold watch with B for 1000 Rs
and later on he promises to teach B's son for a month and takes
for 500Rs for this promise , and if he does not teach B's son, B
cannot retain A's gold watch after A pays 1000Rs. Thus, the right
of retainer is a sort of particular lien. The difference was pointed
out in Bank of Bihar vs State of Bihar 1972 by SC. It
observed that a pawnee obtains a special interest in the pledged
goods in the sense that he can transfer or pledge that special
interest to somebody else. The lien only gives the right to detain
the goods but not transfer. Thus, a pledgee get the first right to
claim the goods before any other creditor can get them. The
pledgee's loan is secured by the goods.
2. Right to extra ordinary expenses (Section 175) - As per
section 175, the pawnee is entitled to receive from the pawner
extra ordinary expenses incurred by him for the preservation of
the goods pledged. For such expenses, however, he does not
have right to detain the goods. Section 175 says that the
pawnee is entitled to receive from the pawner extraordinary
expenses incurred by him for the preservation of the goods
pledged.
3. Right of sale (Section 176) - As per section 176 (Pawnee's
right where pawnor makes default) - If the pawnor makes default
in payment of the debt or performance at the stipulated time, of
the promise, in respect of which the goods were pledged, the
pawnee may bring a suit against the pawnor upon the debt or the
promise and retain the goods pledged as a collateral security; or
he may sell the thing pledged, on giving the pawnor reasonable
notice of the sale.

This right secures the debt for the pawnee up to the value of the
goods pledged because it allows the pawnee to either sue the
pawnor for recovering the debt or perform the promise or sell the
goods pledged. If the value received after selling the goods, the
pawner is still liable for the difference and if the value of the sale
is more than the amount of debt, the pawnee is supposed to give
the difference to the pawnor. However, if the pawnee has sold
the goods, he cannot sue for the debt.
Pawnor's Right to Redeem (Section 177)
Section 177 provides a very important right to the pawnor. It
allows the pawnor to redeem his property even if he has
defaulted. It says that if a time is stipulated for the payment of a
debt or performance of the promise for which the pledge is made,
and the pawnor make default in payment of the debt or
performance of the promise at the stipulated time, he may
redeem the goods pledged at any subsequent time before the
actual sale of them; but he must, in that case, pay, in addition,
any expense which have arisen from his default
Pledge made by non-owner of the goods
Ordinarily goods may be pledged by the owner or by any person
with the consent of the owner. A pledge made by any other
person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it
was held that a pledge made by the servant who was holding the
goods of his master was not valid. Similarly, in Purushottam
Das vs Union of India AIR 1967, a railway company delivered
goods on a forged railway receipt. The goods were then pledged
with the defendants. In a suit by the railways to recover the goods
it was held that the pledge was invalid.
This is important to protect the interests of the owners. However,
in many situations it is equally important to allow trade and
commerces and so there are some situations where a person
having the possession of the goods by owner's consent, is entitled
to pledge those goods even without owner's consent for the
pledge. These situations are discussed below -

1. Pledge by Mercantile agent (Section 178)

When a mercantile agent is in possession of the goods with
consent of the owner, any pledge made by him in ordinary course
of business will be valid, provided that the pawnee acts in good
faith and that he has no notice of the fact that the pawnor is not
authorized to pawn the goods.
The essential conditions of this rule are - he must be a mercantile
agent, he must have possession of the goods by consent of the
owner, and it must be done in ordinary course of business.
Further, the pawnee should act in good faith and he must not
have notice that the pawnor has no authority to pledge.

2. Pledge by a person in possession under voidable

contract (Section 178 A)
When the goods are obtained by a person under a contract that is
voidable under section 19 or 19 A, he can pledge the goods if the
contract is not avoided at the time of the pledge. Thus, in Phillips
vs Brooks Ltd 1919, a fraudulent person pretending to be a
man of credit induced the plaintiff to give him a valuable ring in
return for his cheque which proved worthless. Before the fraud
could be discovered, he pledged the ring with the defendants. The
pledge was held to be valid.
3. Pledge by person with limited interest (Section 179)
Section 179 says that where a person pledges goods in which he
has only a limited interest, the pledge is valid to the extent of that
interest. Thus, when a car worth 100,000Rs is owned jointly by A
and B both having 50% interest in the car, and if A pledges the
car for 60000Rs, the value of the pledge that the pledgee can
receive upon default is only 50% of the value received by sale.
Thus, if a pledgee further pledges the goods, his interest is only
the amount for which the first pledger pledged the goods. For
example, if A pledged his car worth 100000Rs for 20000Rs to B.
B's interest in the car is only 20000 Rs. He can further pledge it

but if he pledges it for more than 20000Rs, A will be liable only for
20000Rs.
HYPOTHECATION
Hypothecation is a form of transfer of property in
goods. Hypothecation agreement is a document by which legal
property in goods passes to the person who lends money on
them, but the possession does not pass. This form of transfer is
not regulated in India by any statute. Neither the Transfer of
Property Act, 1882, nor the Indian Contract Act, 1872, nor the
Sale of Goods Act, 1930, recognize the non-possessory
hypothecation of immovable and the rights and remedies of the
parties are regulated by the courts according to the general law of
contract. In hypothecation, there must be an intention of the
parties to create a security on the property on which the money
has been lent. If that intention can be established, equity gives
effect to it. A hypothecation not merely of moveable existing on
the premises at the time but also in respect of moveable which
might be subsequently acquired and brought there, is valid
though it is not governed by the Transfer of Property Act or by the
Indian Contract Act, 1872. An oral or written hypothecation is
permitted under the law in India. Hypothecation is an extended
form of pledge. Pledge has been codified by the Indian Contract
Act. Sections 172 to 176 deal with pledge of goods. Under
Section 172, a pledge is a bailment of the goods as security for
payment of a debt or performance of a promise. Section 172
entitles a pawnee to retain the goods pledged as security for
payment of a debt and under Section 175 he is entitled to receive
from the pawnor or the pledger any extra-ordinary expenses he
incurs for the preservation of the goods pledged with him. Section
176 deals with the rights of a pawnee and provides that in case of
default by the pawnor the pawnee has the right to sue upon the
debt and to retain the goods as collateral security and to sell the
goods after reasonable notice of the intended sale to the pawnor.
Once the pawnee, by virtue of his right under Section 176 sells
the goods, the right of the pawnor to redeem them

is extinguished. However, the pawnee is bound to apply the sale

proceeds towards satisfaction of the debt and pay the surplus, if
any, to the pawnor. So long the sale does not take place the
pawnor is entitled to redeem the goods on payment of the debt.
Therefore, when a pawnee files a suit for recovery of debt, though
he is entitled to retain the goods, he is bound to return them on
payment of the debt. The right to sue on the debt assumes that
he is in a position to re-deliver the goods on payment of the debt
and, therefore, if he has put himself in a position where he is not
able to re-deliver the goods, he cannot obtain a decree. As
against pledge of goods, the transfer of legal title in the goods in
the case of a hypothecation, the rights of the lender and the
borrower are strictly governed by the terms and conditions of the
hypothecation agreement executed by the parties.
No assumptions can be drawn in such a case. Hypothecation is
resorted to mostly by banks and other financial institutions for
securing their long-term and medium-term loans and limits of
working capital, bill discounting, letters of credit and guarantees
to limited companies, partnerships etc. Alongwith the
hypothecation agreements, the loaning institution including banks
have a plethora of other documents executed by the borrowing
companies e.g. demand promissory note, collateral
personal guarantees of managing directors, directors and other
persons having substantial interest in the borrowing entities,
second charge on fixed assets like land and building and plant
and machinery permanently attached to land by legal or equitable
mortgage and so on and so forth. Hypothecation agreements
usually cover moveable machinery, equipment, stocks of
finished and semifinished goods, raw materials, consumable
stores, present and future available in factories and godowns of
the borrower and also enroute to the borrower's factories and
book debts. While these items as moveable assets, remain in the
possession of the borrower and he has absolute right to
convert them, sell them and deal with them in any manner the
borrower likes in the course of his business, the legal title
vests in the lending institution by virtue of the hypothecation

agreement. Pledge, which is regulated by the Indian Contract

Act, 1872, as stated above, technically speaking, cannot
exist without bailment or possession. Though not accompanied
by delivery of possession, the validity of hypothecation of
moveables has been recognised in India and it has sometimes
been enforced even against a bona fide purchaser
without notice. Since such hypothecation is not governed by
the Transfer of Property Act, 1882 or the Indian Contract Act and
even the Sale of Goods Act, 1930, the Court is thrown back
upon principles of equity and justice.

JUDICIAL REFORM
Bank Of India vs Binod Steel Ltd. And Anr. on 29
September, 1976
Equivalent citations: AIR 1977 MP 188 Bench: C Kondaiah
The petitioner, the Bank of India, seeks in this petition under
Articles 226 and 227 of the Constitution of India to quash the
order of the Sub-Divisional Officer, Indore dated 28-1-1976
confirming the order of the Additional Tahsildar, Indore, dated 2611-1975 rejecting its application not to attach the machinery of
the M/s. Binod Steel Ltd. Company and directing the recovery of a
sum of Rupees 25,765.78 P. due and payable by the Company to
the workers towards their wages for the month of March 1975 by
attachment and sale of the machinery. The first respondent M/s.
Binod Steel Ltd. Company had borrowed on mortgage of its
machinery, a sum of Rs. 33 lacs on various debts from the
petitioner Bank. The Company had closed its business on April 11,
1975. The Payment of Wages Inspector has raised a demand of
Rs. 25,765.78 P. against M/s. Binod Steel Limited Company
towards the amount of wages due and payable by the Company
to the workers for the month of March 1975. The amount also
includes some compensation payable by the Company. The
Payment of Wages Inspector moved the Additional Tahsildar,
Indore for recovery of Rs. 25,765.78 P. from M/s. Binod Steel Ltd.
Co. having recourse to the provisions of the Land Revenue Code.
The Additional Tahsildar took steps to attach the machinery and
other movables belonging to the Company and bring the same for
public auction. At that stage the petitioner Bank objected to the
recovery proceedings initiated by the Additional Tahsildar under
the Land Revenue Code. The ground on which the petitioner Bank
objected to the recovery proceedings is that it is a secured
creditor having obtained a pledge or mortgage of all the movables
belonging to the Company and the revenue authorities or any
other creditor has no right to proceed against the machinery and
other movables of the Company without satisfying the claim and
debt of the Bank. The Additional Tahsildar dismissed the objection

raised by the petitioner and proceeded to attach the movables

and bring the same for sale. Aggrieved by the decision of the
Additional Tahsildar, the petitioner appealed to the Sub-Divisional
Officer, Indore, who held that the Additional Tahsildar was
competent to attach and auction the moveable property of M/s,
Binod Steel Limited Company and the petitioner Bank is
competent to receive any balance amount of the sale proceeds
after satisfying the debt of the workers. Hence this writ petition.
The sum and substance of the contention of Shri K. A. Chitale,
learned counsel for the petitioner is that the petitioner is the
pledgee or mortgagee of the machinery and other movables of
the Company and the possession of such movables after the
pledge or mortgage is for or on behalf of the Bank and, therefore,
no proceedings by any creditor against the Company can be
made in respect of the pledge of the machinery under other
modes and consequently the orders of the Additional Tahsildar
and that of the Sub-Divisional Officer are without jurisdiction and
void and, therefore, liable to be quashed. This claim of the
petitioner is resisted by the learned Deputy Government Advocate
contending inter alia that the revenue authorities are empowered
to have resort to the provisions of the Land Revenue Code in
respect of the amount of Rupees 25,765.78 P. due to the workers
from the Company and the petitioner-Bank is not entitled or
justified to raise any objection and it is entitled only to the excess
and surplus sale proceeds after satisfying the debt due to the
workers. Upon the respective contentions of the parties, the
question that falls for decision is whether on the facts and in the
circumstances, the revenue authorities are empowered to attach
and sell the machinery and other movables of the M/s. Binod Steel
Ltd. Co., which were pledged and mortgaged to the petitionerBank for recovery of Rs. 25,765.78 P. due to the workers and
employees of the Company without satisfying the debt due and
payable to the Bank. It admits of no doubt that the petitionerBank had taken pledges and mortgages of machinery and other
moveable properties and advanced a sum of Rs. 33 lacs to M/s.
Binod Steel Ltd. Co. on several dates. The petitioner-Bank instead

of taking physical possession of the pledged movables of the

Company has permitted the Company itself to be in possession of
the machinery and other movables for and on behalf of the Bank.
The Company was closed down on 11-4-1975. A sum of Rupees
25,765.78 P. is no doubt due and payable to the workers and
employees of the Company for the wages towards the month of
March 1975 and compensation. The debt due and payable to the
petitioner-Bank had come into existence even prior to the incident
of liability of the Company towards the workers. That apart, the
Bank stands in the position of a secured creditor. The legal
possession and custody of the machinery and other movables of
the Company, which were under a pledge, must be held to be in
the Bank itself. The physical possession of the movables and the
machinery of the Company may be with the Company but in the
eye of law the Company must be deemed to be in possession of
the same for and on behalf of the Bank, the pledgee and the
mortgagee. That apart, we may add that the possession is
according to the terms of the Contract Act. The Company has in
fact agreed to be in possession of the movables and the
machinery for and on behalf of the Bank. The legal entity that is
entitled to be in possession of these movables must be the Bank
and none else. The initiation of recovery proceedings by the
Tahsildar in respect of the amount due and payable by the
Company to the workers is on the assumption that the machinery
and movables of the Company really belong to and are in the
possession of the Company itself. This conception of the revenue
authorities is erroneous and illegal. The legal rights of the Bank
who is the pledgee and who is the custodia legis of the machinery
and the movables have been ignored. The respondents 3 and 4
did not approach the question with the correct principles of law in
rejecting the objection raised by the Bank. Either the workers,
who are considered to be the creditors of the Company or the
authorities on behalf of the workers who initiated recovery
proceedings, have no legal right to proceed against the property
of the Bank or any property in which the Bank has got the custody
and legal possession. They can at the most proceed against the

property belonging to the Company or which is in its possession in

its own right, otherwise not. The right to possess movables and
the machinery in the present case is vested in the Bank. No one
can touch the pledged property until the claim of the Bank is
satisfied. The misconception entertained by the respondents 3
and 4 is that they do not find any difference in law between the
mortgage of a moveable property and that of immoveable
property. In respect of the immoveable property, the mortgagor
has got an equity of redemption, The creditor can certainly bring
that property to sell subject to the rights of the mortgagee. That
situation is not applicable to the case of moveable property. The
law relating to moveable properties has been well settled in Bank
of Bihar v. State of Bihar, (AIR 1971 SC 1210). The Patna High
Court took the view first now advanced before us for and on
behalf of the respondents. That view was held to be erroneous
and illegal by the Supreme Court in the aforesaid case. The
learned Judge, Grover, J., who spoke for the Court ruled at page
1213 thus :-"In our judgment the High Court is in error in considering that the
rights of the pawnee who had parted with money in favour of the
pawnor on the security of the goods can be defeated by the
goods being lawfully seized by the Government and the money
being made available to other creditors of the pawnor without the
claim of the pawnee being fully satisfied. The pawnee has special
property and a lien which is not of ordinary nature on the goods
and so long as his claim is not satisfied no other creditor of the
pawnor has any right to take away the goods or its price. After the
goods had been seized by the Government it was bound to pay
the amount due to the plaintiff and the balance could have been
made available to satisfy the claim of other creditors of the
pawnor. But by a mere act of lawful seizure the Government could
not deprive the plaintiff of the amount which was secured by the
pledge of the goods to it. As the act of the Government resulted in
deprivation of the amount to which the plaintiff was entitled it was
bound to reimburse the plaintiff for such amount which the
plaintiff in ordinary course would have realized by sale of the

goods pledged with it on the pawnor making a default in payment

of debt.
The approach of the trial Court was unexceptionable. The
plaintiff's right as a pawnee could not be extinguished by the
seizure of the goods in its possession inasmuch as the pledge of
the goods was not meant to replace the liability under the cash
credit agreement. It was intended to give the plaintiff a primary
right to sell the goods in satisfaction of the liability of the pawnor.
The Cane Commissioner who was an unsecured creditor could not
have any higher rights than the pawnor and was entitled only to
the surplus money after satisfaction of the plaintiff's dues."
In view of the aforesaid decision of the Supreme Court, it must be
held that what has been done by respondents 3 and 4 is illegal
and unjustified and without jurisdiction. The revenue authorities
may if they so choose or desire, pay the entire amount due and
payable to the Bank, take possession of the moveable property of
the Company and proceed against it. In the present case the
respondents are not prepared to pay the debt due to the Bank but
at the same time desire to proceed against the pledged
machinery and other movables of the Company which are in legal
custody and possession of the Bank. We may notice in this
context the decision of the Mysore High Court in In the matter of
Sree Yellamma Cotton, Woollen and Silk Mills Co. Ltd. (AIR 1969
Mys 280). At page 287, the learned Judge, A. Narayana Pai, J. (as
he then was) observed thus :-"In the case of Hypothecation of pledges of movable goods, there
is no doubt about the creditor's right to take possession, to retain
possession and to sell the goods directly without the intervention
of Court for the purpose of recovering his dues. The position in
the case of regular pledge completed by possession is undoubted
and set out in the relevant sections of the Contract Act.
Hypothecation is only extended idea of a pledge, the creditor
permitting the debtor to retain possession either on behalf of or in
trust for himself (the creditor). Hence, so far as the movables
actually covered by the hypothecation deeds are concerned, there

can be no doubt that the Bank is entitled to retain possession and

also to exercise the right of private sale." The decision of a
Division Bench of this Court in State Bank of Indore v. Regional
Provident Fund Commissioner, (AIR 1965 MP) strongly relied upon
by the Deputy Government Advocate does not assist him. That
was a case of immoveable property. We have already pointed out
the difference and distinction between the case of hypothecation
of moveable and immoveable property. For all the reasons stated,
we have no hesitation to hold that the impugned orders are
illegal, erroneous and without jurisdiction and are liable to be
quashed. In the result we quash the impugned order (Annexures
M & O) and issue a mandamus directing the respondents 2, 3 and
4 not to proceed against the machinery and other moveables
pledged by the first respondent-Company to the petitioner. This
writ petition is allowed with costs. Counsel's fee Rs. 200/- if
certified. The amount of security deposit be refunded to the
petitioner.

CONCLUSION
Hypothecation is a common feature of consumer contracts
involving mortgages the debtor legally owns the house, but until
the mortgage is paid off, the creditor has the right to take
possession if the debtor fails to keep up with repayments. If a
consumer takes out an additional loan secured against the value
of his mortgage (approximately the current value of the house
minus outstanding repayments) the consumer is then
hypothecating the mortgage itself the creditor can still seize the
house but in this case the creditor then becomes responsible for
the outstanding mortgage debt. Sometimes consumer goods and
business equipment can be bought on credit agreements
involving hypothecation the goods are legally owned by the
borrower, but once again the creditor can seize them if required.
When an investor asks a broker to purchase securities on margin,
hypothecation can occur in two senses. The purchased assets can
be hypothecated so that, if the investor fails to keep up credit
repayments, the broker can sell some of the securities. The broker
can also sell the securities if they drop in value and the investor
fails to respond to a margin call. The second sense is that the
original deposit the investor puts down for the margin account
can itself be in the form of securities rather than a cash deposit,
and again the securities belong to the investor but can be sold by
the creditor in the case of a default. In both cases, unlike with
consumer or business finance, the borrower does not typically
have possession of the securities as they will be in accounts
controlled by the broker, however, the borrower does still retain
legal ownership.
Pledge is a kind of bailment where a thing is delivered as security
for the repayment of a debt or performance of any promise.
Delivery of the possession to the pawnee may be actual delivery
or constructive delivery. Ownership of the pledged article does not
pass to the pledgee. The pawnee has the right to retain goods till
the payment, of the debt, any interest on the debt, and any other
necessary expenses incurred for preservation of the goods. Where

pawnee incur any other extraordinary expenses on goods for

preservation, he is entitled of the same from pawnor. In case of
the default of the pawnor, in the debt or performance, the
pawnee has the right to sell the goods pledged.
The pawnor has also the right to redeem the goods before the
actual sale, but after the payment of the debt or performance of
promise and any other expenses which have arisen from his
default.
The definition of pledge refers to a bailment, and hence can be
no pledge of goods unless there is an actual delivery of the goods.
A loan however may be secured by a hypothecation of the goods.
Hypothecation is transaction under which goods are made
available as security for a debt without actual transfer of either
the property or the possession thereof to the creditor. The owners
are under an obligation to discharge the debt within the stipulated
time and if they fail to do so, the creditor has the right to recover
his dues, if need be, by the sale of the security.
Where the pledge is by way of hypothecation, the creditor cannot
directly seize the goods by entering premises or otherwise. He
has to do so either with the consent of the borrower or through a
court order. The creditor does not have the right to enter the
premises, lock and seal the same. In Union of India v.
Shenthilnatha, the most conspicuous feature of the agreement
was that in case the borrower committed default in payment of
the debt as stipulated, the lender was at liberty to seize the
goods. The court held that this power was not directly exercisable.
No possession was delivered on the date when the hypothecation
deed was entered into. What was contemplated was a future
overt act on the part of the creditor to sequester the goods, if so
desired and that too by a process known to law. At best the right
which the plaintiff had under the agreement was to file a suit on
the debt and after obtaining a degree to proceed against the
property specified in realisation of the decree.

BIBLIOGRAPHY
1) Avtar Singh, Contract and Specific Relief,
(11th Edition)
2) Indian contract act 1872 by Pollock and
mulla
3) Indian contract act 1872 by R.K.Bangia
4) Indian contract act 1872 by M.L.Bhargva
5) Pledge vs Hypothecation, retrieved from
//www.allbankingsolutions.com
6) T.S. Venkatesa Iyers, The Law of Contracts
& Tenders, Vol.1, (9th Edition)
7) Case- Bank Of India vs Binod Steel Ltd. And
Anr. on 29 September, 1976