Pledge

Bailment of goods as a security for payment of debts or performance of promise is called pledge.  The
bailor is called pledgor or pawnor and the bailee is called pledgee or Pawnee.  

• ESSENTIALS OF PLEDGE:  

 Delivery of Goods:  The delivery of goods to pledgee is necessary to constitute a pledge.

 Delivery of goods should be by way of security. The security being for the payment of debt or
the performance of a promise.

 Goods must be movable. An implied condition to return the goods.  

RIGHTS AND DUTIES OF PAWNEE

 Right of retainer

 Right of particular lien

 Right to extraordinary expenses

 Right in case of default of the pawnor

RIGHTS AND DUTIES OF PAWNOR

 Right of redemption

 Right to take back the goods.

• PLEDGE BY NON OWNERS

• Pledge by mercantile agent

Where a mercantile agent is, with the consent of the owner, in possession of goods or the
documents of title to goods, any pledge made by him, when acting in the ordinary course of business of
a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to
make the same; provided that the pawnee acts in good faith and has not at the time of the pledge
notice that the pawnor has not authority to pledge.

Pledge by person in possession under voidable contract

When the pawnor has obtained possession of the other goods pledged by him under a contract
voidable under section 19 of section 19A, but the contract has not been rescinded at the time of the
pledge, the pawnee acquired a goods title to the goods, provided he acts in good faith and without
notice of the pawnor's defect of title.

Pledge where pawnor has only a limited interest

 Where person pledges goods in which he has only a limited interest, the pledge is valid to the
extent of that interest.

Pledge by co-owner in possession

Where the goods are in possession of one of the co-owners with the consent of the other co-
owners, such co-owner may create a valid pledge of goods.

Pledge by seller or buyer in possession after sale

Pledge by seller or buyer in possession after sale is valid pledge provided it is in good faith.

Distinction between Pledge and Bailment:

• Pledge is bailment of goods for a specific purpose where as Bailment is for a purpose of any kind

• Pawnee cannot use the goods pledged where as bailee can use the goods as per terms of
bailment

Hypothecation

• Hypothecation is a Charge against property for an amount of debt where neither ownership
nor possession is passed to the creditor.

• Being only an equitable charge on moveable property without possession, hypothecation

facility is granted only to parties of undoubted means with the highest integrity.

Characteristics of hypothecation

1. Only moveable assets and book debts can be hypothecated.

2. The charge is floating, present & future.

3. The stocks are constantly changing, as buying and selling are going regularly.

4. The lender has no effective control over the securities, as they are not in his possession, either
actual or constructive.

Hypothecation:
Practice & Procedure

Advance should be allowed only to parties of good reputation and undoubted standing & credit.

2. A written undertaking from the borrower should be obtained that the stock has not been
pledged or hypothecated to any bank or creditor.
3. In case of a Ltd. Co. this charge is to be filed for registration with the RJSC within 21 days after
the date of creation of the charge by execution of documents.

4. Bank should obtain periodical statement of stock duly signed by authorized person with
valuation as per invoices.

The Manager carries out inspection of stock at least once in a month at an irregular interval to detect
any fraud.

6. Bank's signboard or nameplate is to be displayed prominently outside and also inside the
godown.

7. The stock must be insured against all risk.

8. Hypothecation advance is allowed by banks to borrowers only for their working capital and not
for any capital investment.

Characteristics of a Hypothecation

• Union of India v Shentilnathan, (1978) 48 Com Cas 640

• Hypothecation of goods is a concept which is not expressly provided for in the law of
contracts, but is accepted in the law merchant by long usage and practice.

• Hypothecation is not a pledge and there is no transfer of interest or property in the

goods by the hypothecator to the hypothecatee.

• It only creates a notional and an equitable charge in favour of the hypothecatee and the
right of the hypothecatee, as already stated, is only to sue on the debt and proceed in
execution against the hypothecated goods, if they are available.

• As delivery of possession is not a sine qua non for the creation of a notional charge
under a deed of hypothecation and as possession of the hypothecated goods is always
with the hypothecator, a wide door is open to the owner to deal with the goods without
reference to the hypothecatee.  

• In the absence of constructive notice to subsequent interest holders, the hypothecatee

cannot claim priority over such subsequent holder
Difference between Charge, Hypothecation and Mortgage

Nature of Possession Nature of Necessity for Step-in Rights Transferring

Security Interest in the obtaining the Interest
Property Court
approval for
enforcement
of security
Charge/ No possession Special Approach No Cannot be
Hypothecation Property Court except if assigned
the agreement
specifically
provides for
private sale
Pledge Possession Special No need to No Can be
Property approach assigned
court
Mortgage Possession or General No need to Yes Can be
No possession Property approach assigned
(depending on court (except
the type of equitable
mortgage) mortgage
without
written
memorandum
)
Endorsement

• Signature on the back of a negotiable instrument

• Allow payee to cash, deposit or transfer payment of the check to someone else

• Proof that the payee cashed or transferred payment of the check to someone else

• Endorser is responsible for payment of the check if the new owner cannot collect payment

• Endorse should sign the check the way it is on the front of the check and if the name is
misspelled, correct the signature directly up under the first endorsement

• Signature on the back of a negotiable instrument

• Allow payee to cash, deposit or transfer payment of the check to someone else

• Proof that the payee cashed or transferred payment of the check to someone else

• Endorser is responsible for payment of the check if the new owner cannot collect payment

• Endorse should sign the check the way it is on the front of the check and if the name is
misspelled, correct the signature directly up under the first endorsement