Mode of Charging of Security:

Pledge, Hypothecation,Mortgage,
Lien, Assignment & Set off

Compiled By:

JBSC, Dhaka

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What is Charging of Security?
Charging a security means making it
available as a cover for an advance.
Or,
The manner by which some article or
commodities or properties are made
available to a banker as security is
known as charging of security.

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 Classification of Charge

(i) Fixed Charge

(ii) Floating Charge
(iii) Pari Passu Charge
(iv) Second Charge

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The method used depends upon;

Type of property to be charged,

 Nature of the advance &
 Degree of control over the debtor’s
property required by the banker.

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 PLEDGE
Pledge:
Pledge is the bailment of goods as security for
payment of a debt or performance of a
promise ( Sec. 172 of contract Act ).
Bailment:
Bailment is the delivery of goods by one
person to another for some purpose under a
contract that the goods shall, when the
purpose is accomplished, be returned or other
wise disposed of according to the direction of
the person delivering them (sec - 148 of
contract Act).
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 PLEDGE
Pledgor
The person delivering the goods as security is
called 'pledgor' or 'pownor'.
Pledgee
The person to whom the goods are delivered is
called the 'pledgee' or 'pownee'.
Delivery of goods:
Actual delivery
Symbolic or constructive delivery
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 Characteristics of a valid Pledge
1. The ownership of the goods remains with
the pledgor.
2. Delivery of goods is necessary.
3. Pledgee has a right to retaining the goods
for the security until final payment of debt.
4. Right to sell the goods after reasonable
notice, if the borrower defaults.

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 Goods should not be accepted as
securities in pledge account
 Chemicals
 Explosive
 Inflammable goods
 Goods that may cause damage
 Non saleable goods
 Goods that have no open market
 Price of goods constantly fluctuate
 Adulterate goods
 Goods of inferior quality
 Old stock of goods
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 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.
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 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.

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 Hypothecation:
Practice & Procedure
1. 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.
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 Hypothecation:
Practice & Procedure
5. 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.

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 LIEN
 Lien is the right of a creditor to retain
the goods and securities in his possession,
belonging to debtor, until the debt due is
paid.
 Lien does not give power of sale but only
to retain the property.

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 Essential conditions for
exercising the right of lien:
 The goods must be in possession of
the creditor.
 There must be a lawful debt.
 There must not be any contract to
the contrary.

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 Types of Lien

1. Particular lien
Particular lien is that lien which
confers the right to retain that
particular commodity in respect of
which the particular debt arose.

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 Types of Lien

2. General lien
A general lien confers a right to retain
goods and securities not only in respect
of a particular debt incurred in
connection with them but in respect of
the general balance due by the owner
of the goods and securities, to the
person in possession of them.

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 Types of Lien

3. Banker's lien
A banker's lien is more than a general
lien. It is implied pledge and banker
has a right to sell the property after
reasonable notice, provided the
property comes into his hands in the
ordinary course of his business.

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 Types of Lien
4. Negative lien
The banker sometimes ask a borrower to
execute a letter declaring that his assets are
free from encumbrance at the time the
advance is made.
The borrower also undertake that the assets
stated in the said letter shall not be
encumbered or disposed of without the
bank's permission in writing so long as the
advance continues. This understanding is
known as a negative lien.
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 The situations which do not
covered by banker's lien:
1. It does not extend to securities, which do not
belong to the customer if the banker is
aware of it.
2. Securities or valuables lying in safe deposit
locker.
3. Securities deposited upon a particular trust.
4. Any security left in the banker's hand to
cover a proposed advance that is
subsequently declined.

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 The situations which do not
covered by banker's lien:
5. Securities left inadvertently with the
bank by the owner.
6. Bill of exchange or other documents
entrusted for a special purpose.
7. Money deposited for a specific
purpose.

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 ASSIGNMENT
An assignment means transfer of right,
property or debt (existing or future) or to
make it over to another person.
The person who assigns right, property or
debt is called the assignor.
The person to whom the right etc. is
transferred is called the assignee.
Actionable claim is an unsecured claim to
money, which is actionable, i.e., for recovery
of which an action may be brought in the
court of law.
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 Types of Assignment
Legal Assignment
 An assignment must be in writing and signed by
the assignor.
 It must be absolute.
 A written notice of assignment is to be sent by the
assignor to the debtor. In case the assignor fails to
do so, the assignee must do it.
 The notice must be acknowledged by the debtor.

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 Types of Assignment
Equitable Assignment
 If an assignment does not fulfill any of the
requirements of a legal assignment, it is an
equitable assignment.

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 Examples of Assignment
 Book debts of the assignor due from sundry
parties
 Contract money due from Govt. and Semi-
Govt. bodies.
 Supply Bills
 Life Insurance Policies etc.

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 SET-OFF

It is, in effect, the combining of accounts

between a debtor and a creditor so as to
arrive at the net balance payable to one or the
other.

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 Essential features of Set-off
(a) Mutual debts must be for sums certain
(b) Debts must be due immediately
(c) Debts in same right
(d) No agreement to the contrary

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 Automatic right of Set-off

 On the death, insanity or insolvency of the

customer.
 On the insolvency of a partner of a firm.
 On the winding-up of a company.
 On receipt of a garnishee order.
 On receipt of a notice of assignment of the
credit balance of the customer.

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Thank You

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