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Pledge and Hypothecation

Bank Charges like pledge and hypothecation is the legal right to assets securing the payment of money. It gives the creditor in whose favor the charge is created, the right to get the loan back on time. In a charge there is no transfer of interest or property. It is a right over some tangible asset of the borrower. It is a legal transaction as a result of which the lender acquires certain right over the property and the borrower is refrained from dealing in them. If the borrower fails to repay the loan on time, then the lender can establish their right over the assets and entitle to get benefit from the assets and can sale the assets to recover the loan.

Bank Charge

Bank charge may be classified as (a) Fixed Charge and (b) Floating Charge.

Fixed charge: It is made over definite and ascertained assets of a permanent nature i.e. charge on land, building, heavy machinery etc. It prevents the debtor dealing with the property charged without consent of the existing charge holder/creator on property or assets, which is changing in nature or can be moved i.e. stock, share etc. Thus it is a charge on the assets from older.

Floating charge: A Floating Charge can be seen to be more versatile than a fixed charge, but once it has preserved, the organization cannot use the associated resources in the course of business, and they are successfully freezing.

There is some other form of charges like (i) Pari-passu charge and (ii) second charge. The term “Pari-Passu Charge” is usually used in consortium lending. In case of such lending, a number of banks or financial institutions join together to lend a single borrower in an agreed ratio against some common securities. The securities are charged to all lending banks without any reference like first charge or second charge etc. The term Pari-Passu charge over the assets of the borrower means that the lender are entitle to have equal rights over the assets as per agreed share of lending. On the other hand second
charge is applicable for the assets already mortgaged. A creditor holding a second charge by way of mortgage, is entitled to the proceed after the first charge is meet.

Modes of Creating Charge on Securities

Charging a security means making it available as a cover for an advance. The manner by which some articles or commodities or properties are made available to a banker, as security is known as charging over securities. The common methods of charging securities are as follows:

Pledge

Pledge is a usual method of obtaining possessions of goods offered as security. As per Section 172 of Contract Act, 1872, Pledge is a bailment of goods as security for payment of a debt or performance of a promise. The person who delivers the goods (bailor) as the security is called the Pledger and the person to whom the goods are delivered are called Pledgee. Bailment is the delivery of goods from one person to another person for some purpose under a contract, and for a specific period. Upon completion of the bailment period the bailed goods should be returned to the bailor. Thus in case of a Pledge
There should be bailment of goods. The objective of such bailment should be to hold the goods as security for the payment of a debt or the performance of a promise.

Hypothecation

The mortgage of movable property is called hypothecation. Hypothecation is a charge against property for a debt where neither ownership nor possession is passed to the creditor. Actual possession of the goods remains with the borrower. Though the borrower holds the actual physical possession of the goods but the constructive possession remains with the bank as per deed of hypothecation. Hypothecation is a legal transaction, whereby goods may be made available as security for a debt without transferring either the property or the possession to the lender ‘The borrower is in actual physical possession but the constructive possession is still of the bank because, according to the deed of hypothecation, the borrower holds the actual physical possession not in his own right as the owner of the goods but as the agent of the bank.” Hypothecation main feature is a floating charge on the borrower’s assets. The possession of the bank in hypothecation is not very safe. Goods remain in the possession of the borrower. Bankers do not offer hypothecation for all borrowers.

Bank Lien

Lien is the right of one person to retain goods and securities in his possession belonging to another until certain debt due. Lien does not give power of sale but only to retain the property.

Types of Lien

  • Particular Lien: Particular lien is a right of the creditor to retain the goods of the debtor in respect of a particular debt i.e. the right to retain particular commodity in respect of which the particular debt arise.
  • General Lien: A general lien confers a right to retain goods and securities not only in respect of a particular debt but also with some other assets of the borrower.
  • Banker’s Lien: As a general rule the right of lien does not give the person exercising the right of sale. A banker’s lien is more than general lien, banker has a right to sell the property providing reasonable notice to the borrower.
  • Negative Lien: Banks enjoy a general lien on all securities of the borrowers until the entire bank’s claims are satisfied. There is, however, another kind of lien which is called Negative lien. In this case banks take a declaration from the borrower that the assets mentioned therein will be free from any sort of charge.
  • Equitable Lien: An Equitable Lien is an equitable right conferred by law to a charge upon the movable or immovable property of another until certain claims satisfied such as, a partner who pays partnership debts on dissolution has an equitable lien on the property of the partnership.
  • Maritime Lien: A Maritime Lien is a right specially binding a ship her furniture, machinery, cargo and freight for the payment of claim based upon the maritime law. For example, the person who has suffered losses as a result of collision due to ship’s negligence has the right of lien on ship and her belongings.

Assignment

Assignment means transfer of an existing or future right, property or debt by one person to another person. The person who assigns the right is called the assignor. The person to whom the right etc. is transferred is called assignee. In other words, while the Transfer of Property Act provides creation of charge over immovable property by way of mortgage, the same Act provides assignment of “actionable claims”, e.g., book debts, insurance claims etc.
In banking, an actionable claim is the subject of assignment. It is permissible under Section 130 and 136 of the Transfer of Property Act, 1882 to assign “actionable claims” to anyone except to a judge, a legal practitioner or an officer of the Court of Justice. Section 3 of the Transfer of Property Act 1882 defines actionable claim as, “Actionable claim means a claim to any debt other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property or to any beneficial interest in movable property not in the possession either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent”. In other words, an 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. There are 02 (Two) Types of Assignment.

(A) Legal Assignment:

A Legal Assignment is one where, assignment must be in writing duly signed by the assignor. In banking practice, it is done through a registered irrevocable power of attorney where transfer of actionable claim is clear and absolute.
A written notice of assignment containing the name and address of the assignee is to be sent by the assignor to the debtor. The assignee informs the principal debtor about the assignment and also gets the confirmation of the notice. In banking business, banker informs the assignor’s debtor with a copy of power of attorney and gets the confirmation of it.

(B) Equitable Assignment

An equitable assignment is one which does not fulfill any of the above. Banker does not allow equitable assignment in any case. The most common types of assignment in banking business are contracting Money, Supply Bills and Life Insurance Policy.
Assignment as security is not a good one due to breach of the terms of contract between assignor and his debtor may hamper the interest of Banker. Value of the assignment does not depend only on the integrity and credit worthiness of assignor but also on the assignor’s debtor. The assignor’s debtor can exercise his right of set off, if the assignor has any debt to him.

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. Set-off may be available between parties as a statutory right; or by an agreement between parties, express or implied from a course of dealings. The right of set-off enables a banker to adjust wholly or partially, as circumstances permit, a debit balance in a customer’s account with any balance lying at his credit. Both these claim must, however, be for known amounts in the same right and due immediately. In practice, the banker would not exercise the right arbitrarily and without
notice unless there is a specific agreement with the customer to set-off the accounts.

 Essential Features of Set off

–Mutual debt must be for sums certain: Before exercising the right of setoff the claim and the counter claim must be determined accurately
–Only those debt, which are due and recoverable on the date of set off, can be subject of set off.
–The parties mutually indebted in the same right. If a customer maintains two accounts one for his own money and other for the trust money, the banker cannot set off a credit balance in the trust account.
–The right of set off cannot be exercised if there is an agreement between banker and borrower.
–Before exercising the right of set off banker must serve notice of setoff to the borrower with reasonable time.

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