Bailment, Pledge, Hypothesis and Mortgage

Introduction

These terms are used for creating a charge on the assets which is given by the borrower to the lender as a security for any loan. Thus, one of these terms will be normally used whenever an individual or a business firm avails any loan and the bank keeps some assets as a security, so that it will be available to sell the same in case that individual or the firm defaults in repayments.

Bailment

Section 148 to 181 of the Indian Contract Act, 1872 provides the law in respect of contract of “Bailment”. Out of these provisions, Section 168 and 169 provides the rights and duties of the finder of goods. The term bailment implies a relationship in which the personal property of one person temporarily goes into the possession of another. Delivering a vehicle, watch or other article for repair or leaving a vehicle at parking stand etc. are common examples which create the relationship of bailment.

Meaning-The word ‘bailment’, is derived from ‘bailer’, a french word which means ‘to deliver’. Bailment has been defined under section 148 of the Indian Contract Act, 1872, according to which Bailment involves the delivery of goods from one person to another for a specific purpose and upon a contract, when the purpose is fulfilled, the goods has to be returned or dealt with on the direction of the person who has delivered the goods.

Definition of Bailment (Section 148)

Bailment is the delivery of goods by one person to another for some purpose. Upon the contract the goods shall be returned or otherwise disposed of according to the directions of the person delivering the goods, when the purpose is accomplished.

NOTE: The physical possession of a personal property is transferred from one individual to another individual who will subsequently get the property’s possession but not the entire ownership.

The person delivering the goods is called the “Bailor”. The person to whom the goods delivered is called the “bailee”.

Essentials of Bailment

There Must Be Delivery Of Possesion By Bailor To The Bailee:

The first characteristic of bailment is delivery of possession by one person to another. There must be a delivery of goods, which means, delivery of possession of the goods by the bailer to the bailee to fulfil the purpose of bailment.

One who has custody without possession, like a servant, or a guest using host’s goods is not a bailee. The goods must be handed over to the bailee for whatever is the purpose of bailment. Once this is done, a bailment arises, irrespective of the manner in which this happens.

A jewellery-box with declared contents was handed over to a bank for safe custody, the relationship of bailment was constituted, the bank was held liable for loss of contents.[1]

Delivery to bailee may be actual or constructive:

SECTION 149 explains the meaning of delivery of possession. The delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf.

It means that either the goods can directly be put in the actual physical possession of the bailee or put the bailee in a position of power over such goods that can be physically possessed later, if possible.

In constructive delivery, the bailor gives the bailee means of accessing the custody of the good and not its actual delivery.

Delivery upon contract

Delivery of goods should be made for some purpose and upon a contract that when the purpose is accomplished the goods shall be returned to the bailor.

NOTE: When a person’s goods go into the possession of another without a contract, there is no bailment within the meaning of its definition in section 148.

The plaintiff’s ornaments, having been stolen, were recovered by the police and, while in police custody, were stolen again. The plaintiff’s action against the state for the loss was dismissed. The reason is that the ornaments were not made over to the government under any contract, the government never occupied the position of the bailee to indemnify the plaintiff.[2]

Conditional delivery

Bailment of goods is always made for some purpose and is subject to the condition that when the purpose is accomplished the goods will be returned to the bailor or disposed of according to his directions.

A man, for the purpose of cancelling and consolidating nine government promissory notes into a single note of Rs. 48000, went to a Treasury Officer. Later, the notes were misappropriated by a servant at the treasury and the man filed a suit against the State to hold it responsible as a bailee. He failed as there is no Bailment without delivery of goods and a promise to return the same and the government was not bound to return the same notes or deal with them in accordance with the wishes of the man.[3]

Pledge

Section 172 to 179 of the Indian Contract Act provides the law in respect of contract of pledge. Section 172 provides the definition of some important terms like “pledge”, “pawnor”, “pawnee”.

What is Pledge?

Pledge can be defined as that special form of bailment in which goods are bailed as security by one party to another, for the repayment of debt or performance of a promise.

Pledges are form of security to assure that a person will repay a debt or perform an act under contract. In a pledge one person temporarily gives possession of property to another party. Pledges are typically used in securing loans, pawning a property for cash, and guaranteeing that contracted work will be done.

Definition of Pledge

As per Section 172 of the Indian Contract Act, 1872, Pledge is the bailment of goods as a security for the loan. Borrower needs to provide the bank any asset or good that is worth the same amount or more than the loan which he is taking from the bank payment of a debt or performance of a promise.

The party who deposits the goods is the bailor, called as pledger, whereas the party who takes the possession of the goods or the one to whom the goods are deposited is the bailee, called as pledgee.

Who Can Pledge?

Ordinarily goods can be pledged by the owner or by any person with the owner’s consent and authority. A pledge made by another person may not be valid.

The 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 the defendants contended that the railways were too negligent in delivering the goods to a wrong person. But the court held that this would not constitute estoppel against the railway company and that the pledge was not valid.[4]

Section 178, 178-A and 179 provide for certain circumstances in which a person, being left in possession with the consent of the owner, make a valid pledge though without the owner’s authority. These circumstances are as under:

1. Pledge by mercantile agent.
2. Pledge by person in possession under voidable contract,
3. Pledge by pledgee.

What can be pledged?

Any movable items such as assets, documents, valuables, receipt of fixed deposit account or savings bank account and securities can be deposited with the moneylender or promisee, as collateral, against the repayment of loan or fulfilment of the obligation.

There must be actual or constructive delivery of the goods to be pledged. However, government securities are to be pledged by endorsement and delivery.

Essential Characteristics of Pledge

Following are the essential characteristics of pledge-

Delivery of Possession-

Delivery of the property pledged is a necessary element in the making of a pledge. The property pledged should be delivered to the pledgee.

The producer of a film borrowed a sum of money from a financer-distributer, and agreed to deliver the final prints of the film when ready, the agreement was held not to amount to a pledge, there being no actual transfer of possession. Delivery of possession may be actual or constructive.[5]

Delivery of the key of the godown where the goods are stored is an illustration of constructive delivery.

In Pursuance Of Contract:

Pledge is a conveyance to a contract, and it is essential to a valid pledge that delivery of the chattel shall be made by the pawnor to the pawnee in pursuance of the contract of pledge. But it is not necessary that the delivery of the possession of the thing pledged and the loan should be simultaneous and pledge may be perfected by delivery after the advance is made.

Distinction Between Bailment And Pledge

A pledge is only a special kind of bailment, and the chief basis of distinction is the object of the contract. Where object of the delivery of goods is to provide a security for a loan or for the fulfilment of an obligation, that kind of bailment is called pledge. Pawn or pledge is a bailment of personal property as security for some debt. A pawner is one who being liable to an engagement gives to the person to whom he is liable a thing to be held as security for a payment of his debt or the fulfilment of his liability.

Some key points to remember about pledge-

1. Pledge is a kind of Special Contract.
2. Pledge is a part of Bailment.
3. Pledge is a contract by which possession of goods or assets is transferred as a security.
4. Pledger is the person who gives goods as a security. He is the borrower.
5. Pledgee is the person who receives goods as a security. He is the lender.
6. Pledgee is bound to return pledged goods on the successful repayment of loan.
7. A pledgee has no right to use the goods pledged.
8. A Pledgee has the right to sell the goods pledged, on default after giving a notice to the Pledge

Hypothecation

Definition of Hypothecation

Hypothecation refers to a financial arrangement where the borrower borrows money against the security of goods (Here goods mean movable property). In business parlance, hypothecation is defined as the charge created over the asset (usually inventories, debtors, etc.) for the repayment of debt of suppliers, creditors, and other parties.

In this arrangement, the asset is not delivered to the lender but kept by the borrower until he defaults in payment of debt. So, the possession of asset belongs to the debtor only. There are two parties to hypothecation, where hypothecator is the borrower while hypothecatee is the lender. The right of the two parties depends on the agreement signed between them.

If the hypothecator fails to pay the amount, then firstly, the hypothecatee has to take the possession of the goods hypothecated. Thereafter, he can sell them off to adjust the amount of his loan.

In Hypothecation, the Bank (hypothecatee) is treated to be a secured creditor and has a preferential right to recover with respect to the other creditors.[6]

Key Differences Between Pledge and Hypothecation

The significant differences between pledge and hypothecation are specified below:

1. The pledge is defined as the form of bailment in which goods are held as security for the payment of the debt or the performance of an obligation. Hypothecation is slightly different from the pledge, in which the collateral asset is not delivered to the lender.
2. The pledge is defined under section 172 of the Indian Contract Act, 1872. On the other hand, Hypothecation is defined in Section 2 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
3. In the pledge, the possession of the asset is transferred, but in the case of hypothecation, possession lies with the debtor only.
4. Parties to the contract of the pledge are pawnor (borrower) and Pawnee (lender) whereas in hypothecation the parties are hypothecator (borrower) and hypothecatee (lender).
5. In the pledge, when the borrower defaults in payment, the lender can exercise his right to sell the asset to recover the debt amount. Conversely, in hypothecation, the lender does not have the possession of goods so he can file a suit to realize his dues to take the possession first and then disposing off them.

In Hypothecation, the creditor has the right to sell the goods. He can take charge of goods and can sell the hypothecated goods without court intervention, on default or breach of terms of Hypothecation by the debtor, but only if the creditor has been vested with such power under the agreement of Hypothecation.[7]

Pledge is used when the lender (Pledgee) takes actual possession of the asset pledged. In case of Hypothecation, possession of the asset remains with the borrower. Loan is given on security of immovable property, in case of Mortgage. Assignment is used when the owner of a contract (Assignor) handovers a contract to another party (Assignee). Assignment gives the assignee, right of all the responsibilities and all the benefits of the contract assigned.

Mortgage

What is a Mortgage?

A mortgage is a transfer of an interest in immovable property and it is given as a security for a loan. The ownership of an immovable property remains with the mortgagor itself but some interest in the property is transferred to the mortgagee who has given a loan.

DEFINITION:

Section 58 (a) defines mortgage in the following words:

A mortgage is the transfer of an interest in immovable property for the purpose of securing the payment of money advanced, an existing or future debt or the performance of an engagement which may give rise to a pecuniary liability.

Essential Conditions Of Mortgage:

There is a transfer of interest to the mortgagee.

The interest transferred must be of some specific immovable property.

(Immovable property includes also things attached to what is embedded to the earth).

But, if machinery or other fixture is not attached for permanent beneficial enjoyment, it shall not form part of security if the house is mortgaged.[8]

The purpose of mortgage “consideration”.

The Supreme Court has held that a transaction of mortgage does not become ineffective merely because the mortgage could not advance the money on the date of execution of the deed.[9]

Section 58 further defines mortgagor, mortgagee and types of mortgage –

The transferor is called as mortgagor.

The transferee is a mortgagee.

Types Of Mortgage

Simple Mortgage

Is defined under Section 58(b) of Transfer of Property Act, 1882. In a simple mortgage, the mortgagor does not transfer immovable property to the mortgagee but agrees to pay the mortgage money.

Conditional Mortgage

Mortgage by conditional sale is defined under Section 58(c) of Transfer of Property Act, 1882.

This mortgagee places three conditions to the mortgagor, and the mortgagee shall have the right to sell the property if:

• mortgagor defaults in payment of mortgage money on a certain date.
• as soon as the payment is made by the mortgagor the sale shall become void.
• on the payment of money by the mortgagor, the property is transferred and such a transaction is called a mortgage by conditional sale.

Usufructuary Mortgage

Usufructuary Mortgage is defined under Section 58(d) of Transfer of Property Act, 1882.

In this mortgage, the mortgagor delivers the possession of the property to the mortgagee and authorizes the mortgagee to retain such property until the payment is made by the mortgagor and further authorize him to receive the rent or profit arising from such mortgaged property and to appropriate the same instead of payment of interest. Such a transaction is called as Usufructuary transaction.

English Mortgage

English Mortgage is defined under Section 58(e) of Transfer of Property Act, 1882.

In this mortgage, the mortgagor transfers the property absolutely to the mortgagee and binds himself that he will repay the mortgage money on the specified date and lays down a condition that on repayment of money mortgagee shall re-transfer the property. Such a transaction is called an English mortgage transaction.

Deposit Of Title Deeds

Deposit of title -deeds is defined under Section 58(f) of Transfer of Property Act, 1882.

In this mortgage where a person is in Calcutta, Madras, Bombay and in any other towns as specified by the state government and the mortgagor delivers to a creditor or his agent the documents of title of immovable property with an intent to create security and then such a transaction is called Deposits of title-deeds.

Anomalous Mortgage

An Anomalous Mortgage is defined under Section 58(g) of Transfer of Property Act, 1882. A mortgage which is not any one of the mortgages mentioned above is called an anomalous mortgage.

Conclusion

Whenever an Individual or a Non-Individual applies for a loan, the bank or the lender asks for any security for this purpose. Contract of bailment involves the transfer of possession of the good from the bailor to the bailee for the specific purpose and both, the bailor and the bailee, have been confronted with some rights and duties which are necessary for them to follow whenever seem suitable. Pledge, Hypothecation and Mortgage are different terms that are used to create a charge on the assets which is given by the borrower to the lender.

[1] Jagdish Chandra Tikha v. PNB (1998).

[2] Ram Gulam v. Government of U.P. (1950).

[3] Sheo Singh Rai and Anr. v. The secretary of State (1880).

[4] Purushottam Das v. Union of India (1967).

[5] Revenue Authority v. Sudarsanam pictures (1968).

[6] Rehaboth Traders by Partner R. v. Canara Bank (1998)

[7] Sree Yellamma Cotton, Wollen & Silk Mills and Co. Ltd., Bank of Maharashtra Ltd., Pune v. Official Liquidator (1969)

[8] Narayana v. bolaguruswami (1924).

[9] State of karala v. Cochin Chemical Refineries (1968).