Mode of Creation of Security
Depending on the nature of the item concerned, creation of security may take the form of a mortgage, pledge, hypothecation, assignment, set-off,
or lien.
Mortgage
Mortgage has been defined under section 58 of the Transfer of Property Act, 1882, as “the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced by way of loan, an existing or future debt, or the performance of an engagement which may give raise to a pecuniary liability”.
Mortgages are of several kinds but the most important are the Registered Mortgage and the Equitable Mortgage. A Registered Mortgage can be affected by a registered instrument called the ‘Mortgage Deed’ signed by the mortgagor. It registers the property to the mortgagee as a security. Equitable mortgage, on the other hand, is effected by a mere delivery of title deeds or other documents of title with intent to create security thereof.
Pledge
A pledge is defined under section 172 of the Indian Contract Act, 1872, as “the bailment of goods as security for payment of a debt or
performance of a promise.” A pledge thus involves bailment or delivery of goods by the borrower to the lending bank with the intention of creating a charge thereon as security for the advance. The legal ownership of the goods remains with the pledger while the lending banker gets certain defined interests in the goods. The pledge of goods constitutes a specific (or fixed) charge. In a pledge, the bank has all the liabilities and responsibilities of a bailee of goods. The bank may be held responsible for not carrying out their obligations as bailee.
Hypothecation
The term ‘hypothecation’ is not defined in law. In commercial parlance, the term refers to the creation of an equitable charge (i.e., a charge
created not by an express enactment but by equity and reason), which is created in favour of the lending bank by execution of hypothecation agreement in respect of the moveable securities belonging to the borrower. Neither ownership nor possession is transferred to the bank. However, the borrower holds the physical possession of the goods as an agent/trustee of the bank. The borrower periodically submits statements regarding quantity and value of hypothecated assets (stocks, debtors, etc.) to the lending banker on the basis of which the drawing power of the borrower is fixed.
Assignment
Assignment represents a transfer of an existing or future debt, right or property belonging to a person in favour of another person. Only actionable
claims (i.e., claim to any debt other than a debt secured by a mortgage of immovable property or by hypothecation or pledge of moveable property) such as book debts and life insurance policies are accepted by banks as security by way of assignment. An assignment gives the assignee absolute right over the moneys/debts assigned to him. The transfer of debt, right or property is subject to all the liabilities and equity to which the transferor was subject on the date of transfer. In other words, the assignee cannot get a better title than that of the assignor.
Set-off
Set-off is a statutory right of a creditor to adjust, wholly or partly, the debit balance in the debtor’s account against any credit balance lying in
another account of the debtor. A lending bank has the right of set-off in the absence of an agreement, express or implied, to the contrary with the
borrower. The right of set-off enables a bank to combine two accounts (a deposit account and a loan account) of the same person provided both the
accounts are in the same name and in the same right (i.e., the capacity of the account holder in both the accounts should be the same). For the purpose of set-off, all the branches of a bank are treated as one single entity. The right of set-off can be exercised in respect of time-barred debts also.
Lien
Lien is creation of a legal charge with consent of the owner, which gives lender a legal right to seize and dispose / liquidate the asset under lien.