Pledge and Hypothecation
Introduction
Pledge and hypothecation are common methods used to secure loans using movable property. Both involve using goods as security, but they differ mainly in possession and control. Understanding this difference is important for exams and practical legal application.
Meaning / Definition
Pledge
Pledge is defined under Section 172 of the Indian Contract Act, 1872. It means bailment (delivery of goods) as security for repayment of a debt or performance of a promise. Possession of goods is transferred to the creditor.
Hypothecation
Hypothecation is not defined in the Indian Contract Act but is recognized in practice. It means creating a charge (right over property) on goods as security without transferring possession. The borrower continues to keep and use the goods.
Modes or Types
Pledge (Transfer of Possession)
- Goods are delivered to the creditor (pawnee)
- Creditor has control over goods
- Used as security for loan or obligation
Hypothecation (No Transfer of Possession)
- Goods remain with the borrower (debtor)
- Borrower can use goods subject to contract terms
- Creditor has only a right over the goods, not possession
Distinction / Comparison
| Basis | Pledge | Hypothecation |
|---|---|---|
| Legal Status | Defined under Indian Contract Act | Not defined, recognized by usage |
| Possession | Transferred to creditor | Remains with borrower |
| Ownership | Remains with borrower | Remains with borrower |
| Right to Use | Borrower cannot use freely | Borrower can use goods |
| Right of Lien (right to retain goods until payment) | Available to creditor | Not available |
| Control over Goods | High control with creditor | Limited control with creditor |
| Risk | Lower risk for creditor | Higher risk for creditor |
Pledge vs Lien
- Pledge: Right to retain, sue, and even sell goods on default
- Lien: Only right to retain goods until payment is made
Pledge vs Mortgage
- Pledge: Only movable goods, possession transferred
- Mortgage: Can include immovable property, legal rights may transfer
- Pledge: No right of enjoyment (use) for creditor
- Mortgage: Mortgagee may have rights to enjoy property
Practical Example
- Pledge: A gives gold to a bank as security for a loan. The bank keeps the gold until repayment.
- Hypothecation: A takes a car loan and continues to use the car, but the bank has a right over it until the loan is repaid.
Summary
- Pledge involves transfer of possession of goods as security
- Hypothecation does not involve transfer of possession
- In pledge, creditor has more control and lower risk
- In hypothecation, borrower keeps possession and can use goods
- Pledge gives right to sell goods on default; hypothecation requires legal action
- Key difference: possession vs no possession