Mode of Charging of Security: Pledge, Hypothecation,Mortgage, Lien, Assignment & Set off

1. Mode of Charging of Security:Pledge, Hypothecation,Mortgage,Lien, Assignment & Set off Compiled By: JBSC, Dhaka

2. 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.

3. Classification of Charge (i) Fixed Charge (ii) Floating Charge (iii) Pari Passu Charge (iv) Second Charge

4. 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.

5. 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).

6. 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

7. Characteristics of a valid Pledge • The ownership of the goods remains with the pledgor. • Delivery of goods is necessary. • Pledgee has a right to retaining the goods for the security until final payment of debt. • Right to sell the goods after reasonable notice, if the borrower defaults.

8. 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

9. 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.

10. Characteristics of hypothecation • Only moveable assets and book debts can be hypothecated. • The charge is floating, present & future. • The stocks are constantly changing, as buying and selling are going regularly. • The lender has no effective control over the securities, as they are not in his possession, either actual or constructive.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. The situations which do not covered by banker's lien: • It does not extend to securities, which do not belong to the customer if the banker is aware of it. • Securities or valuables lying in safe deposit locker. • Securities deposited upon a particular trust. • Any security left in the banker's hand to cover a proposed advance that is subsequently declined.

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

21. 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.

22. 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.

23. Types of Assignment EquitableAssignment • If an assignment does not fulfill any of the requirements of a legal assignment, it is an equitable assignment.

24. 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.

25. 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.

26. Essential features ofSet-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

27. Automatic right ofSet-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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