CHARGE

Learning Objectives:

To understand the meaning of a

charge
To understand the different
types of charges

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 CHARGE

• 2.1 Introduction
• The term charge refers to a legal
right on the assets that have
been given by the borrower as
security for the loan/advance/
facility extended by the bank.
• The charge gives the bank the
right/ability to possess the
asset should the borrower default
and to sell the asset in order to
realize the amount due.

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 CHARGE
• KINDS OF CHARGE
• The different kinds of charges made to secure
loans are as follows:
Lien
Pledge
Hypothecation
Mortgage
Sub Mortgage

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 CHARGE
• KINDS OF CHARGE : contd
Assignment
First charge
Second charge
Pari passu charge
Floating charge
Trust receipt

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 CHARGE
• Lien
• The banker gets the right to retain the security
in the capacity of a lender till payment is
made by the borrower.
• If a loan is taken pledging fixed deposits the
customer has with the bank, the bank usually
takes the fixed deposit receipt from the
customer and stamps it with the words “on
lien”.

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 CHARGE
• Pledge :Section 172 of the Indian Contract Act,
1872 defines pledge as “bailment of goods as
security for payment of a debt or performance of
a promise”.
• Pawner or Pledger = Person who offers the
security
• Pawnee or Baille or Pledgee = Person who
accepts the security as bailment.
• Objective of bailment = To hold goods as security
for the payment of debt or for the performance
of a promise.
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 CHARGE
• Bailment: Section 148 of Indian Contract Act,
1872 defines bailment as , “delivery of goods
from one person to another for some purpose
upon the contract that the goods be returned
back when the purpose is accomplished or
otherwise disposed of according to the
instructions of the bailor.”
• The borrower and lender should have an oral
or written contract to pledge the property

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 CHARGE
• The Banker as a pledgee :
• The Banker as a pledgee has the right to retain
the goods pledged for payment of debt or
performance of promise.
• The banker can retain the goods as security
for the amount of interest and the expenses
incurred in connection with the possession
and upkeep of the goods pledged.

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 CHARGE
• WHO CAN PLEDGE GOODS?
• Goods can be pledged by anyone who is in
legal possession of the same namely :
The owner of goods
The mercantile agent of the owner
Joint owner with the consent of the co-owner
AND MANY MORE..

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 CHARGE
• Important Legal aspects of pledge:
• The pawner or pledger remains with the
owner of the property except to the extent of
interest which rests with the pledge because
of the loan borrowed from the bank.
• Pledge is not created in respect of future
goods. The goods must be specific and be
capable of identification

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 CHARGE
• Rights of a banker as pledgee :
• Right to retain the goods pledged for the
payment of the debt or performance of the
promise and also the amount of interest due on
the debt and expenses incurred by him that are
required in relation to goods.
• Right to either file a civil suit against the pledger
for the amount due and retain the goods as a
collateral security or the right to sell the goods
pledged after giving the pledger reasonable
notice.

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 CHARGE
• Rights of a banker as pledgee :contd.
 If the pledgee suffers some loss due to the non-
disclosure of information by the pledger then the
pledger will be held responsible.
 If the title of the pledger to the goods pledged is
defective and if the pledgee suffers any loss due
to this fact,the pledger will be responsible.
 If the pledgee has consented due to inducement
by fraud or misrepresentation by the pledger, the
contract is voidable at the option of the pledgee.
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 CHARGE
• Rights of a banker as pledgee :contd
• A pledgee’s rights are not limited to his
interest in the pledged goods. He would have
all the remedies that the owner of the goods
would have against a third person for
deprivation of goods or injury to them.

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 CHARGE
• Duties of a Pledgee :
The pledgee is bound to return the goods on
payment of the debt.
It is the duty of the pledgee to restore the
goods to the pledger or to deliver the goods
according to the directions of the pleger as
soon as the obligation to repay the amount is
discharged.

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 CHARGE
• Duties of a Pledgee :
 The pledge is responsible to the pledger for any
loss, destruction or deterioration of the goods, if
the goods are not returned by the pledgee at the
proper time.
 The pledgee is bound to use the goods pledged
according to the agreement between the two
parties. He is also liable to make compensation to
the pledger if he suffers any damage due to
unapproved use of goods pledged.
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 CHARGE
• Duties of a Pledgee :
 The pledgee is also bound to deliver to the
pledger any increase of profit which may have
incurred from the goods bailed in absence of an
agreement to the contrary.
 The pledgee is bound to take as much care of the
goods as a man of ordinary prudence would,
under similar circumstances, take of his own
goods of the same bulk, quantity and value as the
pledged goods.
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 CHARGE
• Advantages of pledge:
 The goods will be in possession of the bank and it
can be liquidated at the instance of the banker.
Whenever the borrower is at default, the banker
can immediately clear the stock and appropriate
the proceeds towards the loan outstanding.
 Whenever stock is pledged it cannot be
misappropriated as it will be under the control of
the banker.
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 CHARGE
• Advantages of pledge:
 A second charge of the pledged property is not
possible as the banker holds possession of the
property.
 If the pledger becomes insolvent, the banker is
secured to the extent of the value of the goods
pledged and the pledged goods cannot be taken
possession of by the official receiver.
 In case of loss of goods, the amount can be
claimed from the insurance company.
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 CHARGE
• Hypothecation :
Hypothecation is a charge against movable
property for an amount of debt where neither
ownership nor possession is passed to the
creditor.
It is also called as open loan.
The borrower gives a letter stating that the
goods are hypothecated to the banker as
security for the loan granted.
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 CHARGE
• Letter of Hypothecation:
• Empowers the banker to take possession of the property whenever
there is a default in repayment the amount advanced order to
liquidate the balance of the amount advanced.
• States that the property is free from encumbrances.
• Contains description of goods, their quality, quantity, value etc and
a confirmation that the particulars provided are true.
• Provision to apply the sale proceeds of the property hypothecated
towards satisfaction of the claim of the banker.
• Property hypothecated as security should be a continuing security,
for the balance due from time to time.

• Stipulate various other borrower’s responsibilities

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 CHARGE
• Precautions to be taken by banker:
• Banker should ask the borrower to submit a letter that the
goods hypothecated are not hypothecated to any other
bank and obtain periodical statements from the borrower.
• Bankers should make personal inspection of the
hypothecated goods and may ask for additional stock if he
feels that goods hypothecated are depreciating or its value
has gone down.
• Banks should place a board stating ‘hypothecated
to…bank’ in vicinity where the hypothecated property is
stocked.
• Hypothecated goods should be insured against burglary,
theft, fire, for full value.

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 CHARGE
• Precautions to be taken by banker:
• If the goods are owned by a joint stock company, the
charge created against the goods should be registered
within 30 days from such creation with the Registrar of
Companies. Otherwise the liquidator and the creditor
will claim the property.
• The banker should obtain the personal guarantee of
the directors of a company if the financial position of
the company is weak.
• The banker should keep the continuing security against
the advance made.

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 CHARGE
• Guidelines issued by RBI against risk of double financing:
• Restrict borrowing to only one bank as far as possible.
• Obtain written application accompanied by declaration
about existing credit arrangements and undertaking that
stocks will not be hypothecated to any other bank.
• In case the borrower is allowed to avail himself of credit
facilities against hypothecation of socks from various
banks, it should be ensured that stocks are segregated or
demarcated in different godowns/shops and same are
properly recorded in separate stock books so as to
facilitate easy verification by the bank officials.

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 CHARGE
• Mortgage :
• Section 58 of the Transfer of Property Act,
1882 defines mortgage as “the transfer of
interest in specific immovable property for the
purpose of securing the payment of money,
advanced or to be advanced by way of a loan,
an existing or future debt or the performance
of an engagement which may give rise to a
pecuniary liability.”

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 CHARGE
• Characteristics of Mortgage :
 Transfer of an interest in a specific immovable property.
 The object behind the transfer of interest in the property
must be to secure a loan or to ensure the performance of
an engagement resulting in monetary obligation.
 The mortgagee has the right to recover the amount of loan
out of the sale proceeds of the mortgaged property.
 The actual possession of the property need not always be
transferred to the mortgagee.
 The interest in the mortgaged property is re-conveyed to
the mortgagee on the repayment of the amount of the
loan with interest thereon.

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 CHARGE
• Kinds of Mortgage :
 1. Simple Mortgage
 2. Mortgage by conditional sale
 3. Usufructuary mortgage
 4. English Mortgage
 5. Mortgage by deposit of title deeds or
equitable mortgage
 6. Anomalous mortgage
 7. Sub-mortgage
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 CHARGE
• 1. Simple Mortgage : The mortgager binds himself to pay
the mortgage money but does not give possession of
property. The property should be registered irrespective of
the amount of money involved
• 2. Mortgage by conditional sale : The mortgager
ostensibly (conditionally) sells the mortgaged property.
Banker generally does not prefer this type of mortgage.
Foreclosure is the only remedy of the mortgagee.
• 3. Usufructuary mortgage: The mortgagor delivers or gives
possession or binds himself to deliver possession of the
mortgagee. The mortgagee retains possession until the
payment of the mortgage money. The mortgagee is also
entitled to receive rents and profits in lieu of interest, or
repayment of the mortgage money of both.
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 CHARGE
• 4. English Mortgage: The mortgagor binds himself to repay the
mortgage money on a certain date and transfers the mortgaged property
absolutelyto the mortgagee on the condition that the mortgagee will
retransfer the property back to the mortgagor upon payment of the
mortgage money.
• 5. Mortgage by deposit of title deeds or equitable mortgage: Under this
mortgage, the person delivers to the creditor or his agent the document of
title to his immovable property with the intention of creating a security
and obtains a loan.
• 6. Anomalous mortgage: A mortgage which is not a simple mortgage, a
mortgage by conditional sale, a usufructuary mortgage, an English
mortgage or a mortgage by deposit of title deeds is called an anomalous
mortgage.
• 7. Sub-mortgage: Here the mortgagee transfers his interest in the
mortgaged property or creates a mortgage of a mortgage. This is known as
sub-mortgage.

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 CHARGE
• Rights of a mortgagor:
• 1. Right of redemption
• 2. Right of accession of mortgaged property
• 3. Right to inspection and production of
documents:

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 CHARGE
• Rights of a mortgagee :
• 1. Right to sue for mortgage money
• 2. Right to sale
• 3. Right of possession
• 4. Right in case of renewal of mortgaged
lease
• 5. Right of recovery of money spent on
mortgaged property
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 CHARGE
• Assignment :
• Assignment is the transfer of a right, property
or debt – present or future. The transferor is
the assignor and the transferee is the
assignee.

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 CHARGE
• Types of Assignment:
• (a) Legal Assignment : Legal assignment is an absolute
transfer of the actionable claim. It must be in writing
and signed by the assignor. The assignor informs the
debtor too of the assignment along with the assignor’s
name and address. The assignee would also serve a
notice on the debtor and seek his confirmation of the
balance.
• (b) Equitable Assignment : An equitable assignment is
one where the conditions for a legal assignment are
not met or fulfilled. The assignee cannot sue in his own
name.

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 CHARGE
• Actionable claims :
• Section 3 of the Transfer of Property Acts defines actionable claim
as “ claim to any debt, other than a debt secured by mortgage of
immovable property not in the possession, either actual or
constructive of the claimant, which the civil court recognize as
affording ground for relief, whether such debt or beneficial interest
be existent, accruing, conditional or contingent.”
• Borrowers assign actionable claims to the bank from whom the
loan has been taken. Borrowers normally assign :
•  Book debts
•  Money due from government or semi government
organizations
•  Life insurance policies

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 CHARGE
• First charge :A first charge on the assets secured,
means that on default the bank can seize and sell
the asset.In case of winding up, the bank would
be able to possess the asset and sell it to realize
its dues. Hence a bank must always try to ensure
that it has a first charge on the assets secured.
• Second charge : A second charge on the assets
secured means that the bank is entitled to the
asset only after the claim of the holder of the first
or prior charge.

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 CHARGE
• Pari passu charge :A pari passu charge on the
assets secured means that the claim on the
assets hypothecated are equal.
• Floating charge: In case of a floating charge on
the assets of the company, both present and
future, the bank does not have a specific charge
on any asset but has a claim on all the assets of a
company after the claims of those who have a
priori claim is satisfied.
• A floating charge is inferior to a first, second and
paripassu charge on the specific assets.

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 CHARGE
• Trust receipt : A trust receipt is a document
executed by a customer stating that he holds
the goods “in trust” for the bank for the loan
advanced.
• The customer would agree to keep the goods
separate from his other goods and when ever
they are sold the bank would be paid to
reduce the customer’s indebtedness.

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 CHARGE
• CERTAIN MATTERS SHOULD BE CONSIDERED BY A
BANKER BEFORE ACCEPTANCE OF A SECURITY AS
COLLATERAL FOR AN ADVANCE:
• 1. Ready conversion
• 2. No Encumbrance
• 3. Stable price
• 4. Safety
• 5. Return or yield
• 6. Margin
• 7. Valuation
• 8. Other aspects

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 CHARGE

Next Chapter 3
‘Banking Facilities’ ’

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