Chapter- 16

Modes of Creating Charge

by

Abdullah Al Masud
Lecturer
Southeast Business School
Southeast University
 INTRODUCTION
• Lending is an important function of a
commercial bank.
• While lending, a bank has to keep three
important principles in mind, viz., liquidity,
profitability and safety.
• In order to make a safe investment in loans
and advances, banks usually insist upon
security of some tangible assets.
• But a security of tangible asset is of no use
unless it is properly charged in favor of the
bank. A bank can recover the loan in case of
default by the borrower by disposing of the
securities only if they are properly charged in
•
favor of the bank.
 Modes of Creating Charge
• The various modes of creating a charge are as
follows:

A. Lien
B. Pledge
C. Mortgage and
D. Hypothecation.
 Lien

❖ Lien is the right of a creditor to hold

possession of the goods of the debtor
till he discharges his debt. Right of lien
entitles the creditor to retain the
security or goods belonging to the
debtor till the payment of debt.
 Pledge
❖ Pledge is the bailment of movable property to
secure the payment of debt or the performance of
a promise.
❖ The person who offers the security is called the
pledger or pawner and the creditor or the person
who accepts the security is called the pledgee or
pawnee.
❖ The person who delivers the goods is called the
‘bailor’ and the person to whom the goods are
delivered is called the ‘bailee’. Bailment may be
made for any purpose like repair, storing, security,
etc.
❖ But pledge is made only for a specific purpose,
i.e., as security for payment of a debt or
performance of a promise.
 Difference between Pledge and Lien
• Pledge is always created by a contract, whereas
no contract is necessary for a right of lien.
• In case of a lien, the party in possession of the
goods does not have in general any right to sell
the goods. In case of pledge, the creditor or the
pledgee has right to sell the goods in his
possession on the default by the debtor.
• Right of lien is lost with the loss of the possession
of the goods. But pledge is not necessarily
terminated by return of goods to the owner.
• Lien-holder can only hold the goods till the
payment is made. But a pledgee enjoys the right
to sue, right of sale and the right of lien.
 Mortgage
• Mortgage is a mode of charge created on
immovable properties, like land and buildings.
• It is the transfer of legal or equitable interest
in property as security for the debt.
• Mortgage, therefore, is a charge granted by
a borrower to a lender on part or whole of his
property for the repayment of a debt.
• The transferor is called “mortgager.” The
transferee is called “mortgagee.”
• The instrument or deed by which the transfer is
made is called the “mortgage deed.”
 Hypothecation
▪ In layman’s language mortgage of movable
goods is called hypothecation.
▪ In simple words, it is a pledge without
transferring the possession of goods. The
salient feature of hypothecation is that neither
the ownership nor possession is transferred.
▪ Instead a charge is created to give possession
of the goods to the lender (banker) whenever
he asks him to do so.
▪ The banker enjoys the right and powers of a
pledgee.
 Summary
• Lien - Lien is simply ‘Right to retain’ without
creditor’s ability to sell.
• Pledge - Asset movable | Possession with
Lender. Example: Loan against gold
• Hypothecation - Asset movable | Possession
with Borrower. Example: Car Loan
• Mortgage - Asset immovable | Possession
with Borrower. Example: Home Loan