Coverage of this Article
Difference between Pledge and Hypothecation
-Pledge is stipulated under Section 172 of the Indian Contract Act of 1872
Pledge Case Laws
-In Lallan Prasad vs. Rehmat Ali (1967), the SC observed that a pledge is a unique type of bailment in which the pledger guarantees his personal property to the pledgee as security in consideration for a debt.
Hypothecation Case Laws
-In Rehaboth Traders, By Partner R. vs. Canara Bank (1998), the Madras HC held that in circumstances of hypothecation, the creditor has a special and preferential right to recover the debt from the security.
Conclusion
-The main difference between a pledge and hypothecation from the borrower's perspective is that in the event of a pledge, the borrower must give over the property to the lender (banks), but in the case of hypothecation, the debtor does not need to transfer the property to the lender.
Difference between Pledge and Hypothecation
BASIS |
PLEDGE |
HYPOTHECATION |
| Statute | Pledge is stipulated under Section 172 of the Indian Contract Act of 1872. | Hypothecation is explained in Section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. |
| Definition | A pledge is applied when there is actual possession of assets as collateral. | Hypothecation is applied when there is no actual possession of the property. |
| Possession Of Property | Creditor or Lender. | Debtor or Borrower. |
| Legal Document | Deed of Pledge. | Hypothecation Agreement. |
| Parties | The parties to the pledge contract are the pawnor (borrower) and the pawnee (lender). | The hypothecator (borrower) and the hypothecatee (lender) are the parties to the hypothecation contract. |
| Transfer Of Possession Of Asset | Possession of the asset is transferred in the event of a pledge. | Possession remains with the debtor only in the case of hypothecation. |
| Exercising Of Rights | When the borrower fails to make payments under the pledge, the lender has the right to sell the asset to recover the outstanding amount. | In hypothecation, on the other hand, the lender does not have custody of the goods. Thus, he might initiate an action to recover his dues by taking possession first and then disposing of them. |
| Example | An example of a pledge is a Gold Loan. | An example of a hypothecation is a car Loan. |
Pledge Case Laws
- In Lallan Prasad vs. Rehmat Ali (1967), the SC observed that a pledge is a unique type of bailment in which the pledger guarantees his personal property to the pledgee as security in consideration for a debt. The Court ruled that any kind of moveable property can be pledged.
- In Blundell Leigh vs. Attenborough (1921), the Court held that even though the plaintiff delivered security to the jeweller before the money was provided by the jeweller, a legitimate contract of the pledge was constituted, and the money was advanced by the jeweller in obedience of that contract.
Hypothecation Case Laws
- In Rehaboth Traders, By Partner R. vs. Canara Bank (1998), the Madras HC held that in circumstances of hypothecation, the creditor has a special and preferential right to recover the debt from the security. In this case, the creditor is considered a secured creditor, and his claim to recover takes precedence over all other creditors.
- In Appa Rao vs. Salem Motors and Salem Radios (1955), the plaintiff pledged motor cars to the defendant, but custody remained with the plaintiff, who utilized the vehicles for demonstration purposes. The Madras High Court ruled that a pledge becomes hypothecation when the assets to be given as security stay in the debtor's possession rather than the creditors.
Conclusion
The main difference between a pledge and hypothecation from the borrower's perspective is that in the event of a pledge, the borrower must give over the property to the lender (banks), but in the case of hypothecation, the debtor does not need to transfer the property to the lender. Apart from this minor distinction, the rights and responsibilities of the parties under both notions are comparable, so the idea of hypothecation can be considered an extension of the concept of the pledge.
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