Tools of establishing banker’s right over assets of the borrower

(This article explains how the actional claim, bailment, charge creation, hypothecation, lien, right of set-off, pledge, assignment, Trust receipt, etc. establish the right to recover from the specified assets of the borrower.)

The charge creation means the establishment of the lender’s right to recover from the specified assets of the borrower, in case the recovery is difficult in the normal course. The mode of bank charge on different securities depends upon the nature of the facility and type of security. Banks grant loans or extend CC facilities against marking a lien on term deposits of the customer. Loans are granted against the Assignment of Life Insurance policies and National Saving Certificates. Cash Credit or overdraft facilities are also extended to customers against hypothecation or pledge of stocks and receivables. Term loans are granted against the hypothecation of machinery. Mortgages of land and buildings are examples of securities held by the bank against term loans and deferred payment guarantees offered by banks and financial institutions. A third-party guaranty offered to the bank is also a form of security offered to the bank. As a result, Banks establish their rights over different securities by way of lien, pledge, hypothecation, Assignment/ actionable claim, Trust Receipt, etc.

Right of set-off: The right of set-off means that a customer is having one or more accounts with the bank in credit balance. The customer also owes money to a banker in another account or other accounts. In the above circumstance, then the banker has the right to reduce the amount which the borrower owes to him from the credit balance available in his other account/s. This right of a banker is known as the right of set-off or the right of combining accounts. The right of set-off is available to the bank only when the money owed to the bank is a certain sum, which should be due at the time of set-off and there shall not be an agreement, express or implied to the contrary.

Lien: Lien is akin to bailment. It is the right to retain goods or securities belonging to a debtor until dues are paid fully to the retainer (the creditor). No special agreement is necessary for creating the right of lien. Banks are conferred with the right to retention of goods or security ( such as cheques, bills of exchange, deposits, etc,), by way of general lien, until some claim attaching to it, is satisfied or discharged. The lien extends to all such documents under which money will or may be payable to the customer.

Pledge: A pledge is only a special kind of bailment where the object of the delivery of assets/goods is to provide security for a loan or for the fulfillment of an obligation. The essence of a pledge is the goods must be delivered to the possession of the pledgee, as a security for payment of debt and there should be a contract to return the same goods which were pledged after the debt is repaid. The delivery of goods may be actual or constructive.

Hypothecation: The lender’s right under the term “Hypothecation of assets” is not defined anywhere in the statute. However, hypothecation is defined in the SARFAESI ordinance as under;

“a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallization such charge into fixed charge on movable property”.

In hypothecation, neither the possession of assets nor the ownership of the assets is transferred to the lender (hypothecatee). The asset hypothecated remains under the possession of the borrower and he is free to deal with it. The securities commonly covered under hypothecation are goods, book debts machinery, and furniture.

Assignment: Assignment is when the rights, title, and interest in debts due or accruing due to a person are transferred to another person. Actionable claim means any claim other than the debt to the mortgage of immovable property or hypothecation or pledge of goods and receivables. Thus the charge by way of assignment can be created on the actionable claim by an instrument in writing signed by the assignor (Transferor) or through his duly authorized agent. The debts which are sought to be assigned may be present, future, conditional, or contingent charges by way of assignment that can be created under actionable claim. The transfer of Life Insurance Policies, National Saving Certificates, Supply bills, etc, to the name of the bank for the purpose of borrowing are examples of assignments.

Actionable claim: Section 3 of the Transfer of Property Act 1882 defines actionable Claim;

“a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in possession, either actual or constructive, of the claimant, which the Civil Court recognizes as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent”.

The actionable claim can be assigned to anyone except to a judge, a legal practitioner, or an officer of the Court of Justice. Arrears of rent, PF credit, life Insurance Policy claims, money due under a will, under a contract, and money receivable under the sale of property are examples of actionable claims.

“Trust Receipt”: In “trust receipt” under the contract of pledge, the borrower gets his assets/goods released from the pledge, only on full payment of his dues which automatically terminates the contract of pledge. The purpose of a “Trust Receipt” is that allows bankers to maintain the original charge under the pledge and if the customer becomes insolvent, the official assigner/receiver cannot claim the goods for the benefit of unsecured creditors.

Difference between Lien and Pledge
Trust Receipt under the contract of pledge

The essence of the Pledge and Pledgee’s rights & duties
Definition of Assignment and actionable claim

Difference between Assignment and Negotiation

Surendra Naik