A 'Different' Series #19: Pledge Vs Hypothecation

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

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.