Types of Charges on Securities & Mortgages in Banking: 25 Questions & Answers

Types of charges based on possession:
• Pledge (Contract Act): Lender holds physical possession (e.g., gold loan).
• Hypothecation (SARFAESI): Borrower retains physical possession (e.g., car loan).

Essentials of Equitable Mortgage:
• Debt: There must be an existing or future debt.
• Deposit: Physical delivery of original title deeds.
• Location: Must be transacted in towns explicitly notified by the State Government (e.g., Mumbai, Kolkata, Chennai).

Core elements of a valid pledge:
• Delivery of Possession: The most critical element. The lender (pledgee) must take actual or constructive possession of the goods (e.g., gold ornaments, warehouse receipts).
• Ownership Retained: The borrower (pledgor) retains legal ownership of the goods; only possession is transferred.
• Return upon Repayment: The exact goods must be returned once the debt is discharged.

Key aspects of the General Lien:
• Ordinary Course: The asset must be received in the bank’s capacity as a banker, not merely as a safe-keeper.
• Implied Pledge: In banking law, a general lien is historically treated as an “implied pledge,” meaning the bank ultimately holds the right to sell the securities after reasonable notice.
• Absence of Contrary Contract: It applies only if there is no specific agreement restricting this right.

The fundamental rule of Set-Off is Mutuality:
• Same Right & Capacity: The funds must belong to the customer in the same right and capacity. A personal account and a partnership account are held in different capacities.
• Due Debts: The debt must be certain, currently due, and payable (a future or contingent debt cannot be set off).

Key characteristics of an Anomalous Mortgage:
• Hybrid Nature: It is usually a combination of two or more mortgage types (e.g., a Simple-Usufructuary mortgage, where the borrower bears personal liability but also hands over possession).
• Governing Terms: The rights and liabilities of the parties are determined strictly by the specific terms of the contract they drafted, rather than standard statutory defaults.

Distinguishing features of an English Mortgage:
• Absolute Transfer: The legal ownership actually passes to the mortgagee, unlike a simple mortgage where only an “interest” is transferred.
• Personal Liability: The borrower is personally bound to repay, allowing the bank to sue for the money or sell the property without court intervention (under specific conditions of Section 69 of TPA).

Mortgage vs. Charge:

Electronic Pledge Mechanism:
• Creation: The pledgor (borrower) initiates a pledge request via their Depository Participant (DP).
• Confirmation: The pawnee (bank) confirms the request through their own DP.
• Constructive Possession: The depository (CDSL/NSDL) electronically “locks” the specified shares so they cannot be sold or transferred by the borrower, satisfying the legal requirement of delivering possession.

Core Rules of Factoring:
• Mandatory Registration: Centralized registration of the assignment on the CERSAI portal within 30 days is legally required to prevent double-financing of the same invoices.
• Absolute Transfer: The factor steps completely into the shoes of the business and can legally demand payment directly from the buyers (debtors).

Characteristics of a Negative Lien:
• No Possessory Right: It does not give the bank the right to seize, sell, or take possession of the asset.
• Purpose: It simply guarantees the bank that the borrower’s unencumbered assets will remain unencumbered, providing a cushion of general net worth.
• Breach Consequence: If the borrower breaches this undertaking and mortgages the asset to a third party, the bank can only sue for breach of contract, but the third party’s registered mortgage remains perfectly valid.

Termination of Lien (Section 49):
• Delivery to Carrier: If goods are handed to a railway or courier without instructions to hold them back, possession (and thus the lien) is lost.
• Lawful Possession: If the buyer lawfully takes the goods, the lien ends.
• Waiver: The seller can voluntarily waive it.

Rules of Notice for Actionable Claims:
• Validity vs. Protection: The assignment is perfectly valid without notice. However, notice is mandatory to protect the bank’s right against the debtor.
• The Debtor’s Shield: If a debtor, acting in good faith without receiving written notice, pays the original creditor (XYZ Ltd), the debtor is legally discharged from the debt.
• The Bank’s Remedy: The bank (City Bank) cannot sue the innocent debtor; it can only sue XYZ Ltd for misappropriating the funds.

Exclusions from Actionable Claims:
• Mortgages: Debts secured by immovable property are explicitly excluded.
• Pledges & Hypothecations: Debts secured by movable property are explicitly excluded.
• Negotiable Instruments: Promissory notes and cheques are governed separately by the NI Act, 1881, not as actionable claims under the TPA.

Mechanics of Pari Passu Distribution:
• Pro-rata Sharing: When the realized value of the collateral is insufficient to cover all debts, the proceeds are distributed strictly in proportion to the outstanding loan amount of each creditor.
• The Calculation: Total Debt = ₹100 Crores. Bank X’s share = 60%. Bank Y’s share = 40%. Therefore, of the ₹50 Crore sale proceeds, Bank X receives 60% (₹30 Cr) and Bank Y receives 40% (₹20 Cr).

The chain of a Sub-Mortgage:
• Primary Relationship: Borrower ‘A’ mortgages a house to Bank ‘B’ for a ₹50 Lakh loan. Bank ‘B’ now holds a “mortgagee’s interest.”
• Derivative Relationship: Bank ‘B’ needs cash, so it sub-mortgages its interest in A’s house to the RBI or another bank (Bank ‘C’) for a ₹30 Lakh loan.