Pledge and Hypothecation | Law of Contracts - CLAT PG PDF Download

Pledge and Hypothecation

Pledge and hypothecation are both methods of securing a loan or the fulfillment of a promise using movable property as collateral. However, they differ in terms of possession and rights associated with the property.

 Pledge 

• In a pledge, the debtor (pawnor) transfers possession of the movable property to the creditor (pawnee) as security.
• The pawnor loses possession of the property and the right to deal with it.
• The pawnee has the right to sell the pledged property to recover the loan amount if the debtor defaults.

 Hypothecation 

• In hypothecation, the debtor retains possession of the movable property while using it as security for a loan.
• The debtor has the right to deal with the goods, but must adhere to the terms of the contract.
• Hypothecation involves the transfer of rights or interests, but not possession.
• The creditor has the right to inspect the goods and, if necessary, sell them to recover the loan amount.

 Key Differences 

• Pledge involves the transfer of possession, whereas hypothecation involves the transfer of rights or interests without possession.
• In pledge, the pledgee (creditor) takes possession of the goods, while in hypothecation, the hypothecator (debtor) retains possession.
• Both pledge and hypothecation give the creditor the right to sue and sell the goods to recover the loan amount.

In summary, pledge and hypothecation are legal agreements used to secure loans with movable property, differing primarily in the transfer of possession and rights associated with the collateral.

The Differences Pledge and Hypothecation

[Question: 1754499]

 Pledge vs. Lien 

•  Pledge  creates a special property interest in the item pledged, while a lien is simply a personal right that the party can exercise when payment is due.
•  Rights  : In a pledge, the pledgee has the right to retain, sue, and even sell the pledged property. In contrast, a lien only grants the right of retention.
•  Possession vs. Rights  : A lien can be seen as the opposite of hypothecation. While a lien involves the transfer of possession, hypothecation involves the transfer of rights without possession.

 Pledge vs. Mortgage 

•  Pledge involves the transfer of possession of an item in exchange for a certain sum or as security for fulfilling an obligation. It grants the pledgee special rights, such as remedies in case of default.
• In a  mortgage , along with these special rights, legal rights are also transferred. For example, the right of enjoyment is not transferred in a pledge, but it is in a mortgage.