PPB Unit BChapter Notes5–7 Marks Expected

Different Modes of Charging Securities

Principles & Practices of Banking | Unit B · Chapter 26

The full legal machinery behind bank security creation — from the basics of a valid contract and the law of agency and bailment, through all seven modes of charge (assignment, lien, set-off, hypothecation, pledge, all six types of mortgage, and appropriation), to the registration of charges with ROC and CERSAI. Chapter 25 told you what to take as security; this chapter tells you how to legally attach the charge.

By Bankopedia.co.inUpdated 2026JAIIB PPB · Module B

📌 Why This Chapter Matters in JAIIB

Expect 5–7 questions from this chapter — it is one of the heaviest legal chapters in PPB. The examiner tests three clusters: (1) Contract law basics (what makes a contract valid, who can contract, minor's agreement); (2) The seven modes of charge — especially the precise legal definition of each, who holds possession, and when a bank can sell without going to court; (3) Registration — the 30-day ROC window, the three extra time windows, CHG-1/CHG-9 forms, and CERSAI. Lock in the PACO-CL essentials, the B-FAP general-lien holders, the six types of mortgage, the 12-year limitation for mortgage suits, and the distinction between fixed and floating charge.

Key Numbers & Legal References — Chapter 26 at a Glance

Sec 2(h) ICADefinition of a contract — agreement enforceable by law

Sec 11 ICACompetence to contract — sound mind, majority, not disqualified

Sec 171 ICABanker's right of general lien (implied pledge) over goods and securities

Sec 172 ICADefinition of pledge — bailment as security for debt or promise

Sec 176 ICAPawnee's right to sell pledged goods after notice on default

Sec 182 ICADefinition of agent and principal — contract of agency

Sec 148 ICADefinition of bailment — bailor and bailee

Sec 59–61 ICARight of appropriation of payments when debtor has multiple debts

Sec 130 TPAAssignment of actionable claims — must be in writing, notice to debtor

Sec 58 TPADefinition of mortgage (a)–(g): all six types plus anomalous

Sec 48 TPAPriority of mortgages — first in time has better title

12 yearsLimitation period for suit to sell mortgaged property (Art. 62, Limitation Act)

30 daysTime limit to register a charge with ROC after creation

30 + 30 + 60 daysExtended windows for ROC registration (with escalating fees)

CHG-1 / CHG-9E-forms for registering/modifying charge with ROC (CHG-9 for debentures)

CHG-5E-form for satisfying (releasing) a charge registered with ROC

CERSAICentral registry under SARFAESI for security interests — banks make filing compulsory

₹100Simple mortgage must be registered if principal secured ≥ ₹100

₹500 / 3 monthsMinimum arrear and notice period before exercising power of sale without court

₹20 lakhDRT threshold — recovery of dues ≥ ₹20 lakh can be filed in DRT

Sec 332 Co ActFloating charge created within 12 months of winding-up may become invalid

30 yearsPeriod for title search for mortgaged immovable property

B-FAPFour entities with statutory general lien: Bankers, Factors, Attorneys (HC), Policy Brokers

Section 1

Why Banks Need a Legal Framework for Security

The Core Logic

Banks protect their lending by taking security over a borrower's assets. The purpose is simple: if the loan goes unpaid, the bank falls back on the security and recovers its money by selling the charged asset. But a security is only as good as its legal enforceability. An asset becomes a valid security only through an agreement between bank and borrower that conforms to the relevant law — making the charge legally binding and actionable in court.

Two major laws govern security creation: the Indian Contract Act, 1872 (movable property — pledge, hypothecation, lien, assignment, bailment) and the Transfer of Property Act, 1882 (immovable property — mortgage). Charges created by companies must additionally be registered under the Companies Act, 2013 and security interests filed with CERSAI under the SARFAESI Act, 2002.

Key Statutes at a Glance

Indian Contract Act, 1872Pledge, hypothecation, lien, set-off, bailment, agency, assignment of actionable claims, appropriation

Transfer of Property Act, 1882Mortgage of immovable property (Sec. 58–99); assignment of actionable claims (Sec. 130); priority rules (Sec. 48)

Companies Act, 2013Registration of charges created by companies with ROC (Sec. 77); floating and fixed charges

Registration Act, 1908Compulsory registration of mortgage deeds (Sec. 17); priority of registered instruments

SARFAESI Act, 2002Definition of hypothecation (Sec. 2); CERSAI registration; enforcement without court for dues > ₹1 lakh

How the Bank–Customer Relationship Varies by Transaction

Customer deposits moneyBank = Debtor · Customer = Creditor (NOT a trustee relationship)

Customer borrows (loan/OD/CC/bills)Bank = Creditor · Customer = Debtor

Bank keeps valuables in safe custodyBank = Trustee + Bailee · Customer = Bailor

Bank collects cheques/remittancesBank = Agent · Customer = Principal

Locker rentalBank = Lessor · Customer = Lessee

⚠️ Exam trap — deposit ≠ bailment

Money deposited in a bank is NOT a bailment. The bank becomes the debtor, not a bailee. Bailment requires return of the same specific goods — once money is mixed with bank funds, it cannot be returned as the same notes/coins. Only custody of valuables (bonds, jewellery) constitutes bailment.

Section 2

The Seven Modes of Charge — Master Overview

🧠 Master Mnemonic — All 7 Charge Types

"All Lawyers Should Handle Property Matters Appropriately"

A — Assignment (transfer of actionable claims)

L — Lien (banker's right to retain goods — implied pledge)

S — Set-off (netting of mutual debts between bank and customer)

H — Hypothecation (movable property, no possession transfer)

P — Pledge (movable property, possession transferred to pawnee)

M — Mortgage (immovable property — six types)

A — Appropriation (directing payments across multiple debts)

Quick Comparison — All Seven Charges

Charge	Asset type	Possession	Law	Sale on default?
Assignment	Actionable claims (book debts, LIC)	N/A	TPA Sec 130	Via civil suit
Lien	Goods / securities in bank's hands	With bank	ICA Sec 171	Yes (implied pledge)
Set-off	Bank accounts	N/A	ICA / agreement	By netting accounts
Hypothecation	Movables (goods, vehicles)	With borrower	SARFAESI Sec 2	After taking possession
Pledge	Movables (gold, shares, goods)	With bank (pawnee)	ICA Sec 172	Yes, after notice to pawnor
Mortgage	Immovable property	Varies by type	TPA Sec 58	Depends on type / SARFAESI
Appropriation	FDRs / multiple loan accounts	N/A	ICA Sec 59–61	Not applicable

Section 3

Indian Contract Act — Essentials of a Valid Contract

Definition — Sec. 2(h), Indian Contract Act 1872

A contract is an agreement that is enforceable by law.

Contract = Agreement + Legal Enforceability

All contracts are agreements, but not all agreements are contracts. An agreement that cannot be enforced in a court of law is merely a social or moral obligation — not a contract. The Indian Contract Act governs virtually all banking transactions: deposits, loans, guarantees, letters of credit, collection of instruments, and agency services.

🧠 Mnemonic — 6 Essentials of a Valid Contract: "PACO-CL"

Proposal + Acceptance

A lawful proposal by one party must be accepted by the other. Accepted proposal = promise. Promisor makes the offer; promisee accepts it.

Agreement — oral or written

Valid contracts can be oral, but sale/mortgage of immovable property must be written AND registered; otherwise unenforceable in court.

Consideration

Something in return — both parties must give and receive something. Agreement without consideration is void (exceptions: natural love + written/registered; past voluntary act).

Object must be lawful

Purpose cannot be forbidden by law, fraudulent, immoral, or opposed to public policy.

Competence of parties (Sec. 11)

Must be: (i) of sound mind, (ii) attained majority (18 years), (iii) not legally disqualified.

Legal enforceability

Must not be expressly declared void by the Contract Act.

Free Consent — When It Is ABSENT

Consent is not freely given if caused by any of the following (contract becomes voidable at the affected party's option):

→Coercion (Sec. 15) — threatening or actual force
→Undue influence (Sec. 16) — dominant party exploiting the relationship
→Fraud (Sec. 17) — deliberate misstatement of facts
→Misrepresentation (Sec. 18) — honest but untrue statement
→Mistake (Secs. 20–22) — error as to facts or law

Types of Agreement / Contract

Void agreement

No legal effect at all — cannot be enforced by any party (e.g., agreement without consideration).

Voidable contract

Enforceable at one party's option but not the other's (e.g., consent obtained by fraud).

Void contract

Was valid once but later ceased to be enforceable.

Valid contract

Meets all six PACO-CL essentials; fully enforceable.

⚠️ Exam trap — Minor's Agreement is Void Ab Initio

A minor is any person below 18 years. An agreement made by a minor is void ab initio (null from the very beginning) — not merely voidable. The landmark case Mohiri Bibi vs Dharmodas Ghose (1903) settled this: a minor borrowed money and gave a mortgage. The Court held the agreement void; the lender could not recover the money paid to the minor. A guardian can contract on a minor's behalf, but the minor themselves cannot.

Consideration — Exceptions Where Not Required

→Natural love and affection between close relatives — agreement must be in writing AND registered.
→A past voluntary act that the promisor was legally compelled to do (e.g., A finds B's watch and returns it; B's promise to pay ₹100 is valid without fresh consideration).

Section 4

Contract of Agency (Sec. 182, Indian Contract Act)

Definitions

Agent: A person employed to act for another person, or to represent another person in dealings with third parties.

Principal: The person for whom the agent acts, or who is represented by the agent.

Key rule: No consideration is necessary to create a contract of agency. The agent creates contractual relations between the principal and a third party when they act on the principal's behalf.

Banking relevance: When a bank collects cheques, bills, or other instruments for a customer, the bank acts as the customer's agent.

Types of Agent Authority

Express authority

Given explicitly in spoken or written words (e.g., a power of attorney).

Implied authority

Inferred from the circumstances (e.g., a shop manager ordering goods in the owner's name — the owner lives elsewhere and has never prohibited it).

Extent of authority

An agent with authority to do an act has authority to do every lawful thing necessary to carry out that business.

Emergency authority (Sec. 189)

In an emergency, the agent may take such action as a prudent person would take in their own affairs — even without express instruction.

Key Agency Rules

→No delegation — an agent cannot sub-delegate unless authorised. A sub-agent is responsible to the original agent (not the principal) — except in fraud or wilful wrong.
→Exceeding authority — principal may ratify (confirm) or disown unauthorised acts. Ratification binds the principal retrospectively.
→Agent's accounts — must be rendered to the principal on demand.
→Agent dealing on own account — must disclose material facts. If concealed and the principal suffers, principal can repudiate the transaction.
→Principal is bound by all lawful acts of the agent within the scope of authority.
→Principal is liable for the agent's fraud committed within the scope of authority — even if fraud benefited the agent.

🧠 Mnemonic — Termination of Agency: "BREAD"

B — Business of agency completed

R — Renunciation by agent (agent gives up the agency)

E — Either party dying or becoming of unsound mind

A — Adjudication of principal as insolvent

D — Decision of principal to revoke agent's authority

Del Credere Agent

A del credere agent is one who, in return for extra commission (called del credere commission), not only acts as a salesperson or broker for the principal but also guarantees that the third party they contract with will fulfil their obligations.

If the third party defaults on payment, the del credere agent may become personally liable for that amount. The agent must have actively brought about the contract to claim this status.

Section 5

Contract of Bailment (Sec. 148, Indian Contract Act)

Definition & Key Terms

Bailment is the delivery of goods by one person to another for a specific purpose, on the understanding that on accomplishment of that purpose the goods will be returned or disposed of as the delivering party directs.

Bailor = the person who delivers the goods. Bailee = the person who receives them.

Banking relevance: Pledge of jewellery creates a bailor–bailee relationship. When a bank takes over a defaulting borrower's assets for recovery, bailment law applies.

🧠 Mnemonic — Bailee's Duties: "RICE"

Return

Goods must be returned on time with any profits or increase (e.g., a calf born to a bailed cow goes back with the cow).

Income

All income or profits from the bailed goods belong to the bailor.

Care

Bailee must take care of bailed goods as a prudent person would care for their own goods. No liability for loss if proper care is taken.

Extra use is compensable

If bailee uses goods beyond the agreed purpose or in an inconsistent manner, they are liable for any resulting damage.

Mixing of Bailed Goods

Mixed with bailor's consent

Both parties share interest proportionally in the mixed lot.

Mixed without consent (separable)

Each retains title; bailee bears all separation costs and resulting damage.

Mixed without consent (inseparable)

Bailor is entitled to compensation for the full loss in value.

Bailee's Lien & B-FAP Rule

If a bailee expends labour or skill on the bailed goods, they may retain the goods until paid for those services (particular lien).

B-FAP — General Lien Holders (no express contract needed)

B — Bankers
F — Factors (financiers dealing in receivables)
A — Attorneys of a High Court
P — Policy Brokers

These four can retain any goods bailed as security for a general balance of account — not just for the specific debt connected with those goods. All others need an express contract for this.

Section 6

Assignment & Lien

Assignment — Sec. 130, Transfer of Property Act

Assignment is the transfer of a right, property, or debt from an assignor to an assignee as security for a bank advance.

Actionable claim (Sec. 3 TPA): A claim to any debt (other than one secured by mortgage, hypothecation, or pledge) or beneficial interest in movable property not in the claimant's possession — which a civil court can grant relief on.

The transfer must be by a written instrument signed by the transferor. Notice to the debtor is required before the transfer.

→Assignee can sue the debtor in their own name — without involving the assignor.

→All rights and remedies of the assignor vest in the assignee on transfer.

→Assignee takes the claim subject to all liabilities the assignor faced — including the debtor's right of set-off.

→If the debtor (unaware of assignment) pays the original creditor, the payment is valid — assignee cannot re-demand from the debtor.

→Crown / Government debts get priority over bank dues — Dena Bank vs Bhikhabhai Parekh (AIR 2000 SC 3654).

What borrowers commonly assign to banks

Book debtsAmounts due from Government departmentsLife insurance policies (by endorsement on policy or separate deed; notice to insurer required)

Lien — Sec. 171, Indian Contract Act

Lien is the banker's right to retain possession of a debtor's goods and securities until the outstanding debt is fully repaid.

A banker's lien is an implied pledge — it carries the right to sell the retained goods if the debt is not paid (unlike a simple right of retention).

→Section 171 ICA gives banks an absolute right of general lien over all goods and securities received in the ordinary course of banking business.

→Lien applies automatically — no separate agreement is needed.

→Lien does NOT apply to goods left at the bank inadvertently (e.g., customer forgets a packet of share certificates) — not handed over in the normal course of business.

→Express or implied agreement to the contrary removes the lien.

→Lien and set-off cannot be exercised simultaneously against the same customer.

Negative Lien

A negative lien is an undertaking by the borrower to the bank that they will not create any charge over their immovable or movable assets without the bank's prior permission.

It relates to assets not in the bank's possession. It does not require registration with the Registrar of Companies or any other authority.

Section 7

Set-off

What Is Set-off?

Set-off is the statutory right allowing a debtor to apply an amount owed to them by the creditor against the amount they owe to the creditor — arriving at a net balance. In banking: a bank can adjust a debit balance in one customer account against a credit balance in another account of the same customer.

Salient Features of Set-off

→Both debts must be for certain (liquidated) sums — a future or contingent debt cannot be set off against a present debt.

→Cannot set off guarantor's credit balance until the guarantor's liability is determined.

→Cannot set off a credit balance in current account against a contingent liability (e.g., a bill discounted but not yet due).

→A sole proprietor's personal account can be set off against their business account (and vice versa) — legally the same person.

→Two firms with different names but the same set of partners — set-off is available between them.

→Lien and set-off cannot be exercised simultaneously — these are mutually exclusive rights.

Automatic Right of Set-off Arises On

✓Death, insanity, or insolvency of the customer

✓Insolvency of a partner or winding up of a company

✓Receipt of a garnishee order

✓Receipt of notice of assignment of a customer's credit balance

Set-off Availability — Quick Decision Table

Deposit in the name of	Loan in the name of	Set-off available?
Single person	Same person (jointly with others)	✅ Available
Partner in a firm	Partnership firm (same partners)	✅ Available
Sole proprietor	Same proprietary concern	✅ Available
Partnership firm	One partner only	❌ Not available
Trustee	Trust	❌ Not available
Dividend account	Loan account of the company	❌ Not available
Minor via guardian	Guardian personally	❌ Not available
Joint account	One of the joint holders only	❌ Not available

Section 8

Hypothecation

Definition — SARFAESI Act, 2002 (Sec. 2)

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

→Sometimes described as a 'mortgage of movable property' — borrower retains possession; bank holds only an equitable charge.

→Hypothecation differs from mortgage: mortgage = immovable property + transfer of interest; hypothecation = movable property + only an obligation to repay (no interest transferred).

→If the borrower actually hands over possession to the bank, the charge converts into a pledge.

When Hypothecation Is the Right Mode

→Goods that constantly change form (e.g., work-in-progress at a rice mill or oil expeller).
→Stock in a showroom or shop needed for day-to-day business.
→Any situation where physical transfer of goods to the bank is impractical.
→Normally granted only to customers of undoubted integrity — a company registered under Companies Act is preferred, since charge registration constitutes public notice.

🧠 Drawbacks — Mnemonic: "FRAME"

FFraud risk — borrower retains control and can deal dishonestly

RRe-hypothecation — same stock pledged to another bank without bank's knowledge

AAccount manipulation — borrower sells good stock, leaves obsolete items

MMultiple charges — goods may already be pledged elsewhere

EEnforcement on default is difficult, prolonged, and costly

Safeguards Banks Take

→Written undertaking from borrower: goods not charged elsewhere; all sale proceeds held for the bank.

→Prominent notice boards at storage premises: 'Goods hypothecated to [Bank Name].'

→Periodic stock statements with borrower's declaration on title, quality, quantity, and value.

→Physical inspection of goods and borrower's financial health at regular intervals.

→For company borrowers: charge registered with ROC within 30 days (extensions available: +30 days, then +60 days, with escalating fees). Non-registration voids the charge against liquidator and creditors.

→Security interest also registered with CERSAI.

→Sec. 332, Companies Act 2013: floating charge created within 12 months before winding-up may be void under certain circumstances.

Deed of Hypothecation — Key Clauses

→Borrower's request and the resulting hypothecation agreement

→Description, quality, quantity, market value of goods; declaration of clear absolute title; no existing encumbrance

→Undertaking: no further charge; all sale proceeds / insurance claims held for the bank

→Bank's right to inspect goods and all records at borrower's cost at any time

→Insurance of goods; policy endorsed and assigned in bank's favour

→Borrower to maintain the agreed margin of security at all times

→Continuing security clause — credit balance in CC does not extinguish the security

→Bank's right to recover balance from borrower if sale proceeds are insufficient

Section 9

Pledge (Pawn)

Definition — Sec. 172, Indian Contract Act, 1872

“Pledge means bailment of goods for the purpose of providing securityfor payment of a debt or performance of a promise.”

Pawnor

The person who delivers the goods as security (the borrower). Retains general ownership — only special property passes to pawnee.

Pawnee

The person who receives the goods (the bank). Holds special property; full ownership reverts to pawnor on repayment.

Modes of Delivery

Physical delivery

Actual handover of goods to the pawnee.

Symbolic delivery

Delivery of key to the godown where goods are stored — recognised by courts as valid pledge (Co-operative Hindustan Bank vs Surendar Nath Dey, AIR 1932 Cal 524).

Constructive delivery / Attornment

Warehouse keeper acknowledges holding goods on pawnee's behalf; or pawnor declares they hold goods on pawnee's behalf without physical transfer.

Trust Receipt

When a pawnee releases pledged goods to the pawnor to sell, the pawnor signs a trust receipt — an undertaking that they hold the goods and their sale proceeds in trust for the pawnee.

→Bank's rights as pawnee remain unaffected.
→If the pawnor becomes insolvent, the Official Receiver cannot claim the goods — they are held in trust for the bank.
→Without a trust receipt, possession of the pledge is lost and the pledge itself is lost.

🧠 Mnemonic — Pawnee's Rights: "RACES"

Retain goods

For the debt, all interest, and expenses properly incurred for preservation (Sec. 173).

Against third parties

Same remedies as the owner if goods are wrongfully taken or damaged.

Claim extraordinary expenses

Cannot exercise a lien for these; can only file a suit to recover them.

Enforce by three alternative options on default

Sue for the debt; OR retain goods as collateral; OR sell after giving the pawnor reasonable notice.

Surplus must be returned

If sale proceeds exceed the debt + costs, the surplus goes back to the pawnor.

Rights of Pawnor

→Right to receive reasonable notice before any sale of pledged goods.

→Right to surplus proceeds if sale realises more than the outstanding debt.

→Right to redeem goods at any time before the pawnee has actually sold them.

Pledge vs Lien vs Hypothecation

Feature	Pledge	Lien	Hypothecation
Possession	With pawnee (bank)	With bank	With borrower
Right to sell	✅ Yes (after notice)	❌ No	After first taking possession
Assignable	✅ Yes	❌ No	Varies
Survives loss of poss.	✅ With trust receipt	❌ No	N/A
Interest transferred	Special property	None	Equitable only
Action on default	Sell directly	Retain; can't sell	Take possession → sell

Landmark Pledge Cases

Morvi Mercantile Bank vs Union of India (AIR 1965 SC 1954)

Endorsement of railway receipts = valid pledge. Constructive delivery is sufficient. Bank as pledgee has rights of owner — entitled to recover goods value from railways on non-delivery.

Lallan Prasad vs Rahmat Ali (AIR 1967 SC 1322)

A pawnee can sue for money only if they are in a position to return the pledged goods when the pawnor repays. Cannot hold both a money decree and the goods.

Bank of Bihar vs State of Bihar (AIR 1971 SC 1210)

Government cannot seize pledged goods to recover its dues without paying the pawnee-bank what is owed to it first.

Standard Chartered Bank vs Custodian (AIR 2000 SC 1488)

Pawnee can sell pledged property along with any accretions after giving reasonable notice on the pawnor's default.

Section 10

Mortgage — All Six Types (Transfer of Property Act, 1882)

Definition — Sec. 58(a), TPA 1882

A mortgage is the transfer of interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an obligation.

Mortgagor

Borrower — transfers interest

Mortgagee

Lender — receives interest

Mortgage money

Principal + interest secured

Mortgage deed

Instrument effecting the transfer

🧠 Mnemonic — 6 Types of Mortgage: "Simple Conditions Usually Encourage Deposit Analysis"

S — Simple mortgage

C — Conditional sale

U — Usufructuary

E — English mortgage

D — Deposit of title deeds (Equitable)

A — Anomalous

Simple Mortgage (Sec. 58(b))

→No transfer of possession — borrower retains the property.
→Mortgagor personally binds themselves to repay the mortgage money.
→Mortgagee needs a court decree to sell the property.
→Mortgagor remains personally liable for any shortfall after sale.
→Mortgagee has no right to rents or produce of the property.
→Registration is mandatory if principal secured ≥ ₹100.

Mortgage by Conditional Sale (Sec. 58(c))

→An ostensible (apparent) sale that becomes absolute on default.
→If the mortgagor repays on time, the sale becomes void and property reverts.
→On default, mortgagor loses the right to redeem (foreclosure).
→No personal covenant to repay — lender cannot recover shortfall from other assets.
→Court intervention needed to make the sale absolute (foreclosure decree).

⚠️ Not preferred by banks — no personal liability; no recourse to other assets; court intervention required.

Usufructuary Mortgage (Sec. 58(d))

→Mortgagee gets legal possession and collects rents/profits to recover the debt.
→Rents and profits applied towards interest and/or principal.
→No personal liability for the mortgagor.
→Mortgagee cannot sue for sale or foreclosure.
→If mortgagor does not sue for redemption within 30 years, mortgagee becomes absolute owner.

⚠️ Not preferred by banks — recovery through rents is very slow; no personal liability.

English Mortgage (Sec. 58(e))

→Property is absolutely transferred to the mortgagee.
→Subject to condition: mortgagee retransfers on repayment of mortgage money.
→Mortgagor remains personally liable despite the absolute transfer.
→Mortgagee can sue for money and obtain a decree for sale.

Mortgage by Deposit of Title Deeds — Equitable Mortgage (Sec. 58(f))

→Created by depositing original title deeds with a creditor in a notified town (Kolkata, Chennai, Mumbai, and other towns notified by State Governments) with the intent to create a security.
→Three essentials: a debt + deposit of original title deeds + intention to create security.
→No written mortgage deed required — it is an oral transaction; no registration needed.
→A memorandum of entry (internal record) is prepared at the branch; stamp duty payable on it as per State law.
→For companies: charge must be filed with ROC.
→Most widely used type by Indian banks.
→Merits: quick, minimal formalities, no registration costs, no public disclosure of borrower's position.
→Demerit: on default, a court decree for sale is required unless a power-of-sale covenant is inserted (but then the deed must be stamped and registered, losing the simplicity advantage).
→Priority (Sec. 48, Registration Act): prevails over any subsequent mortgage on the same property.

Anomalous Mortgage (Sec. 58(g))

→Negatively defined: any mortgage that does not fit into the five types above.
→Must still satisfy the basic definition of a mortgage under Sec. 58.
→Usually a combination of two types (e.g., usufructuary + conditional sale; simple + usufructuary).
→Can be shaped by local custom and usage.

Six Mortgages — Side-by-Side Comparison

Type	Possession to mortgagee?	Personal liability?	Court needed for sale?	Registration?
Simple	❌ No	✅ Yes	✅ Yes	Mandatory (≥₹100)
Conditional sale	✅ Usually	❌ No	✅ Foreclosure decree	Mandatory
Usufructuary	✅ Yes	❌ No	❌ Not for foreclosure	Mandatory
English	✅ (absolute xfer)	✅ Yes	❌ Power of sale	Mandatory
Deposit of title deeds	❌ No	✅ Yes	✅ Usually	❌ Not required
Anomalous	Varies	Varies	Varies	Depends on type

Limitation Periods

Suit for sale of mortgaged property

12 years from when money became due (Article 62, Limitation Act 1963)

Suit for foreclosure

As per Article 63(a) from when the mortgage money became due

DRT jurisdiction

Recovery of dues ≥ ₹20 lakh from banks/FIs

Civil court

Dues < ₹20 lakh or not covered by SARFAESI

Sale Without Court (Sec. 69, TPA)

A mortgagee can sell without court intervention when:

→Power of sale expressly conferred in mortgage deed AND mortgagee is the Government.
→English mortgage (subject to TPA conditions).
→Power of sale expressly conferred AND property is in notified towns (Kolkata, Chennai, Mumbai).

Pre-conditions: Interest ≥ ₹500 in arrear for 3 months; OR written notice of principal money served and default for 3 months.

Also: SARFAESI Act allows enforcement without court for dues > ₹1 lakh on secured assets.

Leases of Immovable Property

A lease is a transfer of the right to enjoy property for a specified period, in consideration of rent or price. Lessor = landlord; Lessee = tenant; Premium = price; Rent = periodic payment.

A sale is an absolute transfer. A lease is a partial transfer — separating ownership from possession.

Agricultural / manufacturing lease (year to year)

6 months' notice to terminate

Any other lease (month to month)

15 days' notice to terminate

Lease > 1 year

Must be registered instrument

Other leases

By registered instrument or oral agreement + delivery of possession

For lending against leasehold rights: unexpired lease period must exceed the loan repayment period; tripartite agreement (bank–lessor–lessee) or NOC from lessor required.

Section 11

Right of Appropriation & Registration of Charges

Right of Appropriation (Sec. 59–61, Indian Contract Act)

When a borrower has multiple debts with the same bank and makes a payment, these sections determine which debt the payment applies to.

Debtor specifies (Sec. 59)

If the debtor indicates the debt at time of payment, the creditor must apply it accordingly — but the creditor may reject the payment entirely. Once accepted on the debtor's terms, the bank cannot redirect it.

Creditor chooses (if debtor silent)

The creditor may apply it to any lawful debt, including a time-barred one, but not a disputed one.

Neither specifies

Appropriated to debts in chronological order (earliest first); if equal in time, applied proportionally.

⚠️ Appropriation vs. Set-off — key exam distinction

FDR used to recover dues before maturity → Right of Appropriation. FDR used after maturity → Right of Set-off.

Fixed Charge vs. Floating Charge

Fixed Charge

→Attaches to a specific, identified asset.
→Company cannot deal with that asset freely without the creditor's consent.
→Created when a specific asset (land, specific machinery) is charged.

Floating Charge

→Hovers over the company's present and future assets generally (e.g., stock-in-trade).
→Company may deal with the assets freely in the ordinary course until the charge “crystallises.”
→Crystallisation (becomes fixed) on: winding up, cessation of business, or on occurrence of event specified in the charge deed.
→Floating charge created within 12 months before winding up may be void under Sec. 332, Companies Act 2013.

Registration with ROC — Companies Act, 2013 (Sec. 77)

Every company creating a charge must register it with the Registrar of Companies. Charges that must be registered include: book debts, immovable property, movable property (other than pledge), uncalled capital, floating charges, ships, goodwill/patents/trademarks/copyrights.

Within 30 days

Standard window — no extra fee

+30 more days (total 60)

Additional fee payable to ROC

+60 more days (total 120)

Ad valorem fee + ROC permission required

CHG-1

Create / modify charge (other than debentures)

CHG-9

Create / modify charge for debentures (including rectification)

CHG-5

Satisfaction (release) of a registered charge

⚠️ Effect of non-registration

Non-registration does not automatically void the charge. The charge remains valid as against the company as a going concern. However, it becomes void against the liquidator and creditors if the company goes into winding up — meaning the bank ranks as an unsecured creditor in those circumstances.

Registration with CERSAI — SARFAESI Act (Sec. 23)

Particulars of security interest (creation, modification, satisfaction) can be filed with CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest). Not technically mandatory under the statute — but banks make it compulsory in practice.

Filing with CERSAI constitutes public notice from the date and time of filing. Earlier filing = priority over later security interest on the same property.

What must be filed with CERSAI:

Mortgage by deposit of title deedsOther types of mortgageHypothecation of plant/machinery, stocks, book debts, receivablesUnder-construction residential/commercial propertyIntangible assets (patent, trademark, copyright, franchise, know-how)

Charges NOT requiring registration with any authority:

GuaranteeCharges arising by operation of lawHundi (negotiable instrument)

Registration Authority by Type of Charge / Security

Mortgage deed (all types except equitable)Registrar of AssurancesRegistration Act, 1908 (Sec. 17)

Equitable mortgage (deposit of title deeds)❌ No registration neededTransfer of Property Act, 1882

Charge by company (hypothecation/mortgage)ROC (within 30 days)Companies Act, 2013 (Sec. 77)

Security interest over propertyCERSAI (banks make it compulsory)SARFAESI Act, 2002 (Sec. 23)

Section 12

Exam Strategy — Chapter 26 Checklist

Things You Must Know Cold for the Exam

1.Contract = Agreement + Legal Enforceability (Sec. 2(h) ICA)

2.PACO-CL: 6 essentials of a valid contract

3.Minor's agreement is void ab initio — Mohiri Bibi case

4.No consideration needed to create a contract of agency

5.BREAD: 5 ways agency is terminated

6.Del credere agent = salesperson + guarantor for extra commission

7.Bailment = delivery of specific goods for a specific purpose (Sec. 148)

8.Deposit of money in bank ≠ bailment (debtor-creditor, not bailee-bailor)

9.RICE: bailee's four duties

10.B-FAP: four general-lien holders without express contract

11.Master mnemonic: All Lawyers Should Handle Property Matters Appropriately

12.Assignment: Sec. 130 TPA; must be written; notice to debtor; assignee takes subject to all liabilities

13.Lien: Sec. 171 ICA; implied pledge; no right to sell under simple lien

14.Lien and set-off cannot be exercised simultaneously

15.Negative lien: undertaking not to create charge; no registration needed

16.B-FAP general lien: Bankers, Factors, Attorneys (HC), Policy Brokers

17.Set-off: both debts must be certain; auto-arises on death/insolvency/garnishee/notice of assignment

18.Hypothecation: SARFAESI Sec. 2 definition; movable; no possession transfer

19.FRAME: 5 drawbacks of hypothecation

20.ROC registration: 30 days (+ 30 + 60 extension); CHG-1/CHG-9/CHG-5 forms

21.Non-registration: void against liquidator/creditors; valid against company as going concern

22.Pledge: Sec. 172 ICA; bailment of goods as security; pawnor/pawnee

23.RACES: pawnee's 5 rights; right to retain/sue/sell are alternative (not concurrent for sale/retain)

24.Trust receipt: bank's pledge rights survive even when goods released to borrower

25.Six mortgage types: Simple/Conditional Sale/Usufructuary/English/Equitable/Anomalous — mnemonic: Simple Conditions Usually Encourage Deposit Analysis

26.Equitable mortgage: most widely used; no deed, no registration; deposit of original title deeds in notified town

27.12-year limitation for suit to sell mortgaged property (Article 62, Limitation Act)

28.Sale without court: English mortgage or express power of sale in notified towns; pre-condition: ₹500 arrear for 3 months

29.DRT: ≥₹20 lakh; Civil court: <₹20 lakh; SARFAESI: >₹1 lakh secured debt

30.CERSAI filing = public notice; earlier filing = priority; banks make it compulsory

31.Appropriation vs. Set-off: before maturity = appropriation; after maturity = set-off

32.Floating charge crystallises on winding up / business cessation / specified event

33.Floating charge within 12 months of winding up may be void (Sec. 332 Companies Act 2013)

🎯 Highest-Yield Questions from This Chapter

→A minor executes a mortgage. The lender tries to enforce it. What happens? → Void ab initio (Mohiri Bibi). Lender cannot recover the money paid to the minor.
→Who holds a general lien without any express agreement? → B-FAP (Bankers, Factors, Attorneys of High Court, Policy Brokers).
→What is the usual form of contract of agency? → Power of Attorney.
→Banker's lien is defined as _____. → An implied pledge (with right to sell, unlike a simple right of retention).
→Hypothecation differs from mortgage in two ways. State them. → (1) Mortgage = immovable; hypothecation = movable. (2) Mortgage = transfer of interest; hypothecation = only obligation to repay.
→Simple mortgage is created by ___. → An instrument in writing (registration mandatory if principal ≥ ₹100).
→Under Companies Act, a charge includes ___. → A mortgage (Sec. 77).
→FDR appropriated before maturity = right of ___. After maturity = right of ___. → Appropriation; Set-off.
→The pawnee can sell pledged goods if pawnor fails to pay: True or False? → True (Sec. 176 ICA — after reasonable notice).
→What is the limitation period for a suit to sell mortgaged property? → 12 years from when the money became due.

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