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.
📌 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
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
How the Bank–Customer Relationship Varies by Transaction
⚠️ 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.
The Seven Modes of Charge — Master Overview
🧠 Master Mnemonic — All 7 Charge Types
"All Lawyers Should Handle Property Matters Appropriately"
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 |
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.
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).
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"
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.
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.
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.
What borrowers commonly assign to banks
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).
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.
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
Automatic Right of Set-off Arises On
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 |
Hypothecation
Definition — SARFAESI Act, 2002 (Sec. 2)
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"
Safeguards Banks Take
Deed of Hypothecation — Key Clauses
Pledge (Pawn)
Definition — Sec. 172, Indian Contract Act, 1872
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
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.
Mortgage — All Six Types (Transfer of Property Act, 1882)
Definition — Sec. 58(a), TPA 1882
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"
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.
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:
Charges NOT requiring registration with any authority:
Registration Authority by Type of Charge / Security
Exam Strategy — Chapter 26 Checklist
Things You Must Know Cold for the Exam
🎯 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.
Discussion
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