Pledge by Way of Hypothecation

Pledge is a bailment of goods as security for the payment of a debt or performance of a promise. The goods are delivered to the creditor (called the pledgee) and the debtor (called the pledgor) retains the ownership of the goods. The pledgee has the right to sell the goods in case of default by the pledgor.

Hypothecation is a kind of security where the debtor pledges movable property as security for a loan, but the possession of the property remains with the debtor. The creditor (called the mortgagee) has the right to take possession of the property in case of default by the debtor.

Pledge by way of hypothecation is a combination of pledge and hypothecation. In this case, the debtor pledges movable property as security for a loan, but the possession of the property remains with the debtor. However, the creditor has the right to take possession of the property if the debtor defaults on the loan.

Here are some examples of pledge by way of hypothecation:

  • A person borrows money from a bank to buy a car. The person pledges the car as security for the loan. The bank does not take possession of the car, but it has the right to take possession of the car if the person defaults on the loan.
  • A company borrows money from a financial institution to finance its operations. The company pledges its inventory as security for the loan. The financial institution does not take possession of the inventory, but it has the right to take possession of the inventory if the company defaults on the loan.

Here are some MCQs on pledge by way of hypothecation:

  1. Which of the following is not a characteristic of pledge by way of hypothecation?
    • The possession of the property remains with the debtor.
    • The creditor has the right to take possession of the property in case of default by the debtor.
    • The property is always movable property.
    • The property is always used as security for a loan.
    • The answer is (c). The property can be either movable or immovable.
  2. A person borrows money from a bank to buy a car. The person pledges the car as security for the loan. The bank does not take possession of the car. If the person defaults on the loan, can the bank sell the car?
    • Yes, the bank can sell the car.
    • No, the bank cannot sell the car.
    • The bank can only sell the car if the person agrees to it.
    • The answer is (a). The bank has the right to sell the car in case of default by the person.
  3. A company borrows money from a financial institution to finance its operations. The company pledges its inventory as security for the loan. The financial institution does not take possession of the inventory. If the company defaults on the loan, can the financial institution sell the inventory?
    • Yes, the financial institution can sell the inventory.
    • No, the financial institution cannot sell the inventory.
    • The financial institution can only sell the inventory if the company agrees to it.
    • The answer is (a). The financial institution has the right to sell the inventory in case of default by the company.