Report No. 67

Chapter 30

Article 6

30.1. Introductory.-

While agreements, in general, are dealt with by Article 5, special agreements are dealt with in the subsequent article. Article 6 levies duty on an agreement relating to-(i) deposit of title-deeds, (ii) pawn, or (iii) pledge. Duty is chargeable on an instrument evidencing an agreement relating to such deposit, pawn or pledge where the deposit etc. has been made by way of security-(i) for money, advanced or to be advanced by way of loan, or (ii) for an existing or future debt. If it is an agreement relating to deposit of title deeds, the title deeds must relate to property other than a marketable security1. If it is an instrument of pawn or pledge, the pawn or pledge must be of movable property. The article is not confined to loans on security of movable property. But, in practice, most instruments falling under the article relate to movable property.

1. As to deposits of marketable securities, see section 23A.

30.2. Transactions by way of security.-

The principal legal transactions as a result of which a person may create a security in favour of another, so far as movable property is concerned, are mortgage, charge, pledge end hypothecation. In mortgage, there is a conveyance of an interest1 in property as security for the payment of a debt or for the discharge of some other obligation2. In a charge, there is no conveyance of interest in the property, but the charge simply confers upon the charge-holder certain rights over the property. Mortgages are separately dealt with by Article 40.

1. Compare the definition of "mortgage deed" in section 2(17).

2. Lord Chorley Law of Banking, (1974), p. 289.

30.3. Pledge.-

A pledge is a species of bailment. In the leading English case on bailments-Coggs. v. Bernard, (1703) 2 Ltd Rayni 909. -Holt, C.J., enumerated various types of bailments, of which the fourth was vadium, that is, delivery of goods by a debtor to his creditor, to be kept by him until the debt is discharged. A pledge is to be distinguished from a mortgage, inasmuch as there is no transfer of property in the goods and, accordingly, no incidental right of foreclosure. This distinction was strikingly illustrated in one of the English cases1, where the pledge of a picture of Madonna and the child, attributed to a famous painter, was refused a foreclosure order, there being no mortgage.

Under the Indian Contract Act, the bailment of goods as security for payment of a debt or performance of a promise is called a pledge2 It should be pointed out that that Act uses the expressions "pawn" and "pledge" as equivalents of each other. In fact, in the definition of "pledge" in that Act, the bailor is called the pawnor, and the bailee is called the pawnee. The element of bailment (transfer of possession) is an essential element of pledge3. A "pawn" is really another name for a pledge, though it is sometimes taken as indicating those transactions of pledge where the person taking pledge does so as a matter of business. In England, legislation relating to pawn-brokers imposes certain restrictions on this kind of business.

1. Fraser v. Byas, (1895) 11 Times Law Reports 481.

2. Section 172, Indian Contract Act, 1872.

3. LaIlan Prasad v. Rahmat Ali, AIR 1967 SC 1322: (1967) 2 SCR 233.

30.4. A mere license to take possession, given to the creditor, is not a pledge1, though it may amount to hypothecation. The twin elements requisite for a pledge-(i) security, and (ii) delivery of possession-furnish a basis for distinguishing it from other allied transactions.

1. Persons (ex parte), 16 QBD 532.

30.5. Pledge intermediate between lien and mortgage.-

In his judgment in Halliday v. Holgate, 1868 LR 3 Exch 399, J., described a pledge as a security intermediate between a lien and a mortgage. By contract, a deposit of goods is made a security for a debt, but the right to the property vests in the pledge only so far as is necessary to secure the debt.

30.6. Hypothecation.-

Mortgage, charge and pledge were well-known to common law lawyers. Hypothecation on other hand, is a civil law institution. The word is derived from "hypotheca". It was introduced in England through international trade. It was treated as effective in equity, bring regarded as the equivalent of a charge. It is a legal transaction as a result of which goods are made available as security for a debt without transferring either the property in them or the possession to the lender1. It may, in brief be described as a security for a debt, which security remains in the possession of a debtor.

The security is granted by means of a letter of hypothecation. There are two principal situations where hypothecation is convenient, because a pledge is not practicable. The first is when the goods are temporarily in the custody of third parties2. The second is where the goods are stored in the customer's own warehouse, which cannot be sealed off in such a way as to enable the bank to become a pledgee. Where it is practicable to seal off the godown, the practice is to hand over the keys to the bank, in order to give the bank constructive possession of the goods-thereby creating a pledge3.

1. Lord Chorley Law of Banking, (1974), p. 291.

2. See, Hamilton Young and Co. (in re:), (1905) 2 KB 772.

3. Lord Chorley Law of Banking, (1974), p. 322.

30.7. Lien.-

A lien, answering to the tacita hypotheca of the Civil Law is a right conferred by law, and not by contract, upon one man to retain possession of, or to have a charge upon, property real or personal belonging to another, until certain demands are satisfied1.

1. Fisher Law of Mortgage, 6th Edn., para. 5 cited by Donough Stamp Act, Commentary on Article 6.