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Report No. 70

54.11. Classes.-

Real security may be created by contract or may arise by operation of law. In the former case, the security takes the form of mortgage, pledge or charges; in the latter, it is called a lien.

Real securities fall into three classes: First, those by which the creditor obtains proprietary rights over the subject-matter of the security but which do not depend on the creditor obtaining possession of such property,1 secondly, those by which the creditor does not obtain proprietary rights over the property, and which depend on his obtaining possession of the property,2 and; thirdly, those which do not depend on the creditor obtaining either proprietary rights over, or the possession, of the property.3

To each of the kinds of real security is incident a right in the creditor to make the property which is subject to the security answerable for the debt or other obligation, a right in the debtor to redeem the property by paying the debt or performing the obligation, and a liability on the part of the creditor upon such payment or performance to restore the property to the owner.4

1. I.e., mortgage securities.

2. I.e., pledge and the possessory lien.

3. Le., charges and non-possessory liens. This three-fold classification is given by Willes, J., in Halliday v. Holgate, 1868 LR 3 Exch 229 (302).

4. Fisher and Lightwood Law of Mortgage, (1969), p. 3.

54.12. Various classes of security.-

This is perhaps a convenient place for dealing briefly with the principal types of securities on property in England.1

The classic description of a mortgage was given by Lindley, M.R., in Santley v. Wilde,(1899) 2 Ch 474 (CA), in the following terms: "A mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given." In London County and Westminster Bank Ltd. v. Tompkins, (1918) 1 KB 515 (CA), the terms "mortgage" and "equitable charge" are discussed.

Mortgage-A mortgage is a form of security created by contract, conferring an interest in property defeasible (i.e. annullable) upon performing the condition of paying a given sum of money, with or without interest, or of performing some other condition. Realty or personality may be mortgaged. Mortgages of chattels are generally effected by bills of sale. A mortgage may be either legal or equitable.

A charge by way of legal mortgage of land has the same effect as a mortgagee2 without any legal estate being conferred on the mortgagee.

Pledge-A pledge or pawn is a security created by a contract and effected by a bailment of a chattel to the creditor to be kept by him until the debt is discharged. It is incomplete without actual or constructive delivery of the goods to the pledgee. The general property in the goods remains in the pledgor.

Charge and hypothecation-A charge is the appropriation of real or personal property for the discharge of a debt or other obligation, without giving the creditor either a general or special property in, or possession of, the subject of the security, e.g., an order upon a third party to apply money in his hands to the discharge of a debt, or a charge on reality for the payment of a specified amount. The creditor has a right of realisation by judicial process in case of non-payment of the debt.

Where goods are so appropriated the transaction is called hypothecation. And in most cases the documents used in connection with the transaction will require registration under the Bills of Sale Acts. The document setting out the terms of a pledge of documents of title is sometimes referred to as a letter of hypothecation, but, nevertheless, the transaction is pledge. Marine hypothecation may be way of bottomry or respondent.

1. Fisher and Lightwood Law of Mortgage, (1969), pp. 4-6.

2. Law of Property Act, 1925, section 81(1).

54.13. Roman law.-

Let us now discuss briefly the history of Roman Law. In early Roman Law, a pledge or mortgage in the sense of a mere security was altogether unknown, and was only very gradually evolved in three well-defined stages. The oldest conception of a pledge seems to have been a forfeiture,1 and it appears that the same root originally served for the expression of idea which were afterwards specialised as pledge, promise and bet or forfeit. Credit, as we all know, is the tardy growth of civilization and in primitive times a mere promise to pay, we may take, it counted for very little.2

The borrower, therefore had to give something in exchange for the loan to the creditor, to be restored to the debtor on repayment of the debt. The transaction would be closed for the time being, and only a right to redeem would be left, in modern legal language, to the debtor. In a word, the formula 'no debt' no mortgage' had no place in ancient law, as a promise to pay constituted no part of the transaction, which merely involved the surrender by the debtor of his property as a "gage" to be creditor.

If the pledgor failed to fulfil his engagement the pledge was forfeited, but the pledgor was not personally liable for the debt.

1. Ghose Law of Mortgage in India, (1902), p. 7.

2. Ghose Law of Mortgage in. India, (1902), p. 7.

54.14. Modem notion of pledge.-

The progress from the earlier idea of a forfeiture to the modern notion of a collateral security marks the difference between ancient and mature jurisprudence.1 In advanced systems of law a pledge merely creates a right interim enforceable by a sale of the property which is given to creditor by way of accessory security to a right in personam; and, as Professor Holland points out, the right does not extend further than is necessary for the sale of the pledge.2

1. Ghose Law of Mortgage in India, (1902), pp. 8, 9.

2. Holland Jurisprudence, p. 188.

54.15. Fiducia-Transfer of ownership.-

The oldest type of security known to the Romans was the Fiducia, which consisted in the formal transfer by the debtor of the ownership of his property to the creditor. The transfer was, however, subject to the condition that the creditor should reconvey the property on due payment of the debt. In this transaction not only was the debtor liable to forfeit his property however valuable, on non-payment of the debt however small, at the appointed time, but also he placed himself completely at the mercy of his creditor, who might sell or otherwise alienate the property to a stranger, in which case the debtor had only the right to bring an action for damages against the mortgagee. In this form of security the borrower incurred no personal liability.

54.16. Transfer of possession.-

But these were not the only drawbacks1. There were certain kinds of property which could not be transferred by emancipation or cessio in jure-the only modes by which a Fiducia could be created in Roman law, and this constituted a serious defect. A new mode of giving security, therefore, came into use in Rome. The Pignus, by which name the transaction was known, was a transfer not of the ownership but simply of the possession of the thing by the debtor to his creditor and thus came into existence.

In this form of security the debtor who retained his ownership was, no doubt, protected against any fraud or dishonesty on the part of the creditor, but the creditor could only detain the property for the purpose of compelling satisfaction. He could neither sell the pledge for the purpose of realising his dues, nor become the owner if the debt was not repaid. The pledge could only put a pressure on the will of the pledgor, who could not get back the property into his possession without fulfilling his engagement.

To summarise what is stated above, the Fiducia in which the debtor conveys his property conditionally to the creditor is the earliest type of a security. The next in order of time is the Pignus in which the debtor simply makes over possession of the pledge to the creditor. This form of security is followed by Hypothecation, in which the debtor does not part with ownership or possession, though the creditor acquires a real right in the nature of a servitude over the pledge. The law, however, is not yet fully developed.

It has yet to receive its crowing distinction the power of sale which is now of the very essence of a security. This, too, came in time, though it was one-of the tardiest endowments of Roman law: so that if the real purpose of a security is to enable the creditor to turn it into money even as against third persons without disturbing the possession of the pledgor before his title is determined by a sale of the pledge, that purpose was undoubtedly now attained in the Roman law in a manner which may be said to be almost perfect.

1. Ghose Law of Mortgage in India, (1902), p. 9.

54.17. Section 58(a)-Definition of 'mortgage'.-

We shall now consider the definition of "mortgage" as given in the Act, section 58(a). A mortgage is the transfer of an 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 engagement which may give rise to a pecuniary liability.

This is the principal definition, followed by a definition of four other expressions. The transferor is called a 'mortgagor' and the transferee, a 'mortgagee'. The principal money and interest, of which payment is secured for the time being, are called the 'mortgage money'. The instrument (if any) by which the transfer is effected is called a "mortgage deed".

The essential characteristics of a mortgage under this section, are three-viz.

(a) there must be a transfer of an interest;

(b) the interest must be in specific immovable property; and

(c) the transfer must secure the payment of a loan, an existing or future debt or the performance of an engagement which may given rise to a pecuniary liability.

As to the first requirement, where there is no transfer of an interest, a transaction is not a mortgage. This is one reason why charges are not regarded as mortgages, there being no transfer of an interest in property.1 In this connection, it is of interest to draw attention to "floating charge" or "floating security," commonly used in mercantile circles.

A floating charge is a charge which affects all the assets of a going concern expressed to be included in it, but not specifically affecting any item until some event occurs which causes it to crystallise into a fixed security. After the creation of the charge and until it crystallises as mentioned above, the person creating the charge carries on his business as usual, and can dispose of the assets in the ordinary course of business.2

It is not our intention to discuss in detail this type of charge, which is usually-but not exclusively-created by debentures of companies. The point to be made is that while there is an agreement of transfer of interest in property when a certain contingency arises, the difference between the fixed charge and a floating charge is that while the charge is floating, it is not fixed on any particular property, but it is secured on such asset as may be available when the contingency arises.3 This aspect has been brought out more often than once in the judicial decisions, of which it is enough to quote one in which Lord McNaghten observed:4

"A floating charge it ambulatory and shifting in its nature, hovering over and, so to speak, floating with the property, which it is intended to affect later, until some event occurs, or some act is done, which causes it to sit on the subject of the charge within its reach and grasp."

Ordinarily, where the debenture-holders appoint a receiver who takes possession of the assets of the mortgagor company comprised in the floating charge, it becomes crystallised and fixed on those assets.5

1. Lilingworth v. Houldsworth*, 1904 AC 355 (357);

Cf. section 125, Companies Act, 1948 and section 95, (English) Companies Act, 1948.

2. Union of India v. Coorg Estates Ltd., AIR 1963 Ker 301 (304).

3. Mansood A.G. v. Hunter, AIR 1943 Oudh 338 (353).

4. Illazgworth v. Houldsworth, (1904) AC 357 (358).

5. Saha Mmlho Das v. Mukand Ram, AIR 1955 Mad 331 (339).

54.18. Debenture.-

An ordinary form of debenture of a company contains a covenant by the company to pay the registered holder, or sometimes, the buyer of the debenture, a sum named, on a certain date, with interest. Then, there is a charge of such payment of the company's undertaking on all its property, present and future. The conditions usually provide that the money secured should become payable in a certain contingency. A floating security is an immediate equitable charge on art asset of the company for the time being,1 but it remains in no particular property, and the company is at liberty to deal with the property in the ordinary course of business, until it crystallises:-

(a) by the appointment of a receiver;

(b) by winding up;

(c) the happening of some agreed event.

In any of these three contingencies, the charge becomes fixed to the assets and effective, and gives the debenture holder priority over the general creditors.2

1. Fisher and Lightwood Law of Mortgage, (1969), p. 110.

2. Panama New Zealand and Australian Royal Company (in re:), (1807) 5 Ch Appeals 318.

54.19. Property outside India.-

We have stated above1 that a mortgage bears a dual character. It is a transfer of property, though the transfer is ancillary to a debt. Now, when the question arises whether the Act applies to a mortgage relating to property situated outside India, an interesting aspect arises for consideration. Should the transaction be regarded purely as a security, or should the "transfer" aspect of the transaction be regarded as material for the purpose? On principle, there can hardly be any doubt that the latter is the correct view.

1. Para. 54.1, supra.

54.20. This controversy was referred to by Ghose1.-

"The double aspect, so to speak, of a debt secured by a mortgage on land has given rise to a great deal of controversy. It was, for instance, at one time a very debatable point by what law the validity of mortgage of land situated abroad should be governed; but it is now settled that it is governed by the law of the situs, no distinction between recognised between an actual transfer and a mere executory contract, though continental jurists are still divided in opinion on the question.

In some systems, however, the validity of a mortgage made in a foreign country is not admitted without considerable reservations. Article 2128 of the Code Napoleon, for example, says: "contracts made in a foreign country cannot give a mortgage upon property in France unless there be stipulations contrary to this principle in the political laws, or in treaties." The reasons for this limitation will be readily intelligible to all students of French history. But for many purposes a mortgage is regarded only as personal property and if it is assigned, the formalities are regulated by the law of the country where the assignment is made.2

It should here be noticed that though a contract, entered into with the object of creating a charge upon land in a foreign country, may not be executed according to the law of that country, the English Court of Chancery will enforce the charge it the defendant resides within the jurisdiction.3 But the practice, although sanctioned by the municipal law of England, rests upon a very doubtful basis in "private international law.4 I must, however, reserve a fuller discussion of this rather difficult question for the concluding lecture."

1. Ghose Law of Mortgage in India, (1902), pp. 82, 83.

2. Story's Conflict of Laws, section 436, note (a); Jones, section 823.

3. Pollard, ex parte (in re:), 1840 Mont&Ch 239; Holthausen, ex parte (in re:), 1874 LR 9 Ch 772; Mercantile Investment Co. v. River Plate Trust Co., (1892) 2 Ch 303.

4. Perm v. Lord Baltimore, 1750; but see Story's Conduct of Laws, section 544; Norris v. Chambers, (1864) 29 Beav 346.

54.21. However, it is not very clear whether the Act contemplates a mortgage of property situated outside the territories to which the Act extends. On principle, it is still doubtful whether it contemplates such a mortgage at all. In general, in private international law, immovable property is governed by the substantive law of the country of situs-barring the special case of equitable jurisdiction employed to enforce a personal obligation. As a general proposition, rights over immovables are determined by the lex situs.1

In private international law as administered in England, it is specifically held2 that the interest of a mortgagee is an interest in immovable property for the purposes of the rules of conflict of laws. Notwithstanding the contrary view taken in Australia,3 our Courts are more likely to follow the English decisions. Since the general rule is that lex situs is the governing law for questions which arise with regard to immovable property4, and since this general rule is accepted in India also,5 all provisions of the Act dealing with immovable property-should be considered as confined to immovable property in India.

1. Cheshire Private International Law, (1970), p. 469.

2. Hoyles (in re:), (1911) 1 Ch 179.

3. Hague v. Hague (No. 2), (1965) 114 Commonwealth LR 98.

4. Cheshire Private International Law, (1970), p. 475.

5. Bonnaund v. Cherker, 1905 ILR 32 Cal 631.

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