Pledge
A pledge is a form of possessory security where an asset is delivered by a borrower (the pledgor) to a lender (the pledgee) as collateral for a loan. Essentially, the pledgor gives something of value to the pledgee to guarantee repayment. While this is the classic arrangement seen in pawnbroking, pledges are also widely used in commercial lending.
Key Features
-
Contract
-
Delivery of the Asset
-
The asset must be delivered to the pledgee, which can take several forms:
-
Actual delivery: physically handing over the asset.
-
Constructive delivery: giving access or control over the asset without transferring possession (for example, handing over keys to a warehouse or a document representing the goods).
-
Only certain documents, such as bills of lading, are recognized as valid titles in law for pledging purposes.
-
Rights of the Pledgee
-
Once possession is taken, the pledgee becomes a bailee and owes a duty of care to safeguard the asset.
-
The pledgee acquires a special property in the asset:
-
It is not full ownership.
-
It allows the pledgee to retain the asset until the debt is repaid.
-
If the debt is unpaid, the pledgee can sell the asset to recover the owed sum.
Limits and Obligations
-
No Ownership: The pledgee never becomes the owner of the asset.
-
Right of Sale: If the debt is not repaid, the pledgee may sell the asset:
-
Possession Matters: The pledgee retains the right to special property even if the asset is returned to the pledgor temporarily or re-pledged.
Rights of the Pledgor
Duration
The pledge exists until:
-
The debt is fully repaid (then the asset is returned), or
-
The pledgee sells the asset to satisfy the debt.
Example
Imagine a small tech startup needs a short-term loan to cover urgent operational costs. The company pledges a fleet of high-end laptops it owns to a finance company as security.
In this way, a pledge provides lenders with security while still allowing borrowers to access funds, creating a balance of risk and protection.
Lien
In commercial transactions, a lien is a legal right that allows a person to retain possession of goods belonging to someone else until certain debts or obligations are satisfied. Unlike a pledge, a lien does not require delivery of goods—it arises when the lienee already has lawful possession of the asset.
Definition and Key Features
A lien can take different forms, but in common law, it is essentially the right to hold another person’s property until a debt owed to the holder is paid. The lien gives the holder a right of possession, but not ownership, and this possession must be continuous and lawful.
For instance, in Harper v Collins (1890), a shipping company retained goods delivered for storage until unpaid storage fees were settled. The court confirmed that the company’s lien was valid because they lawfully possessed the goods and the possession was continuous.
Lien vs Pledge
It’s important to distinguish lien from pledge:
| Feature | Lien | Pledge |
|---|
| Possession | Pre-existing possession required | Asset must be delivered to the pledgee |
| Ownership | No transfer of ownership | No transfer of ownership, but pledgor delivers asset |
| Right to Sell | Generally cannot sell | Can sell only if loan is unpaid (implied authority) |
| Purpose | Secures payment for work, fees, or debt | Secures repayment of a loan |
In short: a lien is about holding what you already possess until a debt is paid, while a pledge is about receiving and holding someone else’s property as collateral for a loan.
Types of Lien
-
Particular Lien – Right to retain a specific asset until its related debt is paid.
-
General Lien – Right to retain any property of the debtor until all debts owed to the lienee are paid.
Duties of the Lienee
The lienee acts as a bailee and must take reasonable care of the asset. This duty can be modified by contract but generally means the holder cannot deliberately damage or misuse the property.
Lien continues until the debt is paid or until the lienee loses lawful possession.
Example
Scenario:
-
Parties: TechFix Ltd, a computer repair company, and Emma, a freelance graphic designer.
-
Event: Emma leaves her high-end workstation with TechFix for repairs. The repair cost is agreed at $5,000.
-
Lien Arises: TechFix has lawful possession of the workstation. Under a particular lien, they retain the computer until Emma pays the repair bill.
-
Non-payment: Emma delays payment. TechFix cannot sell the workstation because the lien is possessory, but they can continue to hold it.
-
Payment: Once Emma pays $5,000, the lien ends, and the workstation is returned.
-
Special Case: If TechFix had a contractual clause allowing sale of unclaimed items after 90 days, this could modify the lien’s scope.
In conclusion, a lien protects parties who have lawful possession of goods or property from non-payment, without transferring ownership, making it a key tool in commercial law for managing risk. Understanding the distinction between lien and pledge ensures businesses use the right type of possessory security for their needs.
Mortgage – Non-Possessory Real Security
A mortgage is a type of non-possessory real security. It allows a debtor (mortgagor) to transfer ownership of an asset—tangible or intangible, but existing at present—to a creditor (mortgagee), with the agreement that ownership will return to the debtor once the debt is repaid. This right of reclamation is known as the equity of redemption.
If the debtor defaults, the mortgagee can exercise foreclosure, effectively extinguishing the mortgagor’s equity of redemption and taking control of the asset. Foreclosure generally requires a court order and is often a lengthy process, giving the debtor a chance to recover or refinance.
Key Features
-
Transfer of Ownership – The core of a mortgage is the transfer of ownership from the debtor to the creditor.
-
Assets Covered – Mortgages can cover physical assets (machinery, vehicles, equipment) or intangible assets (accounts receivable, contractual rights).
-
Legal vs. Equitable Mortgage –
-
Legal Mortgage: Transfers the legal title of the asset to the creditor.
-
Equitable Mortgage: Occurs when the legal title isn’t transferred, but the contract clearly shows a binding intention to create a security interest. For instance, a written assignment of receivables can create an equitable mortgage over those receivables.
Formalities
-
Non-land assets: Few formalities are required, usually limited to the transfer rules for that asset.
-
Land/property: Governed by specific legislation (e.g., Law of Property Act 1925), requiring strict written agreements and registration.
-
Documentation: Mortgages are generally evidenced in writing, even when minimal formalities are needed.
Power of Foreclosure and Sale
The mortgage provides the lender with the right to recover the debt if the borrower defaults:
-
The creditor may extinguish the debtor’s equity of redemption through foreclosure.
-
A court order is usually required.
-
Once foreclosed, the creditor can sell the asset to recover the owed amount.
-
If the agreement contains a power of sale, the creditor may not need court approval; otherwise, a court order may be necessary.
-
Any surplus from the sale beyond the debt must be returned to the mortgagor; any shortfall may be recoverable from the debtor.
Example
Scenario:
-
Parties: Emily Johnson (mortgagor) and City Bank (mortgagee).
-
Asset: Emily wants a €100,000 loan to expand her bakery. She offers her commercial oven and equipment as security.
-
Agreement: Emily transfers ownership of the oven and equipment to City Bank under a mortgage agreement.
-
Repayment: The loan term is 24 months.
-
Default: After 18 months, Emily struggles to make payments. City Bank applies for foreclosure in court to secure the assets.
-
Sale: The equipment is sold at auction. The sale covers €90,000 of the outstanding debt. City Bank can claim the remaining €10,000 from Emily if permitted under the agreement. If the sale had exceeded €100,000, any surplus would return to Emily.
Mortgages provide creditors with strong security, protecting loans with tangible or intangible assets while allowing debtors to retain temporary use until repayment or default.
Charge – Non-Possessory Security
A charge is a type of non-possessory, real security. It is an equitable interest created to secure the repayment of a debt. Unlike other forms of security such as a mortgage, a charge does not transfer ownership of the asset to the creditor. Instead, it gives the creditor certain rights over the asset as security for the debt.
A charge must be created by an agreement between the parties, supported by valuable consideration (for example, a loan or money advanced). Charges can be fixed or floating, with fixed charges taking priority over floating charges in the event of insolvency.
Fixed vs. Floating Charge
-
Fixed Charge
-
Attaches to a specific, identifiable asset (e.g., a piece of machinery, a vehicle, or an artwork).
-
The debtor cannot dispose of the asset without first satisfying the secured debt.
-
In insolvency, a fixed charge holder has stronger rights compared to floating charge holders.
-
Floating Charge
-
Attaches to a changing pool of assets, such as inventory, raw materials, or receivables.
-
Allows the debtor to continue using and managing the assets in the normal course of business.
-
A floating charge crystallizes (becomes fixed) when certain events occur, such as:
-
appointment of a receiver,
-
entering liquidation,
-
ceasing business operations,
-
automatic conversion under the terms of the agreement.
Crystallization is essential because a floating charge must attach to a fixed pool of assets before the creditor can enforce their rights.
Difference Between Mortgage and Charge
-
Mortgage: Transfers ownership of the asset to the creditor, subject to the debtor’s right of redemption. The creditor may foreclose in case of default.
-
Charge: Does not transfer ownership. The creditor has rights over the asset to secure repayment, which may include obtaining an order for sale or appointing a receiver.
In short, a mortgage gives the creditor more direct control over the asset, while a floating charge allows the debtor to continue using the asset until certain triggering events occur.
Example
Scenario:
-
Parties: Emily Chen (chargor) and Horizon Bank (chargee).
-
Asset: Emily runs a small electronics business and takes a loan of $150,000. She offers all her current and future stock as security.
-
Type of Charge: Floating charge.
-
Operation: Emily can continue to sell and replenish her stock as part of normal business operations.
-
Crystallization Event: Six months later, Emily’s business enters administration. The floating charge crystallizes into a fixed charge over the stock held at that time.
-
Debt Recovery: Horizon Bank can now sell the crystallized stock to recover the debt. Any surplus goes to Emily, while any shortfall may be claimed from her personally if agreed in the contract.
This structure clearly explains what a charge is, how it works, and its practical difference from a mortgage, with a concrete business example that illustrates the process of floating charge crystallization.
What is a pledge?
A form of possessory security where an asset is delivered to the lender as collateral for a loan.
A loan given without any collateral or contract.
What distinguishes a lien from a pledge?
A lien arises when the holder already possesses the asset; a pledge requires delivery of the asset to the pledgee.
A pledge requires no formal contract, while a lien always requires a contract.
What right does a pledgee have if the debtor fails to repay the loan?
The pledgee can sell the asset to recover the owed sum.
The pledgee automatically becomes the owner of the asset.
Which of the following is an example of a particular lien?
A mechanic keeping a car until the repair bill is paid.
A bank taking ownership of all a company’s assets as collateral.
Which feature differentiates a mortgage from a charge?
Mortgage transfers ownership of the asset; a charge does not.
Charge transfers full ownership; a mortgage only grants possession.
What happens when a floating charge crystallizes?
It attaches to a specific asset or pool of assets, becoming enforceable by the creditor.
The debtor automatically regains full control over all assets.
Which type of delivery can satisfy the asset transfer in a pledge?
Actual delivery or constructive delivery.
Only actual physical delivery.
