Pledge

As with English law at Islamic law a pledge is a method of securing a loan or other debt obligation. Upon default the creditor may then exercise the right to liquidate the pledged asset and appropriate the proceeds of thereof in settlement of the debt. In the familiar manner, a creditor may obtain priority over unsecured creditors in the event of insolvency, by means of pledge.

Comparison with Guaranty

A guarantor serves a similar purpose, as a means of securing a loan; however a pledge allows direct recourse to assets of the debtor without the need for a creditor to pursue another party.

Conditions of Pledge

  • pledgor and pledgee must be solvent and possess legal capacity

The pledged property must be:

  • existent at time of contracting
  • known to pledgor and pledgee
  •  valuable and lawful
  • owned by the pledgor
    • with the exception that a guardian may pledge property of their ward for the ward’s own debt
  •  unencumbered
    • it cannot be already pledged or serving as security for another debt
  • susceptible to possession, actual or constructive (by the pledgee)
    • usufruct cannot be pledged as it cannot be possessed
    • it cannot in case of immovable property be attached to another property
  • equal or in excess of the value of the debt against which it is pledged
    • in case of default and the sale of the property by the pledgee any excess must be returned to the pledgor

Rights and Duties

Pledgee: The pledgee holds the property on trust, acquiring a fiduciary duty with regard to it; in case of negligence the pledgee is liable for damage or destruction of the property. The pledgee may not invest or otherwise use the property for profit, or transfer it to another without the agreement of the pledgor. In case of the death of the pledgee the pledgee’s heirs may exercise their right to retain the pledged property until the settlement of the debt.

Pledgor: The pledgor remains the owner and s/he is entitled to any return from the property and liable for the costs of maintaining it, notwithstanding its possession by the pledgee. The pledgor cannot re-gain possession of the property before the debt has been settled in full. In the case of the death of the pledgor the debt is immediately payable from the estate (which includes the pledged property).

 

Mejelle, 5th Book, Preface-Definitions and Chapters I-IV