Explain the difference between the following:
1. Surety(ship);
2. Mortgage;
3. Pledge;
4. Hypothec; and
5. Lien.
1. Surety(ship): Suretyship refers to a contractual agreement between a surety (the person providing the guarantee) and a creditor, in which the surety promises to fulfill the obligations of a third party (the debtor) if they fail to do so. In the context of ships, suretyship is a guarantee provided by a surety to a shipowner or operator, ensuring that they will cover any damages or liabilities incurred by the ship.
2. Mortgage: A mortgage is a legal agreement between a borrower (mortgagor) and a lender (mortgagee), allowing the borrower to use their property as collateral in exchange for a loan. If the borrower fails to repay the loan, the lender has the right to foreclose on the property and sell it to recover the outstanding debt.
3. Pledge: Pledge refers to the act of using an item of value as security for a debt or obligation. In a pledge agreement, the debtor (pledger) provides the creditor (pledgee) with possession of an asset, such as jewelry or stocks, as collateral for a loan. If the debtor defaults on the loan, the creditor has the right to keep or sell the pledged asset to recover their dues.
4. Hypothec: Hypothecation is a legal concept where a debtor pledges collateral (usually movable assets like inventory or accounts receivable) to secure a loan without transferring the possession or ownership of the collateral. The debtor retains control of the pledged assets and continues to use them in their business operations. In case of default, the creditor can seize or sell the hypothecated assets to recover the debt.
5. Lien: A lien is a legal claim against a property that provides security for the payment of a debt or obligation. It gives the creditor the right to sell the property to satisfy the debt if the debtor fails to fulfill their financial responsibilities. Liens can be voluntary or involuntary and can arise from a variety of situations, such as unpaid taxes, unpaid contractors, or outstanding mortgages.