Basically, lien and pledge are forms of the right to retain goods for the same purpose i.e. both are security interest options for payment of debt. Though they look identical; there are certain differences which this article identifies herein.
Lien: Lien is akin to bailment. It is the right to retain goods or securities belonging to a debtor until dues are paid fully to the retainer (creditor). No special agreement is necessary for creating the right of lien. But general liens are created by the special agreements. Banks granting a loan against marking the lien on customers’ deposit with them is an example of general lien. [Click ‘Lien’ to know different kinds of lien].
Pledge: The essence of the pledge is that the goods must be delivered to the possession of pledgee (Pawnee), as a security for payment o the debt and there should be a contract to return the same goods which were pledged after the debt is repaid. The pledgee (Pawnee) has a right to retain the goods not only for debt or performance of the promise; he can retain the goods pledged to him for all necessary expenses incurred by him in respect of preservation of the goods pledged. Pledge also gives the creditor (pledgee/pawnee) the right to sell on default. [Click ‘Pledge’ to know Essence of pledge and pledgee’s rights & duties].
The major difference between lien and pledge are;
Lien is created by law or by express or implied contract
Pledge is created by contract between the parties.
A lien is simply a possessory form of security interest; when possession of the property is lost, the lien is released.
Pledge of goods is not lost by loss of possession. In the case of sale of security by the creditor (Pledgee/pawnor), if the proceeds of such sale are less than the amount due in respect of the debt or promise, the debtor (pawnor) is still liable to pay the balance.
The lien does not constitute ownership; rather, it is a type of encumbrance. Therefore, the lien is simply the right to retain the assets, not to sell the assets unless stated in the agreement.
The pledgee (Pawnee) has a right to retain the goods not only for debt or performance of the promise, all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Pledge also gives the creditor the right to sell on default.