Can I pledge shares of stock, bonds, or a warehouse receipt as security?

You can pledge rights, not only things

A pledge is not confined to tangible movables. Article 2095 opens it to rights that exist on paper: Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The list is illustrative rather than closed — "and similar documents" reaches other instruments that evidence a right. What each of these has in common is that a valuable right is represented by a document, and it is that documented right which is offered as security to the creditor.

Delivery of the instrument is essential

A pledge is a real contract, perfected by delivery, and where the thing pledged is an incorporeal right, what gets delivered is the document that proves it. The article requires that the instrument proving the right pledged shall be delivered to the creditor. Handing over the certificate, the receipt, or the instrument is not a mere formality; without that delivery there is no effective pledge. The creditor takes possession of the paper precisely because possession of the paper is how control over the underlying right is held and, if necessary, realised.

Indorsement where the document is negotiable

For negotiable documents there is a further step: the article adds that the instrument, if negotiable, must be indorsed. Indorsement is what allows the right embodied in a negotiable document — a warehouse receipt or a bond, for instance — to be transferred and later enforced by the holder. Delivering the paper without the required indorsement leaves the creditor short of the means to realise on it. Note, too, that certain documents such as shares of stock carry their own transfer and recording rules under other laws, which a careful creditor will want observed alongside the Civil Code steps.

Doing it properly

To create a good pledge over shares, bonds, or a warehouse receipt, physically deliver the actual certificate or document to the creditor and indorse it wherever it is negotiable. Keep a clear written record describing exactly what was pledged and when. Bear in mind that instruments like warehouse receipts and shares are governed by their own bodies of law on transfer and third-party effect, so satisfying Article 2095 is the starting point rather than the whole of what a prudent lender will require before relying on the security.

Cases citing this provision

These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.

• Lim Tay vs. Court of Appeals, et al, G.R. No. 126891, August 5, 1998 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 2095 — Pledge of Incorporeal Rights