Pledge

A pledge is a bailment that conveys possessory title to property owned by a debtor (the
pledgor) to a creditor (the pledgee) to secure repayment for some debt or obligation and
to the mutual benefit of both parties. The term is also used to denote the property which
constitutes the security. A pledge is type of security interest.

Pledge is the pignus of Roman law, from which most of the modern European-based
law on the subject is derived, but is generally a feature of even the most basic legal
systems. It differs from hypothecation and from the more usual mortgage in that the
pledge is in the possession of the pledgee. It is similar, however, in that all three can
apply to personal and real property. A pledge of personal property is known as a pawn
and that of real property is called an antichresis.

Pledge is a special kind of bailment in which a person transfers the possession of his
property to another for securing the loan taken from the other. It only differs from
bailment in the matter of purpose. When the purpose of the bailment is to secure a loan
or a promise, it is called a pledge. Section 172 of Indian

Contract Act 1872 defines Pledge as follows -

Section 172 - The bailment of goods as a security for the payment of a debt or
performance of a promise is called Pledge. The bailor in this case is called a Pawnor
and the bailee is called Pawnee.

Essential of Pledge

1. Delivery of possession - As in bailment, the delivery of possession is essential

in a pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968,
a film producer borrowed a sum of money from a financier and agreed to deliver
the final prints of the film when ready. This was held not to be a pledge because
there was no delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has
the possession of the property agrees to hold it on behalf of the pledgee upon
direction of the pledger.
Hypothecation - It is also possible to let the pawner keep the physical goods
even though the legal possession is transfered to the pawner. Thus, in Bank of
Chittor vs Narsimbulu AIR 1966, a cinema hall equipment was pledged to the
bank but the bank allowed the hall owner to keep the equipment to show the
movies. The hall owner then sold the equipment to another party. It was held that
the sale was subject to the pledge.
In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases
where goods are hypothecated, other creditors cannot claim right on them until
the claim of the pledgee is satisfied.

2. In return of a loan or a promise - The delivery must be in return of a loan or

of acceptance of a promise to perform something. Thus, if A gives his bicycle to
B in friendship, it is not a pledge but a simple bailment. However, if A gives his
bicycle to B as a security for a debt of 100Rs it will be a pledge.

3. In pursuance of a contract - The delivery must be done under a contract

though it is not necessary that the delivery and the payment of loan be at the
same time. Delivery can be made even after the loan is received.
 Rights of a Pawnee

1. Right of retainer (Section 173- 174) - As per section 173, the pawnee may
retain the goods pledged, not only for a payment of a debt or the performance of
the promise, but also for the interest of the debt, and all necessary expenses
incurred by him in respect of the possession or for the preservation of the goods
pledged. Further, as per section 174, in absence of any contract to the contrary,
the pawner shall not retain the goods pledged for debt or promise other than the
debt or promise for which they have been pledged. However, such contract shall
be presumed in absence of any contract to the contrary with respect to any
subsequent advances made by the pawnee.
This means that if A pledges his gold watch with B for 1000 Rs and later on he
promises to teach B's son for a month and takes for 500Rs for this promise , and
if he does not teach B's son, B cannot retain A's gold watch after A pays
1000Rs. Thus, the right of retainer is a sort of particular lien. The difference was
pointed out in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a
pawnee obtains a special interest in the pledged goods in the sense that he can
transfer or pledge that special interest to somebody else. The lien only gives the
right to detain the goods but not transfer. Thus, a pledgee get the first right to
claim the goods before any other creditor can get them. The pledgee's loan is
secured by the goods.

2. Right to extra ordinary expenses (Section 175) - As per section 175, the
pawnee is entitled to receive from the pawner extra ordinary expenses incurred
by him for the preservation of the goods pledged. For such expenses, however,
he does not have right to detain the goods. Section 175 says that the pawnee is
entitled to receive from the pawner extraordinary expenses incurred by him for
the preservation of the goods pledged.
 3. Right of sale (Section 176) - As per section 176 (Pawnee's right where
pawnor makes default) - If the pawnor makes default in payment of the debt or
performance at the stipulated time, of the promise, in respect of which the goods
were pledged, the pawnee may bring a suit against the pawnor upon the debt or
the promise and retain the goods pledged as a collateral security; or he may sell
the thing pledged, on giving the pawnor reasonable notice of the sale.
This right secures the debt for the pawnee up to the value of the goods pledged
because it allows the pawnee to either sue the pawnor for recovering the debt or
perform the promise or sell the goods pledged. If the value received after selling
the goods, the pawner is still liable for the difference and if the value of the sale is
more than the amount of debt, the pawnee is supposed to give the difference to
the pawnor. However, if the pawnee has sold the goods, he cannot sue for the
debt.
In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs
from the plaintiff on a promissory note and gave him aeroscrapes worth about
35000Rs, as a security for the loan. The plaintiff sued for repayment of the loan
but was unable to produce the security, having sold it. SC rejected his action. It
held that pledgee cannot maintain a suit for recovery of debt as well as retain the
pledged property.

The pawner is required to give a reasonable notice to the pawnee about the sale.
The notice is not a mere notice but reasonable notice. In Prabhat Bank vs Babu
Ram AIR 1966, the terms of an agreement of a loan enabled the bank to sell the
securities upon default without notice. The pawnor defaulted in payment. The
bank sent a reminder upon which the pawnor asked for more time. The bank sold
the securities. SC held that this was bad in law. The bank is required to give a
clear and specific notice of the impending sale. Pawner's request for more time
cannot be interpreted as a notice of sale.

When the goods are lost due to pawnee's negligence, the

liability of the pawnor is reduced to the extent of value of the
goods.

Pawnor's Right to Redeem (Section 177)

Section 177 provides a very important right to the pawnor. It allows the pawnor
to redeem his property even if he has defaulted. It says that if a time is stipulated
for the payment of a debt or performance of the promise for which the pledge is
made, and the pawnor make default in payment of the debt or performance of the
promise at the stipulated time, he may redeem the goods pledged at any
subsequent time before the actual sale of them; but he must, in that case, pay, in
 addition, any expense which have arisen from his default.

J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor
has as absolute right to redeem his property upon satisfaction or the debt or the
promise. This right is not extinguished by the expiry of the stipulated time for
repayment of debt or performance of the promise but only by the actual sale of
the goods. If the pawnor redeems his goods after the expiry of the stipulated
time, he is bound to pay the expenses as have arisen on account of his default.

The pawnor also has a right to take back any increase in the property. In M R
Dhawan vs Madan Mohan AIR 1969, certain shares of a company were
pledged. During the period of the pledge, the company issued bonus and rights
shares. Delhi HC held that the pawnor was entitled to those at the time of
redemption.

Pledge made by non-owner of the goods

Ordinarily goods may be pledged by the owner or by any person with the consent
of the owner. A pledge made by any other person is not valid. Thus,
in Biddomoy Dabee vs Sittaram, it was held that a pledge made by the servant
who was holding the goods of his master was not valid. Similarly,
in Purushottam Das vs Union of India AIR 1967, a railway company delivered
goods on a forged railway receipt. The goods were then pledged with the
defendants. In a suit by the railways to recover the goods it was held that the
pledge was invalid.

This is important to protect the interests of the owners. However, in many

situations it is equally important to allow trade and commerces and so there are
some situations where a person having the possession of the goods by owner's
consent, is entitled to pledge those goods even without owner's consent for the
pledge. These situations are discussed below -

1. Pledge by Mercantile agent (Section 178)

When a mercantile agent is in possession of the goods with consent of the
owner, any pledge made by him in ordinary course of business will be valid,
provided that the pawnee acts in good faith and that he has no notice of the fact
that the pawnor is not authorized to pawn the goods.
The essential conditions of this rule are - he must be a mercantile agent, he must
have possession of the goods by consent of the owner, and it must be done in
ordinary course of business. Further, the pawnee should act in good faith and he
must not have notice that the pawnor has no authority to pledge.

2. Pledge by a person in possession under voidable contract (Section 178

A)
When the goods are obtained by a person under a contract that is voidable under
section 19 or 19 A, he can pledge the goods if the contract is not avoided at the
time of the pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person
pretending to be a man of credit induced the plaintiff to give him a valuable ring in
return for his cheque which proved worthless. Before the fraud could be
discovered, he pledged the ring with the defendants. The pledge was held to be
valid.

3. Pledge by person with limited interest (Section 179)

Section 179 says that where a person pledges goods in which he has only a
limited interest, the pledge is valid to the extent of that interest. Thus, when a car
worth 100,000Rs is owned jointly by A and B both having 50% interest in the car,
and if A pledges the car for 60000Rs, the value of the pledge that the pledgee
can receive upon default is only 50% of the value received by sale.
Thus, if a pledgee further pledges the goods, his interest is only the amount for
which the first pledger pledged the goods. For example, if A pledged his car
worth 100000Rs for 20000Rs to B. B's interest in the car is only 20000 Rs. He
can further pledge it but if he pledges it for more than 20000Rs, A will be liable
only for 20000Rs.

In Jaswantrai Manilal Akhney vs State of Bombay 1956, a cooperative bank

had an overdraft account with the Exchange Bank, which was secured by the
deposit of certain securities. After many dealing and adjustments the last position
of the account was that the overdraft limit was set at Rs 66150 and the securities
under the pledge of the bank were worth Rs 75000. The cooperative bank did not
make use of this overdraft for a long time and when it attempted to use it, the
Exchange Bank was itself in financial crisis and had pledged the securities first
with Canara Bank and then after having redeemed them, pledged them again
with a private financier. The SC held that the pledge was invalid.
 Difference Between Bailment and Pledge

‘Bailment’ refers to the transfer of goods from one party to another party for
some specific purpose. ‘Pledge’ on the other hand is a type of bailment in which
goods are transferred from one party to another party as security for payment of
a debt owed by him. We all many times in our life go through with these terms,
but still we have doubts regarding their actual meanings and differences. So let’s
start our new topic, the difference between Bailment and Pledge.
 Pledge and Pledgee’s right & duties

Pledge is only a special kind of bailment where the object of the delivery of
assets/goods is to provide a security for a loan or for the fulÒllment of an obligation.
Section 148 of the Indian Contract Act, 1872 deÒnes the” bailment”. Section 172 to 176
of the Indian Contract Act, 1872 deals with pledge and pledgee’s right and duties on
goods pledged. Section 148 of Indian contract Act deÒnes Bailment which is
summarized below: I) There must be delivery of goods either actual or constructive II)
Delivery of goods should be for some purpose and based on contract III) When the
purpose is accomplished, the goods must either be returned or disposed o× ,as per the
terms of contract. Section 172 of the Indian Contract Act, 1872 deÒnes pledge as “the
bailment of goods as security for payment of a debt or performance of a promise.” We
may observe from the above sections, the essence of pledge is that the goods must be
delivered to the possession of pledgee, as a security for payment of debt and there
should be a contract to return the same goods which were pledged after the debt is
repaid.

The delivery of goods may be actual or constructive. The delivery of godown keys,
where the goods are stored, in case of Key Cash Credit/key loan, is an illustration of
constructive delivery of goods. As the pledge is not a transfer of property, the pledgee
bank only retains possession of the goods, but right of ownership remains with the
borrower who pledged the goods. In order to constitute a valid pledge, delivery of
goods, and release of advance need not be simultaneous. Delivery of goods can be
subsequent to making the advance (Case study Laun Parshad Vs Rahamat Ali-SC-
1967). Section 173 to 176 of Indian Contract act 1872 states the rights and duties of
bank as pledgee which are as under;

1. Pledgee can retain the goods not only for payment of the debt or performance of the
promise but also for interest and all necessary expenses incurred in respect of
possession and / or preservation of pledged goods (Case study Satyanarayana Vs SBI-
AP HC -1975).

2. Pledgee can file a suit against the borrower for recovery of shortfall of balance if any,
after disposal of pledged goods (Case study Haridas Mundra Vs National Grindlays
Bank Ltd.-Calcutta HC-1963)

3. Pledgee can sell the goods without intervention of Court, after giving due or
reasonable notice to the pledger,

4. Pledgee has a special property in the goods pledged. So long as his claim was not
satisfied, no other creditor including Government Authorities has authority to
supersede the bank’s right over pledged security. Pledgee Bank has the rest charge on
goods pledged. (Case study Bank of Bihar Vs State of Bihar-SC-1971).

5. Pledgee is not entitled to enjoy any accretions on pledged security.Pledgee must re-
deliver the goods after the debt is repaid. A pledge cannot retain goods for any debt
other than the debt for which goods are pledged. However, if the pledgee is a bank,
operation of General Lien (u/s 171) would be applicable unless the bank has expressly
agreed to waive its right of general lien.

6. Pledgee must take same care of the pledged assets, as a man of ordinary prudence
would take his own goods.

7. Goods pledged can be sold by private sale or by public auction.

8. Any person, who is in valid possession of the goods/security, can create valid pledge.
Pledge by an agent or power of Attorney holder is treated on par with pledge by owner
of goods provided by existence of agency can be provided/power to pledge is clearly
expressed in the power of attorney (U/S.178A).

The advancing of loan, execution of the promissory note and endorsement and delivery
of the document of title to goods together form one transaction. Their combined act is
that bank would be in control of goods till the debt is discharged (U/S.180). It is
advisable to draw the bills in favour of the bank and give notice of banks interest in the
relative goods to the carrier so that unpaid seller or a fraudulent person cannot take re-
delivery of the goods. Bank must exercise extra care while accepting documents like
Lorry Receipts, Airway bill because they are not considered as “document to title” under
the sale of goods Act. Bank should invariably notify the carrier of its interest in relative
goods, (Case study: Canara Industrial & Banking Syndicate Ltd Vs R.G.Prabhu, Mysore
HC-1968).

RIGHTS OF PAWNOR :-
Following are the rights of pawnor :

1. Right of Redemption :-
A pawnor has a right of redemption after depositing the dues.

2. Right of Suit :-
If pawnee makes unauthorized sale the pawnor has the right to file a suit against the
pawnee.
3. Right of Proper Care :-
The pawnor can enforce the pawnee to do proper care and maintain the pledged goods.

DUTIES OF THE PAWNOR :-

Following are the duties of Pawnor :

1. Meet the Obligations :-

Pawnor must meet the obligations regarding the contract with in specified time.

2. Pay Extra Expenditure :-

He should also pay the extra ordinary charges.

RIGHTS OF PAWNEE :-
Following are the rights of Pawnee :

1. Receipt of Payment :
Pawnee can retain the goods pledged until his dues are paid.

2. Retain for Other Debts :-

He has also right to retain the pledged goods for other debts taken.

3. Recover Other Charges :-

He has also right to recover the other charges like preservation of the pledged goods.

4. Sell the Goods :-

If pawnor fails to make payment then pawnee can sell the pledged goods after issuing
the reasonable notice.
DUTIES OF PAWNEE :-
Following are the duties of pawnee :

1. Return of Goods :-
On the receipt of his dues he should return the goods.

2. Reasonable Care :-
He must do the reasonable care of the pledges goods.

3. Comply Terms :-
He should abide by the terms.

4. No Misuse :-
He should not make unauthorized use the pledged goods.

5. No Mixation :-
He should not mix the pledged goods with his own goods beard by the pawnee.