Pledge

(1)

Introduction

Pledge is a special kind of bailment in

which a person transfers the possession of

his property to anoth

er for securing the loan taken from th

e 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

Section 172 of

of

Indian Contract Act

18! defines Pledge as follows "

Section 172

Section 172 " #he bailment of goods as a

" #he bailment of goods as a

security for the payment of

a debt or

performance of a promise is called Ple

dge. #he bailo

r in this case is called a

Pawnor and the bailee is called Pawnee.

In case of

Lallan Prasad v

. Rahmat Ali

11

_{$upreme Court of India defined Pledge as%}

&Pawn or pledge is a bailment of

personal property as a security for some

debt or

engagement.

A pawner is one who being liable

to an engagement gi'es to

the

person to whom he is li

able a thing to be

held as security for payment o

f his debt or

the fulfillment of his liability(.

#he property pledged should be deli'ered to the Pawnee. )eli'ery of possession

may be actual or constructi'e. )eli'ery of the key of

the go down where the goods

are stored is an illustration of constructi'e deli'ery. Where the goods are in the

possession of a third person

, who, on the directi

on of the pledger

, consents to hold

them on pledgee*s behalf, that is enough deli'ery. It is sometimes

called deli'ery

by attornment. )eli'

ery of documents of title w

hich would enable

the pledgee to

obtain possession is e+ually effecti'e to create a pledge

!!

. In case of

Morvi

Mercant

ile Bank Ltd v

. Union of India

33

, the Ape Court held that" &deli'ery of

railway receipts was the same thing as

deli'ery of goods, the pledge was therefore

'alid and the pledgee was entitled to sue for the

loss(.

1 AIR 1967 SC 1322 1 AIR 1967 SC 1322

2 Avtar Singh, Business Law, (9th Edin!, "#226 2 Avtar Singh, Business Law, (9th Edin!, "#226 3 AIR 196$ SC 19$%

(2)

Rights of a Pawnee

1. Right of retainer (Section 173- 174) " As persection 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 epenses incurred by him in respect of the possession or for the preser'ation of the goods pledged. -urther, 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 ha'e been pledged. owe'er, such contract shall be presumed in absence of any contract to the contrary with respect to any subse+uent ad'ances made by the pawnee.

#his means that if A pledges his gold watch with / for 1000 s and later on he promises to teach /2s son for a month and takes for 300s for this promise , and if he does not teach /2s son, / cannot retain A2s gold watch after A pays 1000s. #hus, the right of retainer is a sort of

particular lien. #he difference was pointed out inBank of Bihar s State of Bihar 1!72 "# S$. It obser'ed 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. #he lien on ly gi'es the right to detain the goods but not transfer. #hus, a pledgee get the first right to claim the goods b efore any other creditor can get them. #he pledgee2s loan is secured by the goods.

2. Right to e%tra ordinar# e%&enses (Section 17') " As per section 13, the pawnee is entitled to recei'e from the pawner etra ordinary epenses incurred by him for the preser'ation of the goods pledged. -or such epenses, howe'er, he does not ha'e right to detain the goods. Section 17' says that the pawnee is entitled to recei'e from the pawner etraordinary epe nses incurred by him for the preser'ation of the goods pledged.

3. Right of sae (Section 17) " As per section 14 5Pawnee2s right where pawnor makes default6 " 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 security7 or he

may sell the thing pledged, on gi'ing the pawnor reasonable notice of the sale.

#his right secures the debt for the pawnee up to the 'alue of the goods pledged because it allows the pawnee to either sue the pawnor for reco'ering the debt or perform the promise or sell the goods pledged. If the 'alue recei'ed after selling the goods, the pawner is still liable for the difference and if the 'alue of the sale is more than the amount of debt, the pawnee is supposed to gi'e the difference to the pawnor. owe'er, if the pawnee has sold the goods, he cannot sue for the debt.

(3)

In *aan Prasad s Rah+at ,i ,IR 1!7 the defendant borrowed !0000s from the plaintiff on a promissory note and ga'e him aeroscrapes worth about 3000s, as a security for the loan. #he plaintiff sued for repayment of the loan but was unable to produce the security, ha'ing sold it. $C re9ected his action. It held that pledgee cannot maintain a suit for reco'ery of debt as well as retain the pledged property.

#he pawner is re+uired to gi'e a reasonable notice to the pawnee about the sale. #he notice is not a mere notice but reasonable notice. InPra"hat Bank s Ba"u Ra+ ,IR 1!, the terms of an agreement of a loan enabled the bank to sell the securities upon default without notice. #he pawnor defaulted in payment. #he bank sent a reminder upon which the pawnor asked for more

time. #he bank sold the securities. $C held that this was bad in law. #he bank is re+uired to gi'e a clear and specific notice of the impending sale. Pawner2s re+uest for more time cannot be interpreted as a notice of sale.

When the goods are lost due to pawnee2s negligence, the liability of the pawnor is reduced to the etent of 'alue of the goods.

uties of a Pawnee

 )uty to take reasonable care of the goods pledged  )uty not to make unauthori:ed use of goods

 )uty not to mi pawnor*s goods with his own goods  )uty to return goods

(4)

Rights of Pawnor

1. ight to get pawnee*s duties duly enforced #he pawnor has the right to get pawnee*s duties duly enforced5for eample,right to get back the goods pledged,right to recei'e any accretions to the goods pledged6.

!. ight to redeem ;$ection 1<

. If a time time is stipulated for the payment of the debt,or performance of the promise,for which the pledge is made and the pawnor makes default in payment of the debt or

performance of the promise at stipulated time,he may redeem the goods pledged at any subse+uent time before the actual sale of them7but he must7in case* pay*in addition ,any epenses which ha'e arisen from his default.

uties of Pawnor

1. )uty to comply with the terms of pledge

(5)

Pawnors Right to Redee+ (Section 177)

Section 177 pro'ides a 'ery important right to the pawnor. It allows the pawnor to redeem his property e'en 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 subse+uent time before the actual sale of them7 but he must, in that case, pay, in addition, any epense which ha'e arisen from his default.

/ Sheat in *aan Prasad s Rah+at ,i ,IR 1!7, obser'ed that the pawnor has as absolute right to redeem his property upon satisfaction or the debt or the promise. #his right is not

etinguished by the epiry 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

epiry of the stipulated time, he is bound to pay the epenses as ha'e arisen on account of his default.

#he pawnor also has a right to take back any increase in the property. In 0 R hawan s

0adan 0ohan ,IR 1!!, certain shares of a company were pledged. )uring the period of the pledge, the company issued bonus and rights shares. )elhi C held that the pawnor was entitled

(6)

Pedge +ade "# non-owner of the goods

=rdinarily 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 'alid. #hus, inBiddo+o# a"ee s Sittara+, it was

held that a pledge made by the ser'ant who was holding the goods of his master was not 'alid. $imilarly, in Purushotta+ as s nion of India ,IR 1!7, a railway company deli'ered goods on a forged railway receipt. #he goods were then pledged with the defendants. In a suit by the railways to reco'er the goods it was held that the pledge was in'alid.

#his is important to protect the interests of the owners. owe'er, in many situations it is e+ually important to allow trade and commerces and so there are some situations where a person ha'ing the possession of the goods by owner2s consent, is entitled to pledge those goods e'en without owner2s consent for the pledge. #hese situations are discussed below >

1. Pedge "# 0ercantie agent (Section 17) "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 'alid, pro'ided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authori:ed to pawn the goods.

#he essential conditions of this rule are " he must be a mercantile agent, he must ha'e possession of the goods by consent of the owner, and it must be done in ordinary course of business. -urther, the pawnee should act in good faith and he must not ha'e notice that the pawnor has no authority to pledge.

2. Pedge "# a &erson in &ossession under oida"e contract (Section 17 ,) " When the goods are obtained by a person under a contract that is 'oidable under section 1? or 1? A, he can pledge the goods if the contract is not a'oided at the time of the pledge. #hus, inPhii&s s

Brooks *td 1!1!, a fraudulent person pretending to be a man of credit induced the plaintiff to gi'e him a 'aluable ring in return for his che+ue which pro'ed worthless. /efore the fraud could be disco'ered, he pledged the ring with the defendants. #he pledge was held to be 'alid.

3. Pedge "# &erson with i+ited interest (Section 17!)"$ection 1? says that where a person pledges goods in which he has only a limited interest, the pledge is 'alid to the etent of that

interest. #hus, when a car worth 100,000s is owned 9ointly by A and / both ha'ing 30@ interest in the car, and if A pledges the car for 40000s, the 'alue of the pledge that the pledgee can recei'e upon default is only 30@ of the 'alue recei'ed by sale.

#hus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods. -or eample, if A pledged his car worth 100000s for !0000s to /.

/2s interest in the car is only !0000 s. e can further pledge it but if he pledges it for more than !0000s, A will be liable only for !0000s.

(7)

In /aswantrai 0ania ,khne# s State of Bo+"a# 1!', a cooperati'e bank had an o'erdraft account with the change /ank, which was secured by the deposit of certain securities. After many dealing and ad9ustments the last position of the account was that the o'erdraft limit was set at s 44130 and the securities under the pledge of the bank were worth s 3000. #he

cooperati'e bank did not make use of this o'erdraft for a long time and when it attempted to use it, the change /ank was itself in financial crisis and had pledged the securities first with

Canara /ank and then after ha'ing redeemed them, pledged them again with a pri'ate financier. #he $C held that the pledge was in'alid.

(8)

Distinction between Pledge and Bailment

Bai+ent Pedge

/ailment can be for many reasons ranging for reward to gratuitous.

A pledge is bailment done for a specific type of purpose, which is to secure a loan or

performance of a promise. #he bailee does not get a right to sell the

goods.

A pawnee has a right to sell the goods in case of default.

#he bailee only get a right of lien o'er the goods.

A pawnee gets a right of retainer and a special interest in the goods, which is more that 9ust the lien.

#he bailee can use the goods bailed. #he pawnee has no right to use the goods.

#he bailee is not responsible for the loss, destruction, or deterioration if he uses the goods with reasonable care

#he pawnee is absolutely liable for the upkeep of the goods

(9)

Pledge is a kind of bailment where a thing is deli'ered as security for the repayment of a debt or performance of any promise. )eli'ery of the possession to the pawnee may be actual deli'ery or

constructi'e deli'ery. =wnership of the pledged article does not pass to the pledgee. #he pawnee has the right to retain goods till the payment, of the debt, any interest on the debt, and any other necessary epenses incurred for preser'ation of the goods. Where pawnee incur any other etraordinary epenses on goods for preser'ation, he is entitled of the same from pawnor. In case of the default of the pawnor, in the debt or performance, the pawnee has the right to sell the goods pledged.

#he pawnor has also the right to redeem the goods before the actual sale, but after the payment of the debt or performance of promise and any other epenses which ha'e arisen from his default.