♦ PLEDGE:

– The bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. The bailor is in this case called ‘pawnor’. The bailee is called ‘pawnee’.

– Essentials:

1. Delivery of possession: Actual, symbolic, or constructive.

> Morvi Merchantile Bank v Union of India AIR 1965 SC 1954. [A, 578] rail receipts endorsed to bank- goods lost- sued to recover value of goods- SC held: railways receipts equivalent to goods- recover full amount

> Reeves v Capper (1838) 5 Bing NC 136: 132 ER 1057. [A, 579] Pledge by hypothecation- ship captain pledged chronometer to shipowner- owner let him use it- cannot pledge it to another- first pledge valid

2. Purpose of pledge should be security for the payment of a debt or performance of a promise

3. In pursuance of a contract

Pledge under Indian Contract Act of 1872 – A quick recap

4. Goods must be movable and sellable. Notes in circulation cannot be treated as goods.

> Lallan Prasad v. Rahmat Ali & AnrFacts: The appellant advanced Rs. 20,000 to the first respondent against a promissory note and a ‘receipt. The respondent executed an agreement whereby he agreed to pledge certain goods as security for the debt. Promised to deliver them to the appellant, and to keep them in the appellant’s custody. The appellant filed a suit on the promissory note claiming that the respondent failed to deliver the goods, that the agreement therefore did not result into a pledge, and that consequently, he was entitled to recover the amount advanced by him. It was found on the evidence. That the goods were delivered to the appellant, and that he was it pledgee thereof.

Legal Issue: Whether the appellant was entitled to a decree in view of his denial of the pledge and his failure to offer to redeliver the goods

Judgment: The appellant would not be entitled to a decree on the promissory note and also retain the goods found to have been delivered to him and to be in his Custody.  As long as the sale of pledged goods does not take place, the pawner is entitled to redeem the goods on payment of the debit. Therefore, the right to sue on the debt assumes that be is in a position to redeliver the goods on payment of the debt, and if by denying the pledge or otherwise, he has put himself in a position whereby he is not able to redeliver the goods, he cannot obtain a decree.

  • Rights of a pawnee/pledgee:

(i) Right of Retainer (Sections 173-174):

The pawnee’s right to retain the goods pledged extends to:

a. The payment of the debt or the performance of the promise;

b. The interests on the debt; and

c. All necessary expenses incurred by him in respect to the possession or for the preservation of the goods pledged.

All of which is lawfully due. In Right to Lien there is no right to sell but in right to retainer there is.

(ii) Right to Recover Extraordinary Expenses Incurred by Him (S. 175): The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. In order to claim extraordinary expenses right to retainer will not be available and only right to sue will be available.

(iii) Right to Sue (S. 176): The pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security

(iv) Right to Sell (S. 176): He may sell the thing pledged, on giving the pawnor reasonable notice (right to receive a reasonable notice is a statutory right and cannot be bypassed by or through a contract) of the sale. This right can be exercised only after all other available rights have been exhausted.  If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.

  • Right to sell and right to sue are disjunctive in nature i.e. they are independent from each other.

> KM Hidayathulla v Bank of India : the two rights are independent of each other- if filing of suit is barred- remedy to sell still available

  • Presumption to retain for the subsequent advances (further loan is taken on the same goods) (S. 174) :The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; But such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee. The said presumption can be rebutted.
  • If the pledgee loses the goods then he’ll be liable to pay. 
  • Right of a Pawnor:

(i) Right to redeem: A pawnor can redeem his goods from the pawnee anytime before the sale has been made by the pawnee.

  • Who can pledge:

General rule: Anyone who is the owner of goods or an authorised agent acting on the behalf of the principal.

  • Exceptions:

(i) Pledge by mercantile agent  (S. 178): A mercantile agent is an agent who is particularly appointed for a transaction and may pledge the goods belonging to the principal, provided that:

1. He is a mercantile agent

2. He has received the goods from the principal/owner

3. He is pledging the goods in ordinary course of business

4. The pawnee accepts the goods from him in good faith.

(ii) Pledge by person in possession under voidable contract  (S. 178 A): when the pawnor had obtained possession of the goods pledged by him under a contract voidable under Sec. 19 or Sec. 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

> Phillips v. Brooks: An emerald and diamond ring was given believing the buyer to be a good creditor and a cheque was received which got dishonoured later. Before the contract could rescind, the ring was pledged by the buyer. This pledge was held valid.

(iii) Pledge where pawnor has only a limited interest  (S. 179): Where a person pledges goods in which he has only a limited interest( as in a share or part ownership), the pledge is valid to the extent of that interest.he may pledge the part not belonging to him as well.

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Disclaimer: – The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.

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I am Shubham from Batch 2016-21 of GNLU. I am in my final year of 5 years integrated BA LLB course from GNLU, Gandhinagar, and I have completed Company Secretary Course meanwhile with 3rd Rank in Ahmedabad, Gujarat in CS Professional. I am a keen reader and enthusiastic listener of Corporate laws an View Full Profile

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