Pledge

PRAMA MUKHOPADHYAY
 What is a pledge?
 What is the distinction between a bailment and a pledge?
 What are the duties and rights of the pawnor and the pawnee?
 Sections 172-179
Section 172: “Pledge”“pawnor”,and
“pawnee” defined

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 the “pawnor”. The
bailee is called the “pawnee”.
 Pledge or pawn is a kind of bailment of goods with a special purpose.
 The goods pledged or pawned serve as security for the payment of debt
or performance of promise.
Bailment and Pledge Distinguished

1. Purpose- Bailment is a wider term. It includes pledge. Bailment of goods is

made for ‘some purpose’ according to section 148.
 Pledge is a kind of bailment, where the goods are delivered by one person to
another as security for payment of debt or performance of a promise. It
means that if the goods serve as security, it is pledge, whereas when the goods
are given for some other purpose, for example, a watch is given for repairs, it is
bailment (other than pledge).
 When some goods are pledged, the pawnee becomes a secured creditor and
he has a prior claim over the goods pledged than other creditors.
 Example- When certain movables have been pledged by a company to a
bank, they cannot be attached and sold for the satisfaction of claims of other
creditors of the company without first satisfying the claim of the bank.
2. Property- In case of bailment, the bailee gets only the possession of the
goods bailed, ownership remaining with the bailor. In case of pledge, the
pawnee acquires a special property in the goods bailed, the general
property on ownership remaining with the pledger. The special property is a
right to possession coupled with the power of sale on default.
3. Right of sale- In case of bailment, if the bailor does not pay the lawful
charges due to the bailee in respect of services, etc. rendered by the bailee,
the bailee can exercise lien over the goods bailed, i.e., he can retain them
until the necessary payment is made to him.
In case of pledge, the pawnee has not only the right to retain the goods
pledged until the repayment of debt or performance of the promise, etc., but
in the event of default by the pawnor in payment of the debt, or
performance of the promise at the stipulated time, he may even sell the
goods, after giving a due notice of sale to the pawnor.
4. Right to use- in case of bailment, the bailee may use the goods bailed as
per the terms of the contract, while in a pledge the pawnee has no right of
using the goods.
Essentials of Pledge

 Bailment- there must be bailment of goods pledged. Therefore, delivery of

goods, whether actual, symbolic or constructive is necessary to constitute
pledge. However, doing of something which has the effect of putting the
pawnee or his agent in possession of the goods may be treated as
delivery.
 Where a person pledges goods in which he has only a limited interest, the
pledge is valid to the extent of that interest.
 In Bank of Chittoor v Narasimhulu, the bailor of a cinema projector and
other accessories requested the bailee bank to allow the pledged goods
to remain in his possession and promised to hold the same in trust for the
bailee, and also further promised to hold the same in trust for the bailee,
and also further promised to hand over the possession of the same to the
bank whenever demanded. It was held that there was constructive
delivery, i.e., delivery by attornment of the bailee, and the bailor’s
possession was in fact the possession of the bailee. The transaction was,
therefore, a valid pledge.
Hypothecation and Pledge
Distinguished

 Hypothecation as such has not been defined in the Contract Act but the same
has been recognized by usage since long.
 In pledge, there is delivery of goods from one person to another as security for
payment of debt or performance of a promise. In case of hypothecation, since
the possession of the goods is retained by the owner and certain rights in that
property are transferred to the person in whose favour the property is
hypothecated.
 In case of pledge, since the pawnee has got the possession of the goods, in
the default by the pawnor, apart from other rights, the pledgee has a right of
lien over the goods, i.e., he may retain the goods pledged until payment of
debt, or performance of the promise, etc. In case of hypothecation, since the
possession of the goods remains with the owner, the hypothecate cannot have
the right of lien. He may sell the property in default.
 If an agreement empowers the hypothecate to take possession of the
goods and then sell the same in case of default of payment, he can
proceed in accordance with the agreement to sell the goods, without the
intervention of the Court.
 Example- A keeps his car as collateral to secure loan from a bank. The
bank allows A to retain the possession of the car for usage. A is now
unable to repay the loan, bank can seize the car pledged by
hypothecation. While the car is pledged (by hypothecation) to the bank
against the loan, the pledgor is liable for any loss or damage to the car
under his possession.
Surety has no right to goods in
hypothecation

 According to section 141, the surety is entitled to the benefit of such goods
which are with the creditor . It cover situations where the goods are
pledged to the creditor and he has the possession of the goods. If he loses
or parts with the goods, the surety is discharged thereby. In case there is
hypothecation of the goods, the goods remain in the possession of the
borrower. The hypothecate does not have the possession of the goods
and the goods remain in the possession of the borrower.
Rights of the Pawnee
Rights of the Pawnee

i) Pawnee’s Right of Retainer (Section 173)

ii) Pawnee not to retain for debt or promise other than that for which goods
pledged. Presumption in case of subsequent advances.
iii) Pawnee’s right as to extraordinary expenses incurred (Section 175)
iv ) Pawnee’s right where pawnor makes default (Section 176)
Pawnee’s Right of Retainer (Section
173)

 The pawnee may retain the goods pledged, not only for payment of the
debt or the performance of the promise, but 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.
Section 174: Pawnee not to retain for debt or promise other than that for which
goods pledged.
Presumption in case of subsequent advances.

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.
Section 175: Pawnee’s right as to
extraordinary expenses incurred

 The pawnee is entitled to receive from the pawnor extraordinary expenses

incurred by him for the preservation of the goods pledged.
 It has been already noted that according to section 173, a pawnee can retain
the goods for various claims, including the claim for necessary expenses
incurred by him in respect of the possession or for the preservation of the goods
pledged.
 Section 175 confers an additional right , i.e., the right to receive from the
pawnor extraordinary expenses incurred by him for the preservation of the
goods.
 For example- if the pawnee has to arrange for a bank locker for the safety of
the goods or he spends some amount for insuring them against theft, etc., he
can recover such expenses from the pawnor. He can enforce this right by filing
a suit.
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 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.
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.
 The power of sale conferred by this section, is for the benefit of the
pawnee. It can be exercised at his discretion.
 This section confers upon the pawnee two rights in the event of the default
on the part of the pawnor.
i) to file a suit for recovery of the debt or for performance of the promise, and
retain the goods pledged as collateral security.
ii) he may sell the goods on giving the pawnor reasonable notice of the
intended sale.
 a pledge does not get extinguished and, in fact, continues even when the
pawnee has sued and recovered a part of the debt without enforcement
of the pledge or the security.
 A pawnee under the provisions of this section has both collateral and
concurrent rights and can institute a suit for the purpose of realisation of
the said debt or promise while retaining the goods as a collateral security.
 The notice must be clear and specific in its language and must indicate
the intention of the pawnee to dispose of the security. Notice may be oral
or written.
 It is not necessary that the notice under this section should state the date,
time or place of the intended sale.
 If goods are sold by the pawnee without notice of sale, the sale is bad and
void.
Rights of the Pawnor
Section 177: Defaulting pawner’s right
to redeem

If a 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 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 expenses
which have arisen from his default.
 By virtue of Section 177, the pawnor is entitled to redeem the goods
pledged at any time before the actual sale of goods, even though he
makes default in payment of the debt or performance of the promise
within the stipulated time.
 His right is not affected merely because of the expiry of the time stipulated
for repayment and his failure to pay back within that time.
 His right extinguishes after the sale of goods.
 But he has to pay the expenses which has arisen from his default.
 In fact, the period of limitation for a suit by the pawnor against the
pawnee to recover the things pledged is 30 years from the date of the
pawn.
 The right to redeem is extinguished not by the expiry of the time specified
in the notice of sale, but by the actual sale of goods.
 This sale is not just ‘intention to sale’ as contemplated under section 176.
 The term used in section 177 is ‘actual sale’.
 Legal Heir’s Right to Redemption

 Kamali Sarjoni v Indian Bank, AIR 2008 AP 71- Certain gold ornaments were
pledged with the bank as security for gold loan. The pawnor died. He left
behind a will enabling his widow to redeem. His wife sought to redeem the
pledge by repaying the loan. The Bank demanded probate. The court
said that the bank has no right to do so. Neither probate nor succession
certificate was necessary. The son and daughter of the deceased had
raised no objection.
Who can Pledge?

 Ordinarily, it is the owner of the goods, or any person authorized by him in that
behalf, who can pledge the goods.
 If a servant has the custody of the goods, or a tenant gets the possession of a
furnished house, the servant cannot pledge the goods, nor can a tenant
pledge the furnishing materials in his possession.
 A person obtaining the goods fraudulently does not have the right to pledge
them.
 Example- A obtained the possession of certain goods from railway on the basis
of a forged railway receipt and then pledged the goods to B. It was held that
the pledge by A was not valid, and B did not get any rights in the goods as a
pledgee, and hence the railway authorities could recover from B.
 In the following exceptional cases, a person who is neither the owner, nor
having the authority from the owner for pledging the goods, but having
possession with the owner’s consent can make a pledge and confer rights
on the pledgee. The exceptions recognized are as follows:
1. Pledge by a mercantile agent (section 178)
2. Pledge by person in possession under voidable contract (section 178 A)
3. Pledge by a person with a limited interest.
4. Pledge by seller in possession after sale. [ Section 30(1), SOGA]
5. Pledge by buyer in possession after sale .[ section 30(2), SOGA]
Mercantile Agent [Section 2(9) of Sale
of Goods Act]

 “mercantile agent” means a mercantile agent having in the customary

course of business as such agent authority either to sell goods, or to
consign goods for the purposes of sale, or to buy goods, or to raise money
on the security of goods;
Section 178: Pledge by mercantile
agent

 Where a mercantile agent is, with the consent of the owner, in possession
of goods or the document of title to goods, any pledge made by him,
when acting in the ordinary course of business of a mercantile agent, shall
be as valid as if he were expressly authorised by the owner of the goods to
make the same; provided that the pawnee acts in good faith and has not
at the time of the pledge notice that the pawnor has not authority to
pledge.
 Explanation.—In this section, the expressions “mercantile agent” and
“documents of title” shall have the meanings assigned to them in the
Indian Sale of Goods Act, 1930 (3 of 1930).
 The section is the counterpart of the second paragraph of section 27 of
the Sale of Goods Act, 1930, which relates to sales.
 The present section 178 and section 178A were inserted by the Indian
Contract (Amendment) Act, 1930, which came into force on 1 July 1930.
 The language of the old section 178 was very wide and it appeared
capable of giving effect to pledges made by persons who were in
temporary possession of goods or documents of title without having either
the real or apparent authority of mercantile agents, and indeed without
being agents of any kind.
 The pledge made by a person under section 178 is valid if the following
conditions are satisfied-
(a) The pledge must be made by a mercantile agent. Therefore, a person to
whom the goods are entrusted for safe custody or under a contract of hire
cannot make a valid pledge.
(b) The mercantile agent must be in possession of the goods or documents of
tittle to the goods ( for example a railway receipt or a bill of loading) as a
mercantile agent.
(c) The possession must be with the consent of the owner.
(d) He should be acting in the ordinary course of business of a mercantile agent.
(e) The pawnee should act in good faith and should not have, at the time of the
pledge, notice that the pawnor has no authority to make the pledge.
Section 178A:Pledge by person in
possession under voidable contract

 When the pawnor has obtained possession of the goods pledged by him
under a contract voidable under section 19 or section 19A, but the
contract has not been rescinded at the time of the pledge, the pawnee
acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor’s defect of title.
 Example- A obtains an article from B by way of misrepresentation and
pledges it with his best friend, C against a loan. C, acting in good faith,
accepts the article as security. Later, B finds out that A had misrepresented
in order to obtain the article. The pledge between A and C is a valid
pledge and C will have a good title to the goods.
Section 179. Pledge where pawnor
has only a limited interest

 Where a person pledges goods in which he has only a limited interest, the
pledge is valid to the extent of that interest.
 A, B and C are owners of a a gold biscuit to extent of 20%, 30% and 50%
respectively. A is in need of money; therefore, he pledges the gold biscuit
as security against a loan secured from D. The pledge between A and D is
valid only to the extent of 20% share of A in the gold biscuit. If A defaults in
the repayment of loan, D can only recover the loan from A’s respective
share i.e. 20%.
 A, B and C are owners of a a gold biscuit to extent of 20%, 30% and 50%
respectively. A is in need of money; therefore, he pledges the gold biscuit
as security against a loan secured from D. The pledge between A and D is
valid only to the extent of 20% share of A in the gold biscuit. If A defaults in
the repayment of loan, D can only recover the loan from A’s respective
share i.e. 20%.
Lallan Prasad v. Rahmat Ali, AIR 1967
SC 1322

 The appellant advanced Rs. 20,000 to the respondent against a promissory

note and a receipt.
 The respondent also executed an agreement whereby he agreed to
pledge as security, certain goods.
 However, the appellant sued the respondent, first of all for failure to deliver
the goods on pledge and second, to recover the balance of the said
loan.
 By way of evidence it was proved on record that the goods were
delivered by the respondent to the appellant.
 Therefore, the contention of the appellant that there was no Pledge, was
rejected.
Lallan Prasad v. Rahmat Ali, AIR 1967
SC 1322

 The appellant sought to recover the balance of the loan, however, he was
not in a position to return the goods that were pledged by the respondent.
 Issue- Whether the Appellant was entitled to any relief when his case was
that the Respondent never delivered to him the said goods and the said
agreement never ripened into a pledge?
Lallan Prasad v. Rahmat Ali, AIR 1967
SC 1322

Held
 Section 176 of the Indian Contract Act, 1872, deals with the rights of a pawnee and
provides that in case of default by the pawner the pawnee has (1) the right to sue upon
the debt and to retain the goods as collateral security, and (2) the right to-sell the goods
after reasonable notice of the intended sale to the pawner. So long, however, as the sale
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 he 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.