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PLEDGE

Table of Contents

(Ss. 172 to 181)

QUESTION BANK.

Q.1. Define pledge. What are the circumstances in which a pledge created by non-owners is valid?

Q.2. Define pledge and examine the rights of pledgee against third parties and the Pledger when he makes default. Oct. 98, 01, Apr. 2000.

Q.3 Define pledge. Explain rights and duties of Pawnee. Nov.06, Apr.08

Q.4 When is pledge created by non-owners valid? Nov.2005, Nov. 09.

Q.5 When is a ‘pledge’ created by non-owners is valid? Apr.04,09, Nov.09

Q.6 Define pledge. Distinguish between bailment and pledge. Nov.2008

SHORT NOTES.

Rights of Pawnee.
Essentials of contract of pledge.Nov.2003

SYNOPSIS

Pledge Defined.
Essential of pledge.
Delivery.
In pursuance of contract.

III. Right of Pawnee.

Right of lien (Ss. 173 and 174).
Right of extraordinary expenses. (S. 175).
Right of sell (S.176).
Right of Pawnee to redeem (S.177).
Who can pledge?
Pledge by mercantile Agent (S.178).
Person in possession under voidable contract (S.178).
Pledge by a person who has a limited interest (S.179).

I. PLEDGE[1] DEFINED: –

‘Pledge’ is a kind of bailment where the thing is delivered as a security for the repayment of debt. Ownership does not pass; what passes is the right of possession with the right to sell in default.

A pledge differs from a lien; a sale upon default is an incident of a pledge; in a lien, there is only the right to detain and not to sell; secondly, the lien is created by law independent of contract, and the pledge is the creation of contract only. Thirdly, the pledge is determined on the specific goods (assignable), while the lien is not determined but applied to whatever quantity of goods in possession.

172, Defines “Pledge” “Pawner” and “Pawnee”-

It provides that ‘the bailment of goods as security for payment of debt or performance of a promise is called pledge’.

The bailor, in this case, is called a “Pawnor.[2]”. The bailee is called the “Pawnee.[3]”.

Illustration

If A hands over his car to B as security for a loan given by B to A, it is a pledge. As soon as A pays the money, B has to return the car.

II. ESSENTIALS OF PLEDGE;

The following are essential ingredients of a pledge.

1. Delivery: –

The actual or constructive delivery of the goods pledged is a must for the contract of pledge. Therefore, hypothecation is a pledge.

A pledge can be made of movable goods alone. However, if the property transferred is immovable, it will then be a mortgage governed by the Transfer of Property Act[4].

2. In pursuance of the contract: –

It is essential to a valid pledge that delivery of the chattel shall be made by the ‘Pawner’ to the ‘pawnee’ in pursuance of the contract.

III. RIGHTS OF PAWNEE: –

The Pawnee has the following rights.

1. Right of lien or Right of Retainer (Ss. 173, 174): –

The Pawnee has the right to retain the goods pledged until his dues are paid. He has a right to retain the goods not only for payment of debt or performance of the promise but also for the interest due on the debt. He is also entitled to all the necessary expenses incurred by him in respect of possession or preservation of the goods pledged[5].

The Pawnee can retain the goods only for the payment of that particular debt for which the goods were pledged. He cannot retain the goods for any other debt or promise unless there is a contract to the contrary.[6].

2. Right to Extraordinary expenses[7] (S. 175): –

The Pawnee is entitled to receive from the Pawner extraordinary expenses incurred by him for the preservation of goods pledged. For example, if Pawnee had to defend the suit filed for recovery of the goods pledged to it by some other person, Pawnee could get expenses incurred by him from Pawner for defending the suit.

3. Right to sell (S. 176): –

On the default by the Pawner in payment of the debt or performance of the promise, the pledgee gets two rights under S. 176 of the Act. Firstly, the pledgee may sue upon the debt and retain the goods as collateral security. Secondly, he may sell the goods after reasonable notice of the intended sale to the Pawner[8].

IV. RIGHT OF A PAWNER: – TO REDEEM[9] (S.177): –

A Pawner has all those rights available to the Bailor, but the most important right of the Pawner is redemption.

If the time fixed for the performance of a promise or repayment of the debt has expired, and the Pawner defaults in payment of debt or performance of the promise for which the pledge is made. The Pawnee gets the right to sell the goods. But the Pawner may redeem[10] the goods pledged at any time from the Pawnee before making an actual sale of them. Provided he should pay any expenses arising from his default in addition (of previous due).

All the rights available to Bailee are similarly available to Pawnee.

V. WHO CAN PLEDGE: –

Ordinary goods may be pledged by the owner or by the person with the owner’s authority. A pledge made by any other person may not be valid, e.g., a pledge made by a servant. But to secure commercial transactions in good faith, S.178 and S. 179 of the Act[11] provides certain circumstances in which a person possessing goods with the owner’s consent may make a valid pledge without the owner’s authority.

They are-

1. Pledge by mercantile[12] agent (S. 178): –

Where a mercantile agent, with the consent of the owner, is in possession of the goods (or documents of title of goods) and makes any pledge while acting in the ordinary course of his business shall be valid, provided the Pawnee acts in good faith and has no notice of the fact that the agent has no authority to pledge.

2. Person in Possession under voidable contract[13] (S.178A):

When the Pawner obtains the possession of the goods pledged by him under a contract which is voidable[14] , but the (voidable) contract is not rescinded at the time of pledge, if the Pawnee acquires goods in good faith and without notice of defective title of Pawner, he gets the good title.

In Philips V. Brooks Ltd[15]

Facts: – A fraudulent person was showing himself as a rich man, which induced the plaintiff to give him a valuable gold ring. For consideration thereof, he issued a cheque, which was dishonoured. Before the plaintiff could discover the fraud, the fraudulent person pledged the golden ring to the defendant (Pawnee).

Held: The pledge made to the defendant was held to be valid; it is made by a person (fraudulent person) in possession under a voidable contract.

3. Pledge by a person who has a limited interest[16] (S.179).

When a person pledges goods in which he has a limited interest, the pledge is valid to the extent of that limited interest.

For example-

A pledge by a co-owner of goods would be valid to the extent of his proportionate ownership of the goods.
A pledgee, when further pledges the goods; the pledge will be valid only to the extent of his interest.

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[1] तारण, तारणाचा करार म्हणजे असा करार की, ज्यामध्ये कर्जाच्या परत फेडीच्या हमीसाठी वस्तू तारण ठेवली जाते. [प्रतिज्ञा प्रतिज्ञा का अनुबंध एक ऐसा समझौता है जिसमें ऋण की चुकौती की गारंटी देने के लिए माल गिरवी रखा जाता है।]

[2] जे माल ठेवतात. [वह जो माल रखता हो।]

[3] ज्याच्याकडे माल ठेवला जातो तो. [जिसके पास माल रखा हो।]

[4] In Bank of Chittor V. Narshimbulu Naidu. AIR 1966 A.P. 163.

Facts: – A cinema projector and accessory were pledged with a Bank. The bank allowed the property to remain with the Pledgers, (since camera is the equipment of running cinema). But the Pledger sold the machinery.

Court Held: – that the sale was subject to the pledge. There was a constructive delivery of those goods to the bank.

[5] S. 173

[6] S. 174.

[7] जादाचा झालेला खर्च मिळविणेचा अधिकार. [अतिरिक्त खर्च वसूलने का अधिकार।]

[8] In India Bank V. Kiran Overseas Export Ltd. 2000 CLB.

Court Held: – that, if proceeds of such sale are less than amount due, the Pawner is still liable for balance. But if amount received in proceeds is more than debt due, the Pawnee should return the surplus to Pawner.

[9] तारण परत मिळविण्याचा अधिकार [तरणताल को पुनः प्राप्त करने का अधिकार।]

[10] Take back by making necessary payment.

[11] Indian Contract Act 1872.

[12] व्यापारी दलाल म्हणजे असा दलाल की, जो आपल्या मालकाचा माल स्वतःचाच आहे असे समजून स्वतःचे नावे विक्री करतो. [एक व्यापारी दलाल एक दलाल होता है जो अपने स्वामी के सामान को अपने लिए गलत समझकर अपने नाम से माल बेचता है।] Mercantile Agent, means an agent having in the customary course of business as an agent an authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods or to raise money on the security on the security of goods.

[13] निरर्थक करारामुळे वस्तु ताब्यात असणारा व्यक्ती. [शून्य अनुबंध के कारण किसी चीज़ के कब्जे में एक व्यक्ति।]

[14] (under Ss. 19 and 19A) of the Indian Contract Act.)

[15] (1919) 2 K.B. 5

[16] मर्यादित अधिकार असणारा व्यक्ती [सीमित अधिकारों वाला व्यक्ति।].