PLEDGE

M Vijay Bhaskar
Assistant Professor
NLUO
Cuttack
 Meaning of Pledge
Pawn or Pledge is a special kind of bailment where a movable thing is
bailed as security for the repayment of a debt or for the performance
of a promise. For example, if A borrows Rs 500 from B and keeps
his cycle with him as security for repayment, it is a contract of
pledge. The person taking the loan is called the pledger or pawnor
and the person with whom goods are pledged is called the pawnee or
pledgee. Ownership of the pledged goods does not pass to the
pledgee. The general property remains with the pledger but a
"special property" in it passes to the pledgee. The special property is
a right to the possession of the articles along with the power of sale
on default.‘ Delivery of the goods pawned is a necessary element in
the making of a pawn. The property pledged should be delivered to
the pawnee.
 Definition of Pledge
According to Section 172 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”.
Essentials of Pledge
1. Delivery of Possession of goods
In a valid pledge it is necessary that pawnor has delivered
the possession of the goods to the Pawnee. Here only
possession of goods passes from pawnor to Pawnee and not
ownership. Where pawnor has not delivered the possession
of the goods there can not be valid pledge.
As Pledge is kind of Bailment therefore like a bailment delivery of
possession may be of two kinds :-
(i) Actual delivery;
(ii) Constructive delivery.
Delivery of document of title and delivery of key of a store where
the goods are kept is example of constructive delivery.
In Morvi Mercantitle Bank Ltd. v. Union of India AIR SC
1954 the Supreme Court held that the Railway receipts for goods
was the same thing as delivery of goods and delivery of railway
receipts amounts to delivery of goods
2. Possession has been delivered upon a contract:-
It is also essential elements of valid pledge that Pawnor has
delivered the possession of goods in pursuance of contract of
pledge. Delivery of possession may be-
(i) Simultaneous with advance; or
(ii) after getting advance; or
(iii) Before or in contemplation of Advance.
3. Possession of the goods has been delivered as
Security-
For valid pledge it is necessary that Pawnee has delivered some
goods the Pawnee for:
(i) Repayment of a debt; or
(ii) Fulfillment of the promise

4. In a pledge all essential of valid bailment must be

present: -
Pledge is kind of bailment therefore All essentials of bailment
must be present in the valid pledge. Pledge can me made for
only movable goods.
 Pledge Bailment
Delivery of goods from one person to Delivery of goods from one person to
another as security for repayment of another for some Specific purpose ( Sec
debt or performance of a promise (Sec 148)
172)
The person who delivers the goods as The person who delivers the goods on
security is known as Pawnor and person contract known as Bailor and person
receiving it is known as Pawnee receiving it is known as Bailee

The Pawnee cannot use the goods In bailment the bailee use the goads bailed if
pawned the terms of bailment provides so

Pawnee has a right to sell the goods, Bailee may either retain the goods or sue
pledged with him after giving notice to bailor for his dues.
pawnor, in case of default by the pawnor
to repay the debt

Always made for a consideration May be made with or without consideration

 Pledge Hypothecation
Bailment of goods as security against the debt Hypothecation is the pledging of goods, against
for the performance of the obligation or is the debt without delivering them to the lender.
known as the pledge

Section172 of Indian Contract Act, 1872 Section 2 of Securitisation and Reconstruction

of Financial Assets and Enforcement of Security
Interest Act, 2002

Possession of goods remains with the creditor Possession of goods remains with the debtor
or the Pawnee

Here the parties are Pawnor and Pawnee Here the parties are Hypothecator and
Hypothecatee
  RIGHTS OF PAWNEE (SEC.173 AND 176)
1) Right of Retainer [Sec.173]:

 Pawnee may retain the goods pledged for –

 (a) payment of the debt or the performance of promise,
 (b) any interest due on the debt; and
 (c) all necessary expenses incurred by him with respect to possession or for
preservation of goods pledged.

 2) Retainer for subsequent advances [Sec.174]

 (a) Where the Pawnee lends money to the Pawnor subsequently, after the date of
pledge, it shall be presumed that the he has a right of retainer over the goods already
pledged in respect of the subsequent lending also.
 (b) This presumption can be made invalid only by an expenses provision to that
effect.

 3) Reimbursement of Expenses [Sec.175]:

 Where the Pawnee incurs extraordinary expenses to preserve the goods pledged with him, he is
entitled to receive such amount from the Pawnor.
 4) Rights in case of default by Pawnor [Sec.176]
 (a) Suit: Pawnee may institute a suit against Pawnor when there is a default in
payment of debt or performance of promise at the stipulated time.
 (b) Retention / Sale of goods: Pawnee may – (a) retain the goods pledged as
collateral security, or (b) sell the goods pledged by giving a reasonable
notice to the Pawnor.
 (c) Surplus / Deficit on Sale : When there is a surplus on sale, Pawnee shall
pay the excess to the Pawnor. In case of deficit, Pawnor shall be liable for
the balance amount.
 (d) No Notice: Where the Pawnee does not give a reasonable notice to the
Pawnor, the sale is valid, but Pawnee is liable to pay damages to Pawnor.
 5) Right against true owner of goods [Sec.178A]
 (a) Where the Pawnor has acquired possession of pledged goods, under a
voidable contract u/s 19 or 19A but contract has not been rescinded at the
time of pledge, the Pawnee acquires a good title to the goods, against the
true owner.
 (b) The title of Pawnee is good only where – (a) he had no notice of the
Pawnor’s defect in title and (b) he acts in good faith.

 Reasonable notice u/s 176 means that a notice of intended sale of the security by the
Creditor within a certain date, so as to afford an opportunity to the Debtor to pay the
amount within the time mentioned in the notice. Notice of sale is essential and a clause
in the agreement excluding the requirement of Notice is inconsistent with the Act & is
void and unenforceable.
 RIGHTS OF A PAWNOR (SEC.177)
 1) Redeem the goods pledged

 Meaning of redemption: Right to recover back the goods by making

payment of the debt or performance of promise.
 Time for redemption: Where time of redemption is fixed, the pawnor
may exercise redemption:
 (a) within the time so fixed; or
 (b) even after expiry of time so fixed, provided –
 o the pawnee has not sold the good; and
 o the pawnor pays the pawnee all expenses arising on account of his
default.
 2) Enforce pawnee’s duties: The pawnor has the right to
enforce the duties of pawnee, if the pawnee fails to fulfill his
duties.
 3) Receive increase in goods: The pawnor has the right to
recover from pawnee any increase in
 goods pledged.
 4) Right to receive notice of sales: In case of default by the pawnor to pay
the debt or perform his promise, the pawnee has the right to sell the goods,
after giving a reasonable notice to the pawnor. If the pawnee fails to give
notice, the pawnor has the right to recover the loss incurred by him.
 DUTIES OF A PAWNOR (SEC.175)
 Pay the debt: The pawnor is liable to pay the debt or perform his promise as
the case may be. Pay deficit on sale: If the pawnee sells the goods due to
default by the pawnor, the pawnor must pay the deficit.
 Pay extra – ordinary expenses: The pawnor is liable to pay to the pawnee
any extraordinary expenses incurred by the pawnee for preservation of
goods.
 Disclose faults in goods:The pawnor is liable to disclose all the faults which
 (a) are material for use of the goods; or
 (b) may put the pawnee to extraordinary risks.

 Indemnify the pawnee: If loss is caused to the pawnee due to defect in

pawnor’s title to the goods, the pawnor must indemnify the pawnee.
DUTIES OF A PAWNEE
1) Not to use the goods: The pawnee has no right to use
the goods. However, he may use the goods, if he has been
so authorised by the pawnor.
2) Return the goods: The pawnee must return the goods
if the pawnor pays the debt or performs his promise.
3) Take reasonable care: The pawnee must take such care
of goods pledged as a man of ordinary prudence would
take care of his own goods.
4) Not to mix goods: The pawnee must not mix his own
goods with the goods pledged.
5) Return increase in goods: The pawnee must return to
the pawnor any accretion to the goods pledged with
him.
 Duties of Pawnor
Pawnor has the following duties:
1. The pawnor is liable to pay the debt or perform the promise as
the case may be.
2. It is the duty of the pawnor to compensate the Pawnee for any
extraordinary expenses incurred by him for preserving the
goods pawned.
3. It is the duty of the pawnor to disclose all the faults which may
put the pawnee under extraordinary risks
4. If loss occurs to the pawnee due to defect in pawnors title to
the goods, the pawnor must indemnify the pawnee.
5. If the Pawnee sells the good due to default by the pawnor, the
pawnor must pay the deficit.
 Lallan Prasad v. Rahmat Ali & Anr. 1967 SCR (2) 233
FACTS
The appellant advanced Rs. 20,000 to the first respondent against a
promissory note and a ‘receipt. The first respondent executed an
agreement whereby he agreed to pledge as security-for the debt
aeroscapes, 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 first respondent failed to deliver the goods, that the
agreement therefore did not ripen 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.
 ISSUES
1.Whether the first respondent pledged aeroscraps and
delivered possession thereof to the appellant ?
2.Whether the appellant was entitled to any relief when his
case was that the first respondent never delivered to him the
said goods and the said agreement never ripened into a pledge?
3.Whether the custody of the said goods after they were stored
at the aforesaid place was with Apellant or Respondent ?
 Decision
The goods were under the control and custody of the appellant. Some of the evidences apart from
oral evidences are-
The appellant showed indifference about the delivery. Considering the huge amount that
had been advanced he could not ordinarily be content merely with a promissory note. The appellant
was to permit the first respondent to remove and sell part of the said goods provided he paid to the
appellant 3/4th of the sale proceeds. The letter of surety from the second respondent itself stated
that the goods were pledged with the appellant, that the appellant was not allowing the first
respondent to remove them for sale. Appellant continued to pay the salaries of the watchmen,
though their services were no longer required by him. The first respondent removed part of the
said goods but did so after paying to the appellant. Amrit Lal directly gave the cheque to the
appellant w.r.t 100 maunds of the said aeroscraps that he purchased from A.
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. 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 pawnee 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.
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
 The Morvi Mercantile Bank Ltd. And Anr. v. Union of India
1965 SCR (3) 254
FACTS
A firm doing business in Bombay entrusted goods worth Rs.35500 with
the Railway for delivery in Delhi. The goods were consigned to “self ” and
the firm endorsed the railway receipts to a Bank against an advance of Rs.
20,000 made by the Bank to the firm. The firm also executed a promissory
note in favour of the Bank for that amount. When the goods reached the
destination, the Bank refused to take delivery, on the ground that they
were not the goods consigned by the firm. The Bank, thereafter filed a suit
for the recovery of the value of the goods against the Railway.
ISSUE:
1. Can an owner of goods make a valid pledge of them by transferring
the railway receipt representing the said goods?
2. What value such a document carry for this purpose?
 DECISION
An owner of goods can make a valid pledge of them by transferring
the railway receipt representing the said goods.The firm by
endorsing the railway receipts in favour of the Bank, for
consideration, pledged the goods covered by the said receipts, to the
Bank, and the Bank being the pledgee could maintain the suit for the
recovery of the full value of consignment amounting to Rs. 35,500.A
pledge being a bailment of goods under s. 172 of the Contract Act
the pledgee, as a bailee will have the same remedies as the owner of
the goods would have against a third person for deprivation of the
said goods or injury to them under s. 180 of the Act.
Since the language of s. 178 of the Contract Act is clear and explicit,
if any hardship and inconvenience is felt because of, such practice of
treating the receipt as a symbol of goods as not recognized, it is for
Parliament to take appropriate steps to amend the law and it is not
for courts to legislate under the guise of interpretation.
 The Official Assignee of Madras v. The Mercantile Bank of India
Ltd. (1935) 37 BOMLR 130
FACTS:
The Official Assignee of Madras has been assigned with the property of the
insolvents CK Nayaran and sons. The insolvents had a big business of
groundnuts. They were purchased from up-country and transported
through railways to the madras port. A godown in the port was leased to
the insolvents, but the signboard had the respondents’ name(R). R financed
the business by advancing money against a consignment of goods. The
insolvents used to take loans against the consignments and R used to give
them regularly; the railway companies knew about this arrangement, but
were never specifically informed. The company was declared insolvent.
After that some consignment reached the port but the port auth. was not
willing to release them until their debts were paid off. The goods were then
sold off by port auth. and the proceeds were kept.
ISSUE:
Whether a railway receipt is a document of title and thus the pledge of
railway receipts, the pledge of the goods?
 DECISION
Railway receipt is a document of title and pledging such documents is same as pledging the goods
themselves.This is backed up by S.178 of ICA, S.2 (4) of SOGA.
The consideration that, no third party holding the goods or dealing with them without notice of
the respondents’ lien, would be affected by that lien, is irrelevant to the equitable rights
constituted as between the respondents and the insolvents. Even if the documents of title are
regarded as merely tokens of an authority to receive possession, their transfer for value by way of
security for advances must at least raise an equity as between transferor and transferee entitling
the latter to restrain transferor from claiming delivery of the relative goods without producing the
receipts. If so, the appellant must be subject to the same equity.
Application of Hypothecation, which is a right in equity, could also have helped R. Insolvents used
to give letters of hypothecation to R, and it stated that the R had the right to sell off the pledged
goods to recover their debt. Thus the letter crEated an equitable right of R against the official
assignee. (as the assignee was in the shoes of the insolvent and thus did not have any greater right
than the insolvent).
In common law a mercantile agent can pledge the goods by pledging their documents of title but
not the owner. This is an anomalous position. Indian law uses the term “person” and not “agent” to
define who can pledge the goods. This includes both owners and agents of the said goods. The
concept that the pledging of the documents of title is akin to pledging the goods has been
established by the Indian Factors Act and can also be construed by sec. 178 of ICA.