Pledge – Sec 172

• Pledge is a special kind of bailment

- Goods delivered to secure repayment of debt or performance of promise
- (Bailor) – Pawner – Pledger // Bailee – Pawnee – Pledgee
• Essentials
1. Delivery of possession
- Chattels should be delivered to the Pawnee
- A film producer borrowed loan from financer-distributor and agreed to deliver first
copy of the film – held no pledge – because delivery was not given, as film yet to
be produced
- Actual delivery and Constructive delivery e.g., godown key, title deed, railway
receipt etc…
Essentials

- Where a third party in the possession of pledger’s goods agreed to hold them
for pledgee on the instruction of the pledger – constitutes sufficient delivery
and it is called attornment
- Delivery of title deeds enables the pledgee to take effective possession of goods
for the purpose of pledge
• Morvi Mercantile Bank ltd., v Union of India (1965) – certain goods were
consigned with railways to self, for transmission from Bombay to Okhla
- Later consigner endorsed the railway receipt to a Bank and borrowed ₹ 20,000/-
i.e., pledged, goods having lost in transit Banker sued the railway for the
recovery of their actual worth ₹ 35, 500/-
- Trial court rejected; HC allowed to recover ₹ 20,000/- the SC allowed to recover
its actual worth – issue was – whether railway receipt could be treated as
goods? The SC (Subba Rao J)was positive – allowed the pledgee to recover the
loss (whoever holds the railway receipt, holds constructive possession of goods)
- Railway receipt was treated as that of Bill of Lading
Essentials

- Pledgee was allowed to recover what the owner would have availed
against the third party when he was being deprived or causes injury
- Dissenting opinion by J Ramaswamy and J Mudholkar were of the
view that when goods were in the possession of the third party,
notification should have been given to him and he should have
acknowledged that he is holding the goods for pledgee – then that
would have been constructive delivery – otherwise it is not
- CI&B Syndicate ltd., v Ramachandra Prabhu (1968) held by Karnataka
HC that bills issued by public carriers doesn’t acquire the status of
document of title therefore their delivery can’t be regarded as pledge
of goods
Essentials
Pledge by hypothecation

- Goods are allowed to remain with the pledger for some special purpose, it
doesn’t militate effectiveness of the pledge,
- Reeves v. Capper – the captain of a ship pledged his chronometer with the
owner of the ship, but allowed the captain to use it during voyage, but
captain pledged it again with another – court held first pledge remains valid
- The constructive pledge comes into existence when pawner agrees to hold
the goods for pawnee without delivery and agreed to deliver when they
were demanded by the pawnee
- Bank of chittur v Narasimbulu – AP HC held- a cinema projector was pledged
with banker and borrowed loan, but banker allowed the pledger to retain
projector and use in show, but it was sold by the pledger again to somebody
else – held sale was subject to pledge – because there was a constructive
delivery of goods or delivery by attornment, where pledger acknowledges
that he held the goods for pledgee
Essentials `
- In such cases the subsequent pledgee or purchaser can’t claim
anything from those goods unless the first pledgee is satisfied
2. In pursuance of Contract
- In a pledge transaction delivery of goods must be under a valid
contract
- But it is not necessary that delivery of goods and loan should be
contemporaneous
- Delivery may be made in contemplation of loan – sanction of loan
perfects the pledge
- Blundell Leigh v Attenborough – on 1st Nov 1919 plaintiff (lady)
handed over some jewelry to Mr. Miller and told him to value and tell
how much you can lend - Miller was to keep the jewelry as security
Essentials
- But on the same day Miller pledged them with the defendant and
borrowed £1000/ and on 5th November he advanced £500/-
- Later Miller died and plaintiff came to know about the second pledge
and paid back the loan amount and claimed back the jewelry from the
defendant
- Defendant contended that handing over of jewelry was only gratuitous,
no support of consideration – hence no valid pledge – by the time
money was advanced jewelry were not in his possession of Miller
- But court said there was a valid delivery of jewelry in contemplation of
loan and there was a valid pledge, hence subsequent pledge by Miller
is subject to first pledge
Rights of Pawnee
1. Right of retainer (Sec 173-174)(Lien)
- Right to retain goods is not only securing repayment of loan, interest
and other expenses in maintaining etc. but also performance of
promise
- Sec 174 pawnee doesn’t have the right to retain for purposes other
than the purposes for which it was pledged
- However, in the absence of contract to contrary, there is a
presumption that it is applicable to subsequent advances
- But this right of retainer ends when valid tender of money advanced
is made, and refused to accept it (repayment of loan is offered)
- Refusal to accept repayment opens the pledger to seek remedy for
recovery of goods pledged
Rights of pawnee
Special and Paramount Interest of Pledgee in pledged goods –
• Right of retainer is like a right of particular lien – pawnee will get special
property in goods pledged – pawner will have general property right
- After discharge of debt absolute property right will revert to pledger
- Special Property right vests with pledgee only so far as is necessary to
secure his debt
- Bank of Bihar v State of Bihar – the SC observed that right of retainer is
different from right of lien, where lien holder can’t assign, pledge or sell
goods unless it is so provided in contract, whereas in case of retainer it is
permitted to sell, pledge the goods pledged
- Here judgement was obtained against pawner, the decree holder could
not seize the goods pledged unless the pawnees claims was satisfied
- on the bankruptcy of the pawner, pawnee becomes the secured creditor
Rights of pawnee

• Without satisfying the claim of the pawnee, creditors of the pawner

have no right to take away the pledged goods
- In a case, goods pledged with the bank was seized by the state, but
state could not deprive the pledgee’s right to realize – hence state had
to indemnify the pawnee to the extent of his claim
English law is as that of Indian law
- A sugar manufacturing company pledged its sugar stock with a Bank –
on the other hand, factory purchased surgr cane from the farmers
but not paid, and failed to pay wages of labour, - complained to Sugar
Commissioner and he seized the sugar for securing payment to
farmers and labours - held bankers right over stock has precedence
over Sugar Commissioner’s right to seize claim – in the absence of
winding up proceedings the claim of the banker was ranked as
unsecured creditors
Distinction between right of lien and Right of retainer-(rights of pawnee)

1. Right of Lien is either created by law or by express or implied contract

- Whereas in case of right of retainer is crated by contract
2. Right of lien is in possessory form of security interest, possession is
lost right of lien is lost
- Right of retainer is not lost by loss of possession – if the amount realized
on sale of goods pledged is insufficient to redeem the debt, pledger is
liable for the rest of the amount
3. Right of lien doesn’t constitute ownership; rather it is a kind of
encumbrance, hence, it can be simply retained, but can’t sell unless it
is so provided in contract
- Retention is not only for securing repayment of debt and performance
of promise but also interest and other expenses – allows the pledgee to
sell pledged goods on default of pledger
Rights of pawnee

• Hypothecatee has no direct right of seizure

- Hypothecator(Pledger/Pawner) and Hypothecatee(Pledgee/Pledger)
- When pledge is in the form of hypothecation the hypothecatee can’t
directly seize the goods by entering, locking etc., of the premises
- He can seize the goods with the prior consent of the hypothecator, or
by court order
- In Union of India v. Senthilnathan, one of the most conspicuous term
of the contract says that if the debtor commits default in repayment of
loan as per the stipulation, the lender was at liberty to seize goods –
the court held this power was not directly exercisable
- Goods are not given to the possession of creditor on the day of
execution of hypothecation deed, what was contemplated on the part
of creditor was to go for sequester the goods if it is so desired, that too
as per the process of law
Rights of Pawnee

- Best approach on the part of creditor is to file a suit and obtain a

decree to proceed against the goods as specified in the decree
- Muthoot Leasing and Finance ltd., v. Vasudeva Publicity Service –
Vehicle purchase was financed, the financer without informing the
latest position of instalment, outstanding balance, and without notice
vehicle was seized by force. Fact being all the instalments were duly
paid –held vehicle seizure by force was illegal, the trial court awarded
₹50,000 damages for the breach of contract by financer – it was
upheld in appeal
Rights of pawnee

- One of the terms in contract says that financer can forfeit the
payment of instalments which is already made in the event of default
of debtor – held void and arbitrary,- any amount paid by the debtor
should be duly accounted and credited to his account, the financer is
entitled only for the balance amount
- Duty of care – if hypothecated good are missing from the possession
of the hypothecatee i.e., Bank was held liable for the loss
2. Right to extraordinary expenses Sec. 175
- If at all pawnee incurred any expenses extraordinarily in preserving
the goods pledged he is entitle receive it
- However, he can’t retain goods pledged for the recovery of expenses
at the most he can sue for the recovery of expenses
- Bank is not permitted to debit the amount as legal and xerox charges
Rights of pawnee

3. Right to sell Sec. 176

- When pawner fails to repay debt or perform promised obligation, the
pawnee will get two distinct rights
(i) May sue upon the debt and retain the goods as collateral security
(ii) Can sell the goods pledged after giving reasonable notice to pawner
- Right to sue is a personal action based on contract of loan apart from
pledge
- Goods can be retained by the pawnee until the realisation of debt
amount, after realisation of debt they have to be surrendered back to
pawner
- Lallan Prasad v. Rahamath Ali, the SC observed that by the reason of
his own act the pledgee is unable to return goods pledged he can’t
have the judgement for the debt…..
Rights of pawnee

- In the above-mentioned case the defendant borrowed ₹ 20,000/ from

plaintiff by pledging aero scraper worth ₹ 35,000/- The plaintiff sued
defendant for the repayment of debt but unable to produce pledged
aero scrapes having sold it to someone – hence action for loan
recovery was rejected
- Justice Shelat after observing the rights of parties to pledge quotes
the observation of House of Lords in Trustees of Property of Elics and
Co. v Dixon Johnson ‘ if a creditor holding security and lending loan is
under obligation on payment of debt to handover the security, if
security is improperly made away and unable to return them to
debtor, he can’t have judgement for the debt
- Otherwise, what happens the creditor would recover debt and retain
security - pawner would be placed in increased liability than
bargained under the contract of pledge
Rights of pawnee

• Dodla Baskar Rao v SBI – Bank holding gold as collateral security, filed
a suit on promissory note – gets the conditional decree – to return
gold – if debtor doesn’t satisfy the decree, then he can proceed to sell
• Bank was allowed to retain the FD receipts and sue for the recovery of
loan
• Bank was not allowed to adjust the monthly instalments of FD
towards loan amount
• The creditor has two concurrent rights – against property pledged and
sue him personally
• Central Bank of India v Abdul Mujeeb Khan 1977- Hypothecation of
truck – neither sold nor maintained – bank was held liable for
extraordinary depreciation
Rights of pawnee

• SBI v. Suresh Kumar – Bank financed to purchase lorry, paid insurance

premium also – later owner reported the loss of lorry by theft – held
insurance Co. was liable to pay - bank was hypothecatee and
Insurance Co. and owner of lorry became joint debtor
- Liability of insurance Co. was to the extent of sum assured and owner
for the remaining balance
• Two rights are disjunctive – one will not take away other – not
necessarily assertion of these rights in order
• Priority of employees PF dues
- Maharashtra Co-operative bank ltd v. Assistant Commissioner PF 2009
- employer defaulted in depositing employees PF dues – the court held
PF department will have the priority over property pledged for
attachment
Rights of pawnee

• Requirement of Reasonable notice

- One of the alternative rights of pawnee is selling pledged goods – subject to
reasonable notice – specifying time within which it will be sold
- Statutory requirement can’t be dispensed with by terms of contract
- Prabhath Bank v Baburao – a term was incorporated in contract for dispensation
of notice – defaulted – demanded – requested for time – later sold – contended
that there is an inference of notice because debtor asked for time, court said it is
not because, notice should express the intention of pawnee to sell the security
within the time given
• Proceeds are insufficient
- Right of sale can be exercised against time barred debt, but court in lieu of sale
order the pawner to pay off the time barred debt, but such an order shall
inevitably be accompanied by an order to the pawnee to return the pledged
articles
Rights of pawnee

• The fact that time, date and place is not mentioned in the notice did
not render the notice unreasonable
- No payment is made even after the notice, mere requesting the
pawnee to postpone the sale will not stop the pawnee from proceed
with sale
- Can a pledgee participate in sale process as purchaser? Punjab HC on
the basis of Privy Council decision held positive – It will not render the
contract void as such
- But the pledger can hold the pledgee liable for any loss by he
purchasing the goods for himself E.g., less than the market price etc.
- Loss of security due to negligence on the part of pledgee – the liability
of pledger is reduced to that extent
 Pawners right to redeem

• Gurbax Rai v Punjab National Bank – A firm pledges its goods in godown
in favour of Bank, goods were insured covering fire risk, in a fire
accident part of the goods were destroyed, bank claimed and received
the sum assured for goods damaged – bank was asked reduce the
liability of pledger to that extent
• Pawner’s Right to redeem
- Time stipulated for payment of debt or performance of promise expires
but pawner fails - even after default he has the right to redeem
- Even after reasonable notice but before actual sale of goods rightfully
- Liable for additional expenses by default of pawner
- Satisfaction of debt or performance of promise puts an end to the
contract of pledge – pawnee is bound to redeliver the goods pledged
Who can pledge?
- Right of special interest of pledgee in the goods pledged will come to an end when
debt is redeemed
- Thus, right to redeem is absolute
- If there any increase in the goods pledged pawner is entitled for the same E.g.,
shares and securities are pledged, on such pledged securities rights issues, bonus
share etc.,
• Who can Pledge –
- Ordinarily the owner and the persons authorized by the owner
- E.g., goods left with the servant for some special purpose are pledged when owner
is temporarily out of station – held to be invalid pledge
- In Purushotham Das v U of I 1967 – railway company delivered the goods to the
holder of forged railway receipt – later they were pledged with the defendant –
when railway co. sued the defendant for the recovery – contended that railway
Co., was too negligent in delivering the goods to a wrong person – held this will
not estop the railway company from suing the defendant with whom goods were
pledged- held pledge was not valid
Who can pledge?

- But interest acquired in goods the during ordinary commercial

transaction required to be protected
1. Pledge by Mercantile Agents Sec 178 – when an agent is in
possession of goods or title deeds with the consent of owner –
pledge made by him in the ordinary course of business is valid
- Provided pawnee acts in good faith, has no notice of fact that agent
doesn’t have the authority to pledge
• Necessary conditions
(i) Mercantile Agent – Sale of goods Act 1930 – in the customery
course of business has the authority to sell, consign, purchase, raise
fund by giving goods as security
(ii) Possession with the owner’s consent – agent should be in
possession of goods or title deeds with the consent of the owner
Who can pledge?

- The SC observes that if the consent is there, it is immaterial it was

obtained by fraud, misrepresentation or dishonest intention – at the
most he may be answerable for the same – consent given by the owner
is not annulled thereby
- E.g., a goldsmith obtained jewelry in the pretense that he had customer
to buy, but he pledged them – pledge was held to be valid
- E.g., a French Co., sent some pictures to an agent in London for
exhibition only, but agent pledged them – held pledge was valid
(iii) In the course of business – goods must have been entrusted to in the
course of business and received in the capacity of Mercantile agent,
otherwise the pawnee can’t claim it to be a valid
- E.g., a furnished house was given on rent, tenant happens to be an
auctioneer, can he sell or pledge the furniture? Definitely not, because
furniture were not given in the ordinary course of business
Who can pledge?
(iv) Good faith – pawnee should have acted in good faith with notice that agent
doesn’t have the authority – pledge is not valid
- Pledge of document of title – where mercantile agent is in possession of
document of title of goods – pledgee gets good title
- It includes bill of lading, dock warrants, warehouse keeper’s certificate,
wharfingers certificate, railway receipt etc.
- Constructive possession and control over the goods also makes the pledge valid
2. Person in possession of voidable contract Sce. 178A-
- Pawner has obtained the goods under voidable contract and pledged them –
becomes valid pledge – provided pawnee acted I good faith without notice of
defective title of pawner – pledged before voidable contract is rescinded
Who can pledge?

• Phillips v. Brooks – a fraudulent person pretended himself as creditor

and induced plaintiff to pledge his diamond with him in return of
worthless cheque – but before plaintiff discovered that it was a fraud
the diamond was pledged with defendant
- Held it was a valid pledge because it was an instance of fraud and
diamond was received under voidable contract, diamond was pledged
before plaintiff could rescind the contract and pledgee (the defendant)
acted in good faith without the notice of defective title of fraudulent
person – thus the true owner can’t claim back his diamonds from the
pledgee
- However, if a person obtain the possession of goods under void
contract such person in possession can’t create a valid pledge
Who can pledge?

• In Central National Bank v. United India Bank Justice Mukarjee explains the
principles that in case of mistaken identity of persons there is no real consent
(non-existence of consent) renders the contract void
- E.g., ‘A’ obtains goods from a owner by falsely representing himself to be ‘B’
thus owner never consented the possession of goods to ‘A’, thus the so called
consent is not real, hence it is void
- Consent means two parties agrees to upon the same thing in same sense
- Contract must not have been rescinded at the time of pledge – usual method
of rescinding contract is giving notice expressing intention to rescind the
contract
- Pledge after receiving notice of recission is not valid
- Person obtained goods under voidable contract keeps them away from the
reach of the owner and out of contact, then he has to demonstrate the
intention of recission of contract by informing the police- after such actions if
the pledge is made it is not binding on owner
Who can pledge?

3. Pledge by the Pledgee –Sec 179

- Where a person pledges the goods with the limited interest pledge is
valid only to that extent
- In case of pledge pledgee acquires limited interest in the goods
pledged i.e., to the extent of loan amount
- If the pledgee pledges the pledged goods for larger amount, still the
first pledger is entitled to his property on paying the amount for
which he pledged them
- Where on the other hand pledge is not effective on the part of the
pledgee, any pledge made by him also equally ineffective