What is pledge? What are the essentials of pledge? Can a pledge be made by a person who is not the owner of goods? What is the difference between bailment and pledge? Explain Pawner's right to redeem.
Pledge is a special kind of bailment in which a person transfers the possession of his property to another for securing the loan taken from the other. It only differs from bailment in the matter of purpose. When the purpose of the bailment is to secure a loan or a promise, it is called a pledge. Section 172 of Indian Contract Act 1872 defines Pledge as follows -
Section 172 - The bailment of goods as a security for the payment of a debt or performance of a promise is called Pledge. The bailor in this case is called a Pawnor and the bailee is called Pawnee.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 observed that Pawn or pledge is a bailment of personal property as a security for some debt or engagement.
The following are essential ingredients of a pledge -
1. Delivery of possession - As in bailment, the delivery of possession is essential in a pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready. This was held not to be a pledge because there was no delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has the possession of the property agrees to hold it on behalf of the pledgee upon direction of the pledger.
Hypothecation - It is also possible to let the pawner keep the physical goods even though the legal possession is transfered to the pawner. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a cinema hall equipment was pledged to the bank but the bank allowed the hall owner to keep the equipment to show the movies. The hall owner then sold the equipment to another party. It was held that the sale was subject to the pledge.
In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases where goods are hypothecated, other creditors cannot claim right on them until the claim of the pledgee is satisfied.
2. In return of a loan or a promise - The delivery must be in return of a loan or of acceptance of a promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a simple bailment. However, if A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge.
3. In pursuance of a contract - The delivery must be done under a contract though it is not necessary that the delivery and the payment of loan be at the same time. Delivery can be made even after the loan is received.
Rights of a Pawnee
1. Right of retainer (Section 173- 174) - As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also 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. Further, as per section 174, in absence of any contract to the contrary, the pawner shall not retain the goods pledged for debt or promise other than the debt or promise for which they have been pledged. However, such contract shall be presumed in absence of any contract to the contrary with respect to any subsequent advances made by the pawnee.
This means that if A pledges his gold watch with B for 1000 Rs and later on he promises to teach B's son for a month and takes for 500Rs for this promise , and if he does not teach B's son, B cannot retain A's gold watch after A pays 1000Rs. Thus, the right of retainer is a sort of particular lien. The difference was pointed out in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a pawnee obtains a special interest in the pledged goods in the sense that he can transfer or pledge that special interest to somebody else. The lien only gives the right to detain the goods but not transfer. Thus, a pledgee get the first right to claim the goods before any other creditor can get them. The pledgee's loan is secured by the goods.
2. Right to extra ordinary expenses (Section 175) - As per section 175, the pawnee is entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have right to detain the goods. Section 175 says that the pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged.
3. Right of sale (Section 176) - As per 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 the 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.
This right secures the debt for the pawnee up to the value of the goods pledged because it allows the pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged. If the value received after selling the goods, the pawner is still liable for the difference and if the value of the sale is more than the amount of debt, the pawnee is supposed to give the difference to the pawnor. However, if the pawnee has sold the goods, he cannot sue for the debt.
In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note and gave him aeroscrapes worth about 35000Rs, as a security for the loan. The plaintiff sued for repayment of the loan but was unable to produce the security, having sold it. SC rejected his action. It held that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property.
The pawner is required to give a reasonable notice to the pawnee about the sale. The notice is not a mere notice but reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an agreement of a loan enabled the bank to sell the securities upon default without notice. The pawnor defaulted in payment. The bank sent a reminder upon which the pawnor asked for more time. The bank sold the securities. SC held that this was bad in law. The bank is required to give a clear and specific notice of the impending sale. Pawner's request for more time cannot be interpreted as a notice of sale.
When the goods are lost due to pawnee's negligence, the liability of the pawnor is reduced to the extent of value of the goods.
Pawnor's Right to Redeem (Section 177)
Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his property even if he has defaulted. It says that if a time is stipulated for the payment of a debt or performance of the promise for which the pledge is made, and the pawnor make 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 expense which have arisen from his default.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor has as absolute right to redeem his property upon satisfaction or the debt or the promise. This right is not extinguished by the expiry of the stipulated time for repayment of debt or performance of the promise but only by the actual sale of the goods. If the pawnor redeems his goods after the expiry of the stipulated time, he is bound to pay the expenses as have arisen on account of his default.
The pawnor also has a right to take back any increase in the property. In M R Dhawan vs Madan Mohan AIR 1969, certain shares of a company were pledged. During the period of the pledge, the company issued bonus and rights shares. Delhi HC held that the pawnor was entitled to those at the time of redemption.
Pledge made by non-owner of the goods
Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge made by any other person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it was held that a pledge made by the servant who was holding the goods of his master was not valid. Similarly, in Purushottam Das vs Union of India AIR 1967, a railway company delivered goods on a forged railway receipt. The goods were then pledged with the defendants. In a suit by the railways to recover the goods it was held that the pledge was invalid.
This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerces and so there are some situations where a person having the possession of the goods by owner's consent, is entitled to pledge those goods even without owner's consent for the pledge. These situations are discussed below -
1. Pledge by Mercantile agent (Section 178)
When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods.
The essential conditions of this rule are - he must be a mercantile agent, he must have possession of the goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.
2. Pledge by a person in possession under voidable contract (Section 178 A)
When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person pretending to be a man of credit induced the plaintiff to give him a valuable ring in return for his cheque which proved worthless. Before the fraud could be discovered, he pledged the ring with the defendants. The pledge was held to be valid.
3. Pledge by person with limited interest (Section 179)
Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B both having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the pledge that the pledgee can receive upon default is only 50% of the value received by sale.
Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods. For example, if A pledged his car worth 100000Rs for 20000Rs to B. B's interest in the car is only 20000 Rs. He can further pledge it but if he pledges it for more than 20000Rs, A will be liable only for 20000Rs.
In Jaswantrai Manilal Akhney vs State of Bombay 1956, a cooperative bank had an overdraft account with the Exchange Bank, which was secured by the deposit of certain securities. After many dealing and adjustments the last position of the account was that the overdraft limit was set at Rs 66150 and the securities under the pledge of the bank were worth Rs 75000. The cooperative bank did not make use of this overdraft for a long time and when it attempted to use it, the Exchange Bank was itself in financial crisis and had pledged the securities first with Canara Bank and then after having redeemed them, pledged them again with a private financier. The SC held that the pledge was invalid.
Difference between Bailment and Pledge -
Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true.
Pledge is a special kind of bailment in which a person transfers the possession of his property to another for securing the loan taken from the other. It only differs from bailment in the matter of purpose. When the purpose of the bailment is to secure a loan or a promise, it is called a pledge. Section 172 of Indian Contract Act 1872 defines Pledge as follows -
Section 172 - The bailment of goods as a security for the payment of a debt or performance of a promise is called Pledge. The bailor in this case is called a Pawnor and the bailee is called Pawnee.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967 observed that Pawn or pledge is a bailment of personal property as a security for some debt or engagement.
The following are essential ingredients of a pledge -
1. Delivery of possession - As in bailment, the delivery of possession is essential in a pledge. Thus, in Revenue Authority vs Sudarsanam Pictures, AIR 1968, a film producer borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready. This was held not to be a pledge because there was no delivery of possession at the time of the agreement.
It is possible to do delivery by atonement in which case a third person who has the possession of the property agrees to hold it on behalf of the pledgee upon direction of the pledger.
Hypothecation - It is also possible to let the pawner keep the physical goods even though the legal possession is transfered to the pawner. Thus, in Bank of Chittor vs Narsimbulu AIR 1966, a cinema hall equipment was pledged to the bank but the bank allowed the hall owner to keep the equipment to show the movies. The hall owner then sold the equipment to another party. It was held that the sale was subject to the pledge.
In Bank of India vs Binod Steel AIR 1977, MP HC held that in such cases where goods are hypothecated, other creditors cannot claim right on them until the claim of the pledgee is satisfied.
2. In return of a loan or a promise - The delivery must be in return of a loan or of acceptance of a promise to perform something. Thus, if A gives his bicycle to B in friendship, it is not a pledge but a simple bailment. However, if A gives his bicycle to B as a security for a debt of 100Rs it will be a pledge.
3. In pursuance of a contract - The delivery must be done under a contract though it is not necessary that the delivery and the payment of loan be at the same time. Delivery can be made even after the loan is received.
Rights of a Pawnee
1. Right of retainer (Section 173- 174) - As per section 173, the pawnee may retain the goods pledged, not only for a payment of a debt or the performance of the promise, but also 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. Further, as per section 174, in absence of any contract to the contrary, the pawner shall not retain the goods pledged for debt or promise other than the debt or promise for which they have been pledged. However, such contract shall be presumed in absence of any contract to the contrary with respect to any subsequent advances made by the pawnee.
This means that if A pledges his gold watch with B for 1000 Rs and later on he promises to teach B's son for a month and takes for 500Rs for this promise , and if he does not teach B's son, B cannot retain A's gold watch after A pays 1000Rs. Thus, the right of retainer is a sort of particular lien. The difference was pointed out in Bank of Bihar vs State of Bihar 1972 by SC. It observed that a pawnee obtains a special interest in the pledged goods in the sense that he can transfer or pledge that special interest to somebody else. The lien only gives the right to detain the goods but not transfer. Thus, a pledgee get the first right to claim the goods before any other creditor can get them. The pledgee's loan is secured by the goods.
2. Right to extra ordinary expenses (Section 175) - As per section 175, the pawnee is entitled to receive from the pawner extra ordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have right to detain the goods. Section 175 says that the pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged.
3. Right of sale (Section 176) - As per 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 the 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.
This right secures the debt for the pawnee up to the value of the goods pledged because it allows the pawnee to either sue the pawnor for recovering the debt or perform the promise or sell the goods pledged. If the value received after selling the goods, the pawner is still liable for the difference and if the value of the sale is more than the amount of debt, the pawnee is supposed to give the difference to the pawnor. However, if the pawnee has sold the goods, he cannot sue for the debt.
In Lallan Prasad vs Rahmat Ali AIR 1967the defendant borrowed 20000Rs from the plaintiff on a promissory note and gave him aeroscrapes worth about 35000Rs, as a security for the loan. The plaintiff sued for repayment of the loan but was unable to produce the security, having sold it. SC rejected his action. It held that pledgee cannot maintain a suit for recovery of debt as well as retain the pledged property.
The pawner is required to give a reasonable notice to the pawnee about the sale. The notice is not a mere notice but reasonable notice. In Prabhat Bank vs Babu Ram AIR 1966, the terms of an agreement of a loan enabled the bank to sell the securities upon default without notice. The pawnor defaulted in payment. The bank sent a reminder upon which the pawnor asked for more time. The bank sold the securities. SC held that this was bad in law. The bank is required to give a clear and specific notice of the impending sale. Pawner's request for more time cannot be interpreted as a notice of sale.
When the goods are lost due to pawnee's negligence, the liability of the pawnor is reduced to the extent of value of the goods.
Pawnor's Right to Redeem (Section 177)
Section 177 provides a very important right to the pawnor. It allows the pawnor to redeem his property even if he has defaulted. It says that if a time is stipulated for the payment of a debt or performance of the promise for which the pledge is made, and the pawnor make 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 expense which have arisen from his default.
J Shelat in Lallan Prasad vs Rahmat Ali AIR 1967, observed that the pawnor has as absolute right to redeem his property upon satisfaction or the debt or the promise. This right is not extinguished by the expiry of the stipulated time for repayment of debt or performance of the promise but only by the actual sale of the goods. If the pawnor redeems his goods after the expiry of the stipulated time, he is bound to pay the expenses as have arisen on account of his default.
The pawnor also has a right to take back any increase in the property. In M R Dhawan vs Madan Mohan AIR 1969, certain shares of a company were pledged. During the period of the pledge, the company issued bonus and rights shares. Delhi HC held that the pawnor was entitled to those at the time of redemption.
Pledge made by non-owner of the goods
Ordinarily goods may be pledged by the owner or by any person with the consent of the owner. A pledge made by any other person is not valid. Thus, in Biddomoy Dabee vs Sittaram, it was held that a pledge made by the servant who was holding the goods of his master was not valid. Similarly, in Purushottam Das vs Union of India AIR 1967, a railway company delivered goods on a forged railway receipt. The goods were then pledged with the defendants. In a suit by the railways to recover the goods it was held that the pledge was invalid.
This is important to protect the interests of the owners. However, in many situations it is equally important to allow trade and commerces and so there are some situations where a person having the possession of the goods by owner's consent, is entitled to pledge those goods even without owner's consent for the pledge. These situations are discussed below -
1. Pledge by Mercantile agent (Section 178)
When a mercantile agent is in possession of the goods with consent of the owner, any pledge made by him in ordinary course of business will be valid, provided that the pawnee acts in good faith and that he has no notice of the fact that the pawnor is not authorized to pawn the goods.
The essential conditions of this rule are - he must be a mercantile agent, he must have possession of the goods by consent of the owner, and it must be done in ordinary course of business. Further, the pawnee should act in good faith and he must not have notice that the pawnor has no authority to pledge.
2. Pledge by a person in possession under voidable contract (Section 178 A)
When the goods are obtained by a person under a contract that is voidable under section 19 or 19 A, he can pledge the goods if the contract is not avoided at the time of the pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person pretending to be a man of credit induced the plaintiff to give him a valuable ring in return for his cheque which proved worthless. Before the fraud could be discovered, he pledged the ring with the defendants. The pledge was held to be valid.
3. Pledge by person with limited interest (Section 179)
Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. Thus, when a car worth 100,000Rs is owned jointly by A and B both having 50% interest in the car, and if A pledges the car for 60000Rs, the value of the pledge that the pledgee can receive upon default is only 50% of the value received by sale.
Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods. For example, if A pledged his car worth 100000Rs for 20000Rs to B. B's interest in the car is only 20000 Rs. He can further pledge it but if he pledges it for more than 20000Rs, A will be liable only for 20000Rs.
In Jaswantrai Manilal Akhney vs State of Bombay 1956, a cooperative bank had an overdraft account with the Exchange Bank, which was secured by the deposit of certain securities. After many dealing and adjustments the last position of the account was that the overdraft limit was set at Rs 66150 and the securities under the pledge of the bank were worth Rs 75000. The cooperative bank did not make use of this overdraft for a long time and when it attempted to use it, the Exchange Bank was itself in financial crisis and had pledged the securities first with Canara Bank and then after having redeemed them, pledged them again with a private financier. The SC held that the pledge was invalid.
Difference between Bailment and Pledge -
Pledge is a special kind of Bailment. Thus, all Pledges are Bailments but the reverse is not true.
| Bailment | Pledge |
| Bailment can be for many reasons ranging for reward to gratuitous. | A pledge is bailment done for a specific type of purpose, which is to secure a loan or performance of a promise. |
| The bailee does not get a right to sell the goods. | A pawnee has a right to sell the goods in case of default. |
| The bailee only get a right of lien over the goods. | A pawnee gets a right of retainer and a special interest in the goods, which is more that just the lien. |
| The bailee can use the goods bailed. | The pawnee has no right to use the goods. |
| The bailee is not responsible for the loss, destruction, or deterioration if he uses the goods with reasonable care. | The pawnee is absolutely liable for the upkeep of the goods. |
can you tell me any case laws that differentiate between pledge and bailment
ReplyDeleteThe content was too much helpful. It was very easy to understand.
ReplyDeleteDifference between Bailment and Pledge