“Pledge”, “pawnor”, and “pawnee” defined (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 “pawnee”.

(Refer section 148 which says,  A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.)

A pledge is only a special kind of bailment, and the chief basis of distinction is the object of the contract. “Where the object of the delivery of goods is to provide a security for a loan or for the fulfilment of an obligation, that kind of bailment is called as pledge”.

Essentials characteristics of a pledge:

1. Delivery of the chattel (tangible movable property) pawned is a necessary element in the making of a pawn. The property pledged should be delivered to the pawnee. (Bank of Rajastha Ltd. v. Hajarimal Milap C. Surana). Delivery of possession may be actual or constructive.

Revenue Authority v. Sudarsanam Pictures : The producer of a film borrowed a sum of money from a financier-distributor, and agreed to deliver the final prints of the film when ready, the agreement was held not to amount to a pledge, there being no actual transfer of possession.

Pledge by way of hypothecation : Sometimes the goods are allowed to remain in the custody of the pledger for a special purpose. But that does not militate(bring change) against the effectiveness of the pledge.

Where certain motor vehicles pledged by a motor dealer were allowed to remain in his possession for demonstration purpose, the pledge was held to be valid. (Appa Rao v. Salem Motors).

In such cases, the other creditors cannot claim anything from such goods unless the claim of the pledgee is first satisfied. (Bank of India v. Binod Steel Ltd.)

2. In pursuance of Contract : Pledge is a conveyance pursuant to a contract, and it is essential to a valid pledge that delivery of the chattel shall be made by the pledger to the pledgee in pursuance of the contract of pledge. But it is not necessary that delivery of possession and the loan should be contemporaneous. Delivery and advance need not be simultaneous and a pledge may be perfected by delivery after the advance is made.

Right of retainer ( Sec 173 & 174)

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 interests of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.

So, the first important right of a pawnee is the right to retain the goods pledged until his dues are paid.

But, the pledgee can retain the goods only for the payment of that particular debt for which the goods were pledged and not for any other debt or promise, unless there is contract to the contrary. Where, however, after a pledge is created, a subsequent advance is made without any other security, a contract to burden the same goods shall be presumed.

Pawnee not to retain for debt or promise other than that for which goods pledged-Presumption in case of subsequent advances(Section 174)

The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise of 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.

(The right of retainer is thus in the nature of particular lien.)

Hypothecatee has no direct right of seizer :- Where the pledge is by the way of hypothecation, the creditor cannot directly seize the goods by entering premises or otherwise. He has to do so either with the consent of the borrower or through a court order. The creditor does not have the right to enter the premises, lock and seal the same.

Union of India v. Shenthilnathan : the most conspicuous feature of the agreement was that in case the borrower committed default in payment of the debt as stipulated, the lender was at liberty to seize the goods. The court held that this power was not directly exercisable.

Pawnee’s right as to extraordinary expenses incurred (Section 175)

The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.

Unlike section 173 & 174,where the word retain is used, in the section no 175,the word receive is used. Means, the pawnee is entitled to receive from the pawner extraordinary expenses incurred by him for the preservation of the goods pledged. For such expenses, however, he does not have the right to retain the goods. He can only sue to recover them. This right is provided in sec 175.

When pawnor makes default (Section 176)

If B doesn’t make payments within 2 yrs, then what is the remedy for A ?

Section 176 answers the question :

i) A may sue upon the debt and retain the goods as a collateral security.

ii) He may sell the goods but, after reasonable notice of the intended sale to the pawner.

Now suppose, as per the provisions of section 176, if he sales the diamond in the market for Rs. 1.40 cr and the amount due to him with interest is Rs. 1.2 cr he must return the difference of Rs. 20L to B OR,

for any reason if gets only Rs. 1.10 cr and the due amount is Rs. 1.20 cr,

he is still eligible to recover balance of Rs. 10 L from B.

Sec 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 right to sue is a personal action and rests upon the contract of loan quite apart from the pledge. But, until the money due is recovered, the pledged goods may be retained,

Dhani Ram and Sons v. Frontier Bank : Supposing that a due notice of a sale has been given so that, the pledgee gets the right to see, may he buy the goods himself ?

The Punjab HC held that, a sale to the pledgee himself is not void.

Where goods are lost due to the negligence of the pledgee, the liability of the pledger is reduced to the extent of the value of such goods.(ref : Gurbax Rai v. PNB).

Provision to redeem (Section 177)

If B doesn’t make payments within 2 yrs.

As per section, 176, A may sale by giving reasonable notice.

But as per section 117 A may redeem before the actual sale but he must pay additional expenses if any because of his default.

S 177. Defaulting pawnor’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, on that case, pay, in addition, any expenses which have arisen from his default.

Pledge by Mercantile Agent (Section 178)

Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents 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 authorized 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 no authority to pledge.

Explanation: In this section, the expression “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 above provision is applicable to mercantile agents only

(Section 2(9) of the Sale of Goods Act, 1930, defines a mercantile agent as “a mercantile agent having in the customary course of business as such agent, 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 of goods.)

Pledge by person in possession under voidable contract (Section 178A)

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 goods title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

The usual method of rescinding a contract is by giving notice to the other party of the intention to rescind. If he pledged the goods after receiving such notice, the pledge will not be valid.

So we can say tht, the contract under which possession is obtained is void, the person in possession cannot create a valid pledge.

Pledge by Pledgee (Section 179)

Section 179 Pledge where powner has only a limited interest : Where person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.

When a pledgee further pledges the goods the pledge will be valid only to the extent of his interest and his interest is the amount for which the goods have been given to him as a security.

If he pledges the goods for a larger amount, the original pledger will still be entitled to his goods on paying the amount for which he himself pledged the goods ( reference : Thakurdas v. Mathura Prasad )

Suit by bailor or bailee against wrong-doer(Section 180)

If a third person wrongfully deprives the bailee of the use or possession of goods bailed, or does them any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made; and either the bailor or the bailee may bring a suit against a third person for such deprivation or injury.

Apportionment of relief or compensation obtained by such suits (Section 181)

Whatever is obtained by way of relief of compensation in any such suit shall, as between the bailor and the bailee, be dealt with according to their respective interests.