PLEDGE

SEC. 172
“Pledge” “pawnor”, and “pawnee” defined.
• 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”.
(Pledge is a kind of bailment. Here, goods are
bailed for a special purpose, i.e., a security for a
loan or performance of a promise.)
 Example
A borrows Rs. 50,000 from B. He delivers the
necklace of his wife to B as security. The
bailment of necklace is a pledge as security for
the money borrowed. Here, A is a pawnor and
B is the pawnee.
Goods as security (necklace)

A (Pawnor/Pledger) B (Pledgee/ Pawnee)

Loan/ Debt
 DIFFERENCE BETWEEN BAILMENT & PLEDGE
BAILMENT
PURPOSE May be for any purpose-
use, safe custody,
transportation etc.
RIGHT TO USE According to conditions of
contract, bailee may use
the goods bailed
RIGHT TO SELL Bailee can’t sell the goods
bailed except in some
exceptional case
CONSIDERATION May or not be there in
bailment
DISCHARGE OF When purpose is
CONTRACT accomplished or after
specified time
PLEDGE
Only for the purpose of security
for payment of a debt or
performance of a promise.
Pledgee cannot use the goods
pledged
Pledgee has a right to sell the
goods pledged if default is made
by the pawnor
In pledge, there is always a
consideration
On payment of debt or sale of
security
 ESSENTIALS OF PLEDGE
1. Bailment for security
2. Goods
3. Existing goods
4. Delivery
5. Delivery under a contract
6. Possession
7. Transfer of interest in the property
8. Priority of claim
1.Bailment for security- Pledge is a special kind
of bailment. It is a bailment for security for
payment of a debt or performance of a
promise. (Sec. 172)

2. Goods- as defined under Sale of Goods Act,

1930. Goods include all movable properties.
3. Existing goods- Only existing goods can be pledged.
Future and contingent goods cannot be pledged.
Revenue Authority V. Sudarsanam Pictures AIR (1968)
Mad 319
A, a film distributor, advanced money to B, a film
producer, on the condition that B will deliver the
final prints of the film when the same were ready.
Held- There was no pledge as goods were not in
existence.
4. Delivery of goods from pawnor to pawnee-
Delivery of goods from pawnor to pawnee is a
must for creating a pledge. The delivery may
be actual, symbolic, constructive.
 MORVI MERCHANTILE BANK V. UOI
AIR 1965 SC 1954
A consigned certain goods through railway for being carried from Bombay to
Okhala and to be delivered to self. A endorsed the railway receipt to a
bank against an advance of Rs. 20,000. The goods were lost during transit
and the bank as endorsee of the receipt and pledgee of the goods sued
the railway for loss of the goods.
Held- It was a valid pledge because delivery of receipt means the delivery of
goods represented by it.
Owner of goods can make a valid pledge by transferring railway receipt
representing the said goods. The owner by endorsing the railway receipt
in favour of the bank, for consideration, pledged the goods covered by the
said receipt, to the Bank, and the bank being the pledgee could maintain
the suit for the recovery of the full value of consignment.
5. Possession- A pledge is created by transfer of
possession of goods. If a pawnee parts with
possession of goods voluntarily, his right on
goods as pawnee are lost. However, a pawnee
may part with possession of goods for limited
purpose. But, if the pawnee is wrongfully
deprived possession of the goods pledged, he
is entitled to sue for recovery of possession of
goods or damages. (Se. 180)
6. Transfer of interest in the property-
In a contract of pledge, absolute ownership/
property in the goods is not transferred. An
interest in the property pledged in transferred
to the pawnee. Therefore, he can again make
a valid pledge to the extent of his interest in
the goods.
7. Delivery under a contract- The pledge is a special contract. Therefore, the
delivery of goods must be given under a contract.
Blundell-Leigh v. Attenborough [192 1] 3 K. B. 235, 240
On 1st November, Plaintiff handed her jewellery to one Miller to value it and
let her know what offer he could make as to lending her money. He was to
keep the jewellery as security if he made the advance. On the same day
Miller pledged the jewellery with defendants, who in good faith advanced
1000 pounds on it, to Miller. On 5th November, Miller advanced 500
pounds to the plaintiff on the security of the ring. Miller died, plaintiff
came to know the facts. She paid the amount she had borrowed. She sued
the defendant for return of her jewellery.
Contention on her part was that that when she gave the jewellery to miller
for examination, he only became a gratuitous bailee having no right to
deal with it. There was not valid pledge then. Subsequently, when he
advanced the money, no valid pledge could arise as he had already parted
with the possession of the goods.
Held- On 1st November, he did not have any title to pledge the
jewellery. But on 5th Nov. he acquired this power. Thereupon,
pledge with the power to make a sub-pledge was complete.
Delivery made on 1st November was a good delivery for
creating a pledge, whenever that pledge was created. The
original delivery, though a gratuitous one, constituted a good
and valid delivery. Thus even though he was not in the
possession of the jewels at the time of making the pledge, it
was still valid.
8. Priority of claim- The purpose of pledge is to secure the
payment of the debt or performance of the promise.
Therefore, the pledgee becomes a secured creditor. He has
a prior claim over the goods pledged than the other
creditors.
Bank of India v. Binod Steel Ltd. AIR (1977) MP 188
A pledged certain movables to a bank. Thereafter, A was
adjudged insolvent. Held- The movables cannot be
attached and sold for satisfaction of claims of other unpaid
creditors without first satisfying the claims of the bank.
Bank as a pawnee has a prior claim over other creditors.
PLEDGE BY HYPOTHECATION
 HYPOTHECATION
Meaning-
A kind of pledge whereby goods are allowed to
remain in the custody of the pledger for a
special purpose. Creditor has right over a thing
belonging to another. Creditor has right to sell
the goods to be paid his claim out.
 Example
A- Debtor , takes a loan of Rs. 5 Lakhs from B. A agrees
to give his car as security.
B- Creditor, agrees that A can keep the car with
himself. But if A makes a default in paying the loan,
he has to give the car to B.
This is pledge of the car by hypothecation. Possession
of the goods is still with the debtor. In case of
default, the creditor can exercise his rights over the
car. Though A has the car in his possession, the car
has been hypothecated with B.
 REEVES V CAPPER
(1838) 5 Bing NC 136
Capper-Defendant- Owner of a ship
Wilson- Captain of ship – Owner of chronometer
Reeves- Plaintiff- Third person

Defendant gives money to Wilson, who pledges the chronometer

to Defendant. But possession was with the repairer. Wilson is
going for a voyage. Defendant allowed him to use it during the
voyage. Voyage ended and then again Wilson gives it to the
repairer. Now, Wilson pledged it to the plaintiff (Reeves) and
received advance from him without paying back money to the
defendant , Capper.
Issue- Who actually has the possession of chronometer?
Plaintiff (Reeves) argued- For pledge, possession must be with the pawner.
Capper did not have possession of the chronometer. Thus, he is not the
pawnee.
Held-
The legal valid possession is still with Capper. Here delivery of chronometer to
Wilson under the terms of the argument did not amount to transfer of
possession. It was only a license/ permission given to Wilson to use it for a
limited time. It did not amount to parting with the possession. Possession
is still with Capper. Term of agreement allowed Wilson to use it only for
the purpose of voyage. It did not give any interest to him. First pledge with
Capper is valid. Property in the instrument is with Defendant.
 Bank of Chittor v. Narsimbulu
AIR (1966) AP 163
A, the owner of a cinema hall pledged the
projector machinery of his cinema to a bank
under an agreement. The clauses of the
agreement allowed the owner to retain the
machinery for the use of his cinema.
Held- This is pledge by hypothecation.
 UOI V. SHENTHILNATHAN (1977) 2 Mad LJ
499
Agreement of hypothecation provided that in case the
borrower committed default in payment of the debt,
the lender was at liberty to seize the goods
Held- In pledge by hypothecation, the creditor cannot
directly seize the goods. He has to do so either with
consent of the borrower or through a court order.
The power to seize is not automatically excercisable.
Under the agreement, plaintiff was to file a suit on
the debt and obtain a decree to proceed against the
property specified.
RIGHTS OF PAWNEE/
PLEDGEE
 PAWNEE’S RIGHT TO RETAIN THE GOODS
(Sec. 173) Pawnee has right to retain (lien) on the goods pledged
with him. He may retain the goods pledged for the following-
1. For payment of the debt or the performance of the promise
by the pawnor
2. For the interest of the debt
3. For all the necessary expenses incurred by him in respect of
the possession or for preservation of the goods pledged.
*Necessary expenses include expenses of warehousing,
insurance etc.
Eg. A lends Rs. 5000 to B on the pledge of necklace. A can retain
the necklace until Rs. 5000, interest due on the amount and
other charges incurred in preservation of the necklace are
recovered.
 BANK OF BIHAR V STATE OF BIHAR (1972) 3
SCC 196
Facts-The pledgee bank advanced loan to the pledgor on the pledge of sugar bags
whose constructive delivery was made by handing over of the key of the
godown where these were stored. However, the sugar bags were then seized by
the state of Bihar through rationing officer and district magistrate n connection
with a demand of sugar cess by the Cane Commissioner. The sugar was sold
and the sale proceeds were attached towards the payment of cess. No payment
was made to the plaintiff bank. Thereafter, the pledgee Bank, filed a suit against
the government department for recovery of the amount.
Held- The act of the State of seizing the goods will not deprive the pledgee of his
rights of the pledge and that he was still entitled to the amount he advanced.
Thus the State had the responsibility to indemnify him. The Bank had the
special property right over the sugar bags which will not extinguish until the
debt amount has been paid back to him. Thus, the State had to reimburse the
bank after realizing the sale of the pledged goods on default of pawnor in
making repayment of the debt.
 Contd.....
The pawnee had special property and a lien which was not of ordinary nature on the
goods and so long as his claim was not satisfied no other creditor of the pawnor
had any right to take away the goods or its price. After the, goods had been seized
by the Government it was bound to pay the amount due to the plaintiff and the
balance could have been made available to satisfy the claim of other creditor of
the pawnor. But by a mere act of lawful seizure the Government could not deprive
the plaintiff of the amount which was secured by the pledge of the goods to it. As
the act of the Government resulted in deprivation of the amount to which the
plaintiff was entitled it was bound to reimburse the plaintiff for such amount which
the plaintiff in ordinary course would have realized by sale of the goods pledged
with it on the pawnor making a default in the payment of debt.
The plaintiff's right as a pawnee could not be extinguished by the seizure of the goods
in its possession inasmuch as the pledge of the goods was not meant to replace
the liability under the cash credit agreement. It was intended to give the plaintiff a
primary right to sell the goods in satisfaction of the liability of the pawnor. The
Cane Commissioner who was an unsecured creditor could not have any higher
rights than the pawnor and was entitled only to the surplus money after
satisfaction of the plaintiffs dues.
 PAWNEE’S RIGHT TO RETAIN GOODS FOR
SUBSEQUENT ADVANCES
Sec. 174
- The pawnee shall not, in the absence of a contract to that effect, retain
the goods pledged for any debt or promise other than the debt or
promise for which they are pledged.
- In the absence of anything to the contrary, it is presumed that a pawnee
has a right to retain the goods for subsequent advances made by the
pawnee.Thus, the right to retain the goods for subsequent advances
can be rebutted by anything to the contrary.
Eg. A lends Rs. 5000 to B on the pledge of a necklace. A makes a further
loan of Rs. 5000 to B without making a pledge of the necklace for this
loan. A still has right to retain the necklace until the subsequent loan,
interest and other charges are paid because of the lien of pawnee is
presumed in the absence of anything to the contrary.
 MOHAN ENTERPRISES V ANDHRA BANK
I (2008) BC 476
Loan was obtained from bank by keeping title
deeds of goods as security. Another loan was
taken from the same bank by the debtor.
Regarding the first loan, Bank sued him. He
paid the amount. He asked for return of title
deed of goods. Bank refused.
Held- Title deeds can be retained by bank as
security for subsequent advances.
 PAWNEE’S RIGHT TO RECEIVE
EXTRAORDINARY EXPENSES INCURRED
A pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the
preservation of the goods pledged (Sec. 175).
Pawnee does not have lien in respect of
extraordinary expenses. He can ask the pawnor
to compensate for the extraordinary expenses.
He can retain the goods only for ordinary expenses
incurred by him.
 Example
If A pledges his cow to B for Rs.8000. B paid all the
ordinary expenses like food for cow, shelter etc. Here,
A has a duty to pay the expenses back to B. If A does
not pay for the ordinary expenses, pledgee can retain
the cow against the payment of ordinary expenses.
If the cow got injured in an accident and pledgee incurs
medical expenditure, he can sue the A to compensate
him for the extraordinary expenses. But he cannot
retain the cow for the extraordinary expenses.
RIGHTS OF PAWNEE IN CASE OF DEFAULT BY PAWNOR (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 pledge 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.
In case of default by pawnor, the pawnee can
exercise either of the following two rights:
1. Right to sue the pawnor, or
2. Right to sell the goods
 PAWNEE’S RIGHT TO SUE AGAISNT THE
PAWNOR
If the pawnor make a default in payment of the
debt or performance of the promise, the
pawnee may bring a suit against the pawnor
and retain the goods as a collateral security
until the due money is recovered.
(Sec. 176 para-1)
 LALLAN PRASAD V. RAHMAT ALI
AIR 1967 SC 1322

Defendant borrowed Rs. 20,000 from the plaintiff on a

promissory note and gave him aeroscrape worth
about Rs. 35,000 as security for the loan. The plaintiff
sued for repayment of the loan, but was unable to
produce the security, having sold it, and therefore his
action for the loan was rejected by the court.
 RIGHT TO SELL THE GOODS

If the pawnee does not want to sue the pawnor, he may sell the
goods pledged on default by the pawnor. However, the
pawnee is bound to give a reasonable notice of sale to the
pawnor before selling the goods. (Sec. 176 para-1)
It should be noted that the pledgee has a right to sell, but has no
obligation to sell. He is not bound to sell the goods. Therefore,
he can sue the pawnor and also retain the goods with him as
collateral security.
Moreover, filing of the suit against pawnor does not take away
the pawnee’s right of sale as these two rights are not
mutually exclusive.
 PRABHAT BANK V. BABU RAM AIR 1966 All
134
One of the terms of loan agreement provided
that lending banker can sell the securities
without any notice to the pawnor. The pawnor
defaulted in payment. The bank sent a
reminder, but the pawnor asked for more
time. The bank thereupon disposed of the
securities.
Held- Requirement of reasonable notice is a statutory
requirement and there cannot be contract to contrary. Sec.
176 contemplates a reasonable notice and not merely a
notice. The reasonable notice means 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 up the amount
within the time mentioned in the notice. Court did not agree
with bank’s contention that the sale notice should be
inferred from the pawnor’s request for time. A notice of the
character contemplated by Sec 176 cannot be implied. Such
notice has to be clear and specific in language.
PAWNEE’S RIGHT TO RECVOER THE BALANCE

If the proceeds of sale of the goods are less than

the amount due in respect of the debt or
promise, the pawnee is entitled to recover the
balance from the pawnor. If the proceeds of
the sale are greater than the amount so due,
the pawnee shall pay over the surplus to the
pawnor. (Sec. 176 para-2).
RIGHTS OF THE PAWNOR/ PLEDGER
 PAWNOR’S RIGHT TO GET BACK (TO REDEEM)
THE GOODS ON PAYMENT OR PERFORMANCE
A pawnor has a right to get back the goods pledged by
paying the debt or performing the promise. He will
also have to pay interest due and other expenses
incurred by the pawnee before claiming the goods.
Redemption means the enforcement of the right to
have title to the goods pledged to be restored to
the pledger free and clear of the pledge. When debt
is satisfied, the pawnee is bound to redeliver the
property.
 DEFAULTING PAWNOR’S RIGHT TO REDEEM
THE GOODS
In case the pawnor makes a default in paying the
debt or performing the promise at the
stipulated time, he may still redeem the
goods, pledged at any subsequent time before
the sale of them. But for this he must pay, in
addition to any expenses which have arisen
from his default. (Sec. 177)
Sec. 177 provides that the pawnor may redeem the goods
at any time subsequent to the expiry of stipulated time
and before the actual sale is made. So long as the sale
does not take place the pawnor is entitled to redeen
the goods on payment of the debt. The right to redeem
is extinguished not by the expiry of time specified in the
notice of sale, but by the actual sale of the goods.
Where tha pwnor redeems after the expiry of the
specified time, he is bund to pay to the pawnee such
expenses as have arisen on account of his default.
Special interest of the pledgee comes to an end
as soon as the debt for which the goods were
pledged is discharged. It is open to the pledger
to redeem the pledge by full payment of the
amount for which the pledge had been made
at any time after fixed date and the right
continues until the thing pledged is lawfully
sold.
 TO REQUIRE THE PAWNEE TO TAKE CARE
AND PRESERVE THE GOODS
A pawnor has a right to require a pawnee to
take all reasonable steps for proper care and
preservation of the goods pledged, like a
bailee.
TO RECEIVE INCREASE OR PROFIT FROM THE
GOODS
If there is any increase or profit from the goods
pledged during the period of pledge, the
pawnor is entitled to recive the increase or
profit. However, this right is subject to a
contract to the contrary. (Sec. 163)
TO EXERCISE RIGHTS OF A DEBTOR
Every debtor also has certain rights against his
creditor. He is entitled to all the rights which
are conferred by any law of the land.
 DUTIES OF PAWNEE OR PLEDGEE
• To take care of the goods pledged
• Not to use the goods pledged
• Not to mix the goods with his own goods
• To return the goods after payment of debt or performance of
the promise
• To return the increase or profit from the goods pledged
• To give notice before sale of goods
• To pay the surplus of the proceeds of the sale of the goods
pledged
• To act in good faith and must not accept goods on pledge if he
has knowledge that pawnor has obtained the goods under a
voidable contract.
 DUTIES OF THE PAWNOR OR PLEDGER
• To disclose the defects in the goods pledged
• To pay the debt, interest and other expenses or perform the
promise at the time specified
• To pay extraordinary expenses if no contract contrary is there
with the pawnee
• To redeem the goods pledged before sale
• To pay additional expenses which arise from his default in
delayed payment or redemption of goods
• To pay the balance of debt, interest and other charges if the
proceeds of the sale of goods pledged are less than the
amount due in respect of the debt or promise
 PLEDGE BY NON-OWNERS
1. Pledge By Mercantile Agent
2. Pledge By Person In Possession Of Goods
Under Voidable Contract
3. Pledge By Person Having Limited Interest
 Pledge By Mercantile Agent
(Section 178)
Meaning- “mercantile agent” and “documents of title” shall have the
meanings assigned to them in the Sale of Goods Act, 1930- Sec. 2(9) &
Sec. 2(4) respectively.
A mercantile agent is not the owner of goods but he can create a valid pledge.
However, the following conditions must be fulfilled-
1. Pawnor must be a mercantile agent.
2. He must be in possession of goods or documents of title to the goods.
3. Such possession must be with the consent of the owner of goods.
4. The pledge must have been made by him when acting in the ordinary
course of business of a mercantile agent.
5. He must have been expressly authorised by the owner to pledge the
goods.
6. The pawnee must act in goods faith. The pawnee at the time of pledge,
must not have notice that the pawnor (the agent) has no authority.
Pledge By Person In Possession Of Goods Under
Voidable Contract

(Section 178 –A) Where goods are obtained by a person under

a voidable contract (under Sec. 19 or 19-A i.e., coercion,
undue influence, fraud or misrepresentation) the pledge by
such person is valid provided the following conditions are
satisfied:
1. Pawnor has possession of goods.
2. He has obtained the possession under voidable contract.
3. The contract must not have been rescinded at the time of
pledge.
4. The pawnee should have acted in good faith without notice
of the pawnor’s defect of title
 Example
A, by false misrepresentation, induces B to sell
and deliver him a diamond ring. A pledged the
ring to S before B has rescinded the contract. S
keeps the ring in good faith without notice of
misrepresentation. The pledge is valid.
 Pledge By Person Having Limited Interest

Sec. 179- Where a person pledges goods in

which he has only a limited interest, the
pledge is valid to the extent of that interest
Eg. (i) A finds a briefcase on the road and spends
Rs. 200 in searching out the owner B. B
refuses to pay the amount. A pledged it for Rs.
500 with C. B can recover the briefcase on
payment of only Rs. 200.
(ii) A pledges her necklace with B for a loan of
Rs. 2, 000. B took a loan of Rs. 5,000 from C by
pledging the same. C is bound to return the
necklace to A if A pays Rs. 2,000 only.