PLEDGE

Prof. Pallavi Goel

BASIS BAILMENT PLEDGE

Meaning When the goods are temporarily handed over from When the goods are delivered to act as security
one person to another person for a specific purpose against the debt owed by one person to another person

Section Section 148 Section 172

Parties The person who delivers the goods is Bailor. The The person who delivers the goods is Pawnor. The
person to whom the goods are delivered is Bailee. person to whom the goods are delivered is Pawnee.
Consideration May/may not be there. (Gratuitous/Non-gratuitous) Always present.
Right to sell The party whom goods are being delivered has no The party whom goods are being delivered as security
the goods right to sell the goods. (except some cases) has the right to sell the goods if the party who
delivers the goods fails to pay the debt.
Use of Goods The party whom goods are being delivered can use The party whom goods are being delivered has no
the goods only, for the specified purpose. right to use the goods.
 The Indian Contract Act, 1872
Chapter-IX Of Bailment
Bailments of Pledges

Section 172: “Pledge”“pawnor”,and “pawnee”

defined.
S. 172, ICA The bailment of goods as security for payment of
a debt or performance of a promise is called
“pledge” [pawn]. The bailor is in this case called
the “pawnor” [pledgor]. The bailee is called the
“pawnee” [pledgee].
 A lends money to B against the security of
mobile phone which B deposits with A – this is
bailment for pledge.

EXAMPLE A= bailee / pawnee / pledgee

B = bailor / pawnor / pledgor [owner of

goods]
 Any type of documents, goods, securities can be
pledged – Govt. securities should be pledged by
endorsement and delivery.

WHAT The definition of goods, under section 2 (7) of the

CAN BE Sale of Goods Act means every kind of movable
property other than actionable claims and money,
PLEDGED and includes stock and shares, growing crops,
grass and things attached to or forming part of the
land which are agreed to be severed before sale
or under a contract of sale.
 1. There should be bailment of goods (a
contract)
2. For purpose of security for payment of debt
or performance of a promise
ESSENTIALS 3. Goods pledged shall be in existence
4. There must be delivery of goods from
pledgor to pledgee (in some cases no
delivery)
5. Delivery of Possession
 ▪ Bailment = transfer of temporary possession
from bailor to bailee for purpose with
#1 intention of return upon fulfillment or
otherwise
BAILMENT
OF GOODS ▪ Delivery = transfer of possession from one
person to another. Actual or Constructive
 ▪ Bailed goods will act as SECURITY for payment of
debt
▪ When goods are pledged, pawnee/bailee/pledgee
becomes a secured creditor and he has a prior claim
#2 over the goods pledged over other creditors.

PURPOSE ▪ The pledge or hypothecation creates a special

property in the goods in favour of the pledgee or
hypothecatee. It entitles him to have the possession
of goods and dispose them for the realization of
his debt, for which the goods constitute security.
 ▪ The property pledged should be delivered to
the pawnee – either actual or constructive or
#3 attornment.
▪ Delivery by attornment: where the goods are
MUST BE in possession of a third person, who on the
TRANSFER direction of the pledger, consents to hold them
on pledgee’s behalf – this is delivery.
OF
▪ Delivery of document of title which enables the
POSESSION pawnee to have possession of the goods will
have same effect.
 An agreement where in the producer of a film
agrees to deliver final prints of the film under
#4 production when the same are ready to a
financier/distributor in return of the finance,
GOODS MUST was held to not constitute pledge because there
BE IN is no transfer of posession.” Revenue Authority
v. Sudarsan Picturess [i.e., the goods have to
EXISTENCE be in existence and delivered in present not
future date]
 ▪ Transfer of document of title constitutes delivery

#5 under pledge. Delivery of railway receipt

(considered as document of title under law) will
DELIVERY OF constitute “delivery” for purposes of pledge.
GOODS FROM ▪ Sometimes the goods are allowed to remain in the
PLEDGOR TO custody of the pledger for a special purpose that
does not mitigate against the effectiveness of the
PLEDGEE pledge.
The bailor of a cinema projector
requested the bailee bank to allow
pledged goods to remain in his
possession and promised to hold the
same in trust for the bailee and to
handover the possession of the same to
the bank whenever demanded.

Is there delivery to constitute a valid

pledge?

Bank of Chittoor vs Narasimhulu

The cinema projector + accessories
were pledged with the bank. The
bank allowed the property to
remain with the pledgers for
running the cinema.
Subsequently the pledger’s sold the
machinery.
What is the status of the pledge? Is
the pledge still valid?

Bank of Chittoor vs Narasimhulu

The captain of the ship pledged the
chronometer with the shipowner who
allowed him to use the instrument for
purpose of the voyage. The captain
pledged the chronometer with another
person ‘X’
Is the first pledge valid?
Reeves v. Capper
 ▪ For a valid pledge its important that delivery of
goods shall be made by the pledger to the pledgee in
#6 pursuance of the contract of pledge.

PLEDGE IS IN ▪ But delivery of possession and advance need not be

PURSUANCE simultaneous. Possession can be given within

reasonable time after the advance is made.
OF A ▪ Delivery can also be made before or in
CONTRACT contemplation of an advance, which ripens into a
pledge as soon as the advance is made.
WHO CAN PLEDGE
 Who can pledge?
❑ Owner of the goods ?
❑ Person authorized by the owner?
QUESTION ❑ Servant in custody of goods?
❑ Tenant?
❑ Person obtaining goods fraudulently?
 ▪ Goods may be pledged by the owner
or by any person with owner’s
authority.
▪ Pledge by any other person may not be
valid.

ANSWER ▪ Where the goods are temporarily left

by the master with the servant and the
servant pledges the goods – its not a
valid pledge.
▪ When goods are left with X for a
special purpose and X pledges the
goods with Z, its an invalid pledge.
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, the defendants contended that the
railway was negligent in delivering the
possession to the wrong person and
were now estopped from disputing.
Decide.
Purshottam Das Benarsi Das v. UOI
(1967)
PLEDGE BY NON-
OWNERS
 ❑ Mercantile Agent (S.178): persons who are
in the possession of the goods or the
documents to the title of the goods with the
consent of the owner & can pledge these
PLEDGE BY goods while acting in the ordinary course of
business.
MERCANTILE
AGENT ❑ Pledge by MA is valid only when the
Pledgee/Pawnee acts in good faith and at the
time of pledge pledgee/pawnee was unaware
of the fact that the mercantile agent did not
have the authority to pledge.
 S.178 PLEDGE BY MERCANTILE AGENT
Where a mercantile agent is, with the consent of the
owner, in possession of goods or the document 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 authorised by
the owner of the goods to make the same; provided
S.178, ICA that the pawnee acts in good faith and has not at the
time of the pledge notice that the pawnor has not
authority to pledge.

Explanation.-- In this section, the expressions

mercantile agent and "documents of title" shall have
the meanings assigned to them in the Indian Sale of
Goods Act, 1930 (3 of 1930).
 1. Pledge should be by a mercantile agent (MA)

2. MA should have obtained possession of goods

or documents of title in his capacity as a MA
and with the consent of the owner
S.178,
3. He must pledge the goods while acting in the
REQUIREMENTS ordinary course of his business of a MA

4. The pledgee should have acted in good faith and

without notice that such a MA did not have
authority to pledge
 Rakesh gives his watch to mercantile
agent to know the amount for which the
watch can be pledged. Surya (MA) here
has no authority to pledge the watch, yet
he pledges the watch it would be a valid
QUESTION pledge?
****
Rakesh gives the watch to his neighbor for
safe custody. The neighbor is a mercantile
agent, he goes and pledges this watch is
the pledge valid?
 S.179,
PLEDGE BY S.179. Pledge where pawnor has only a
limited interest
PERSON
Where a person pledges goods in which he has
WITH only a limited interest, the pledge is valid to the
LIMITED extent of that interest.

INTEREST
 A finds a watch on the road and spends
Rs. 1000 on its repairs. He pledges it with
EXAMPLE B for Rs. 5000/-. The real owner can get
the watch by paying Rs. 1000 to the
pledgee
Erica pledges the goods to
Brittany for Rs. 5,000 who
sub-pledges to Kim for Rs.
8,000. Can Erica take back
the goods from Kim?
 Pledge by Non-Owners
(S.30(1) SOGA, Pledge by seller in possession after sale)
S.30(1) SOGA: Where a person, having sold goods, continues or is
in possession of the goods or of the documents of title to the
goods, the delivery or transfer by that person or by a mercantile
agent acting for him of the goods or documents of title under any
sale, pledge or other disposition thereof to any person receiving the
same in good faith and without notice of the previous sale shall have
the same effect as if the person making the delivery or
transfer were expressly authorised by the owner of the goods
to make the same.
 Pledge by Non-Owners
(S.30(2) SOGA, Pledge by buyer in possession)
S.30(2) SOGA: Where a person, having bought or agreed to buy
goods, obtains with the consent of the seller, possession of the goods
or the documents of title to the goods, the delivery or transfer by that
person or by a mercantile agent acting for him, of the goods or
documents of title under any sale, pledge or other disposition thereof
to any person receiving the same in good faith and without notice of
any lien or other right of the original seller in respect of the goods
shall have effect as if such lien or right did not exist.
 II. Pledgee acting in good-faith
❖Pledgee should act in good-faith and without knowledge that
MA is not authorized to pledge.

❖S.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 good title to the
goods, provided he acts in good faith and without notice of the
pawnor’s defect of title.
North went to P’s shop and selected some
jewelry. He represented himself as “Sir
George” a man of high credit. He
persuaded the P to give him the jewelry in
lieu of a cheque payment and handover
the jewelry immediately. The cheque was
dishonored. Before P could rescind the
contract the jewelry was pledged with the
D. D got the jewelry in good faith and
without knowledge of a voidable contract.
Is the pledge valid?
- Philips v. Brooks Ltd.

Will your answer change if the jewelry

was stolen by North?
 Pledge by joint account holders

When a co-owner in possession of the goods with the assent of all the other co-
owners pledges them, it is a valid pledge.
The complainant (Wife) and her husband had a
joint fixed deposit in the bank, which the
husband used to pledge for a mortgage. The
husband defaulted in payment and the bank
adjusted the amount due from the joint
account. The complainant protested that the
fixed deposit, though on a joint basis, did not
permit the bank to adjust a loan from any one
of the joint holders. But the bank said that the
account was on the principle of ‘payment to
either or survivor’ basis.
Can the bank do so?

- Anumati v. Punjab National Bank

RIGHTS OF
PLEDGEE

Ss. 173 - 176

 Pawnee’s right to Retainer
(S.173 & 174)
S.173: Pawnee’s right of Retainer: 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.

The Pawnee has a right to retain the goods pledged for:

– the payment of the debt or the performance of the promise for which the goods were
pledged;
– the interest of the debt; and
– All necessary expenses incurred by him in respect of the possession or preservation of the
goods pledged.
 Pawnee’s right to Retainer
(S.173 & 174)
S.174: Pawnee not to retain for debt or promise other than that
for which goods pledged: Presumption in case of subsequent
advances: 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; but
such contract, in the absence of anything to the contrary, shall be
presumed in regard to subsequent advances made by the pawnee.
 Pawnee’s right to Extra-ordinary Expenses
(S.175)
S.174: The pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the preservation of
the goods pledged.
Pledgee Raj had to arrange for a bank
locker for safety of the goods. Can he claim
from pledgor?

Raj spent some amount for insuring the

pledged goods against theft. Can he claim
from pledgor?

A loan was granted against hypothecated

goods. The agreement required the goods to
be insured by the borrower against fire and
other risks. Bank was at liberty to get
insurance at risk and expense of borrower
if he failed to insure goods. Borrower
challenges such clause.
Right of suit to recover debt and sale of pledged goods

S.176: If the pawnor makes default in payment of the debt, or performance;

at the stipulated time or 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.
Neela pledged her F.D.R (fixed deposit
receipts). Can the bank retain the FDR
and bring suit to recover the load?

SBI v. Smt. Neela Ashok Naik

 Right of pledgee against other creditors

The pledgee has special property rights and a lien on the goods and so long
as his claim is not satisfied, no other creditor or pledgor has any right to take
away the goods.

- CBI v. Sirigupta Sugars and Chemicals Ltd

 Rights of pledgee where pledgor defaults

S.176. Pawnee’s right where pawnor makes default.—If the

pawnor makes default in payment of the debt, or performance; at the
stipulated time or 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.
RIGHTS OF
PLEDGOR
 Rights of Pledgor if pledged goods are lost or
damaged
❖ If the pledged goods have been lost or damaged due to the fault of the
pledgee, he fails to take care of the goods as are required by S.151 of
Contracts Act.

❖ In negligence due to pledgee, if the pledged goods are lost, then the pledgee
is liable for loss of goods and not entitled to succeed in his claim against
the pledgor. CBI v. Grains and Gunny Agencies
 Defaulting Pledgor’s right to redeem

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 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, in that case, pay, in addition, any expenses which have
arisen from his default.
 Pledge by Accretion

❖ Accretion to the goods pledged constitute part of pledge transaction.

❖ If shares and debaters are pledged any bonus shares issued and
divided and interest paid will constitute part of the securities
pledged and they can also be retained as security by the pawnee.
❖ Right of redemption of goods will also include right to any accretion
to the goods pledged.
- Standard Chartered Bank v. Custodian