Pledge is a type of special contract in the Indian Contract Act 1872. It comes under bailment but is quite distinct. In bailment, the owner delivers the good to another person for some purpose. When the objective is fulfilled the good is returned to the owner. The owner who delivers the good is called the bailor and the person who receives them is the bailee. Whereas, in pledge, the goods are used as security for payment of a debt or fulfillment of a promise.
Definition and Concept
According to Halsbury’s Laws of England, when goods are deposited as a security for debt and “the right to the property vests in the pledgee so far as is necessary to secure the debt;” the security is known as “pawn”. Section 172 of the Indian Contract Act defines pledge in following words:
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 ‘pawnor’. The bailee is called the ‘pawnee’.
For example, A keeps a jewel with B and takes a loan of Rs 50,000/-. A is the pawnor, B is the pawnee and the jewel acts as a security.
Generally, when the pawnee lends money in exchange for the delivery of goods by the pawnor it is a valid pledge. Then the Sections 172 to 181 of the Indian Contract Act are applicable to the contract of pledge.
A pawn must have following ingredients:-
- The pledged property be deliver to the pawnee.
- The pawnee should only enjoy special property. The general property lies with the pawnor and returns to them once the debt is paid.
Essentials of Pledge
A bailment is said to be a pledge only if it fulfills following three essential conditions:
- Delivery of the pledged goods from one individual to another.
- The delivery of goods with the intent of being a security.
- There should be security for payment of the debt.
Pledged goods may include existing goods, documents, personal valuables, insurance policies, shares, bonds, promissory notes, etc.
There needs to be actual or constructive transfer of possession of goods. An agreement to do so is not enough as held in Revenue Authority v. Sudarsanam Pictures [AIR 1968 Mad. 319] where the High Court decided that agreeing to deliver the final prints of the film that is still in production to a financier or distributer in exchange of money by the latter does not amounts to pledge.
When a third person is in possession of the goods, they must first inform the transferor that they are holding the goods on the transferee’s behalf. Such a person acts as an agent of the transferee and the transferee must have the possession of those goods through that person.
A bailor can also hold the possession of the pledged goods for the bailee. In a situation where bailor keeps the goods on behalf of the bailee the pledge is valid. This bailment is called constructive delivery of goods to the bailee. An example of this is Bank of Chittoor v. Narasimhulu [AIR 1966 AP 163].
In Morvi Mercantile Bank v. Union of India [AIR 1965 SC 1954] a business unit had consigned some goods through railway from Bombay to Okhla. The firm borrowed Rs 20,000 from Morvi Bank and executed a promissory note in the bank’s favour along with the railway receipt as a security for the loan. When the goods were lost in the travel, the bank filed suit against the railway as the pledgee(pawnee) of the goods. The respondent argued that endorsement of railway receipt only means pledge of the railway receipt and not means pledge of the goods. Justice Subbarao, however, held that the existing Indian law regards railway receipt as a document of title. Thus, the transfer of a title document implies the transfer of goods which the document represents.
The pawnee becomes a secured creditor of the pledged goods letting them have a prior claim over it. When a company pledges a bank some movables they cannot be attached and sold to other creditors of the company before the claim of the bank over them is fulfilled. (Bank of India v. Vinod Steel Ltd. AIR 1977 MP 188)
Delivery is an important element of pledge. It is not necessary that the delivery and advance of money be at the same time. The pledged good must be taken care of by the pawnee and kept in a secured place they find suitable to keep it. If the pawnee redelivers the goods to the pawnor for a limited purpose, the right of the pawnee over them doesn’t cease, provided the purpose be selling the goods by the pawnor on behalf of the pawnee.
Lastly, the good used as security must be agreed and identified upon by both the parties with an agreement that the good can be held by the lender as long as the debt isn’t paid. In case of debtors failure to repay, their security commodity can be sold by the pawnee to get their payment. The commodity that is kept as security should be more in value than the debt given to the pawnor. If the proceeds of the sale do not satisfy the debt the pawnee would sue the pawnor for the balance amount. And if the proceeds exceed, Pawnee must inform and the extra amount should be paid to the pawnor.
In Metonic India Pvt Ltd v. Krishna Behl [AIR 1997 P&H 297] it was held that the debtor remains the legal owner of the good. The pawnee does not becomes the owner just because of possessing the property for a specific time. However, with agreement between both the parties if there is failure to redeem within the time period of the pledge, the property shall pass to the pawnee. (Dwarika v. Bagawati AIR 1939 Rang 413)
The main purpose of a pledge is to have a security for payment of debt which makes it different from bailment. The pawnor should deliver the goods to the opposite person to be kept as a security with that person until the purpose of keeping the particular good as security with the pawnee is not accomplished.
Halsbury’s Laws of England
The Indian Contract Act, 1872 (Bare Act)
Contract II – R K Bangia
Pollock & Mulla on The Indian Contract Act, 1972 (15th Edition)
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