PLEDGE- PROS AND CONS
Updated: Nov 11, 2020
By Sandeep Harish B, III year B.A.,LL.B.
A pledge is a special kind of bailment. Section 172 of the Indian Contract Act defines a pledge as, ‘the bailment of goods as security for payment of debt or performance of a promise’. The bailor in the pledge is called ‘pawner’ or ‘pledger’ and the bailee is called the ‘pawnee’ or ‘pledgee’. In a pledge, delivery of goods may be actual or constructive.
Example: “A” needs money. So he borrows Rs. 5,000 from “B” and gives his gold ring as a security for the payment of the debt. This is a contract of pledge, “A” is the pawnor and “B” is the pawnee.
Essentials of a pledge
1. The goods or chattel pawned or pledged must be delivered to the pledge
2. The delivery must be actual or constructive.
There are many types of delivery
● Handing over the keys of a go down of goods is a constructive type of delivery.
● If the goods are in the custody of third person and he consents to act on the pledgee’s behalf, then it is also delivered and it is called delivery by ‘atonement’
● Also, documents and railway receipts can be treated as delivery, and hence such a pledge is valid.
3. The delivery of goods or chattel must be in pursuance of the contract it must be in pursuance of the contract of pledge, but the delivery and the advance of money need not be simultaneous.
4. Pledge is a bailment of goods as a security
● For the payment of a debt
● For the performance of a promise
5. Any kind of movable property which is saleable- like documents, valuables, etc, may be pledged.
Rights and duties of pawnee and pawnor
The rights of a pawnor and pawnee are the same as that of a bailor and bailee. However, there are some special rights to pawnee.
1. Rights of pawnee
● Right to retain (section 173 and 174)
The pawnee can retain the goods pledged until his dues are fully paid. The pawnee can retain the goods only for the repayment of the particular debt of the pledge and not for any other debt. Even after the pledge is created, if a subsequent advance without any security is made, then it is presumed that the right of retention extends to such subsequent advances also.
Standard Chartered Bank vs. Custodian, the bank subscribed rights shares in respect of pledged stock. These right shares would belong to the bank as it has paid for the shares. The supreme court held the bank would be entitled to keep them irrespective of whether there is a pledge or not.
● Rights to extraordinary expenses/ special expenses (section 175)
The pawnee is entitled to get the extraordinary expenses/ special expenses spent by him for the preservation of the expenses of the goods spent by him for the preservation of the goods pledged. For such expenses, he can sue the pawnor, but cannot retain the goods.
● Pawnee’s right when the pawner makes the default (section 176)
a. Suit against the pawnor
The pawnee can bring a suit against the pawnor if he fails to pay or makes any default in payment of the debt in time.
b. Retention of goods as security
In addition to the right to file a suit by the pawnee, he can retain the goods of the pawner as security.
c. Right to sell
The pawnee may sell the goods after giving the pawner a reasonable notice of the sale. The notice need not state the date, time or place of the sale. Without notice, if he sells the goods, the pawnor may sue him for conversion. The pawnee himself may buy the goods during the sale.
d. Deficiency or surplus of the sale
If the pawnee finds that the proceeds of the sale are less than the amount, the pawnee can recover the deficiency, if it is surplus, he has to pay the surplus to the pawnor.
2. Duties of the pawnee
a. To take reasonable care of the goods pledged to him.
b. The pawnee must not use the goods pledged for his self-purpose and if he is liable for all losses.
c. He must return the pledged goods on to the payment of the debt.
3. Rights of the pawnor
a. Right to recover the goods
On repayment of the loan, the pawnor is entitled to recover the goods pledged from the pawnee.
b. Right to redeem the goods
Sometimes, the pawner may not be able to pay the debt in time. Even if the pawnor makes a default in the payment of the debt at the time specified, he may still redeem the goods pledged at any subsequent time but before the actual sale of the goods. However, he must pay besides, any expenses which have arisen to the pawnee due to his default (section 177)
c. Safe custody of the goods
The pawnor is authorized to check and verify whether the pawnee, preserves the goods pledged and property maintains them and keeps them in safe custody.
4. Duties of the pawnor
a. The pawnor must repay the pawnee the loan amount with interest, if any, and redeem the goods pledged with to the pawnee.
b. The pawnor must compensate the pawnee for all losses for the defective title of the pawnor.
c. The pawnor must compensate the pawnee for all the extraordinary expenses incurred by the pawnee for the preservation of the goods pledged.
Pledge is also one kind of bailment. In this pledge, the pawnor and pawnee have some rights and duties in the pledge, so the pawner and pawnee have followed the above rights and duties.