Pledge: Meaning, Nature and Essentials

Meaning of Pledge

Section 172 of the Indian Contract Act, 1872, defines “pledge”, “Pawnee” or “Pledgee” as follows:

“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’.”

‘Pledge’ or ‘Pawn’ is a kind of bailment of goods with a special purpose. The goods pledged or pawned serve as security for the payment of a debt or performance of a promise. The person pledging the goods is known as the ‘Pawnor’ and the person with whom the goods are pledged is known as the ‘Pawnee’ or ‘Pledgee’.

The bailor is in this case called the “pawnor”.

The bailee is called the “pawnee”.

The term “pledge” literally means “thing given over as security”. In the ordinary sense of the term, a pledge is a case in which money is advanced on goods or chattels which are given into the possession of the person who advances money on them.

As per Black’s Law Dictionary:

“Pledge” is a formal promise or undertaking; the act of providing something as security for a debt or obligation; a bailment or other deposit of personal property to a creditor as security for debt or obligation.

Ray Andrews Brown describes “pledge” in the following words:

A pledge is a bailment of personal property to secure an obligation of the bailor. If the purpose of the transaction is to transfer property for security only, then the Courts will hold the transaction a pledge, even though in form it may be a sale or other out-and out transfer.

The term “pledge” has also been described as “a bailment of movable property by way of security. Possession is given and the transaction involves a transfer of special property in the subject of the security”.

It is further explained that:

A pawnee has no right of foreclosure since he never had absolute ownership at law and his equitable-title cannot exceed what is specifically granted by law.

The pledgee is in possession of and has a special property in the goods which he is entitled to detain to secure repayment.

Explaining the Common Law concept of “pledge”, a three-Judge Bench of the Supreme Court in Maharashtra State Co-op. Bank Ltd. v. Assistant P.F. Commissioner A.I.R. 2010 S.C. 868 said:

…..a pawn or a pledge is a bailment of personal property as a security for some debt or engagement.

A pawner is said to be one who being liable to an engagement gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability.

The Court, further, said that, the two ingredients of a pawn or a pledge are:

(1) that, it is essential to the contract of pawn that the property pledged should be actually or constructively delivered to the pawnee; and

(2) a pawnee has only a special property in the pledged goods but the general property in the pledge therein remains in the pawner and wholly reverts to him on discharge of the debt.

A pawn, therefore, is a security where, by contract a deposit of goods in made as security for a debt.

The right to property, the Court explained, vests in the pledgee only so far as is necessary to secure the debt. In this sense a pawn or pledge is said to be-

an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed.

It has been held that there is no difference between Common Law of England and the law with regard to the pledge, as codified in Sections 172 to 176 of the Indian Contract Act, 1872.( Maharashtra State Coop. Bank Ltd. v. Assistant P.F. Commissioner, A.I.R. 2010 S.C. 68)

Section 172 defines “pledge” in terms of “bailment”. It is, thus, basically a “bailment”. But, in pledge, bailment is executed for a special purpose, i.e., as security for a debt or performance of a promise.

A pledge is, thus, only a special kind of bailment and the main basis of distinction is the object of the contract. It is-

to provide a security for a loan or to the fulfilment of an obligation.( Lallan Prasad v. Rahmat Ali, A.I.R. 1967 S.C.1322, per Shelat J.)

Also read Who can pledge?

Also read Rights of Pledgee or Pawnee under Indian Contract Act 1872

Difference between Bailment and Pledge

1. Bailment is a wider term. It includes pledge. Pledge is a kind of bailment, where the goods are delivered by one person to another as security for payment of a debt or performance of a promise. It means that if the goods serve as security, it is pledge, whereas when the goods are given for some other purpose, for example, a watch is given for repairs, it is bailment other than pledge.

2. In case of bailment, if the bailor does not pay the lawful charges due to the bailee in respect of services, etc. rendered by the bailee, the bailee can exercise lien over the goods bailed, i.e., he can retain them until the necessary payment is made to him. In case of pledge, the pledgee has not only a right to retain the goods pledged until the repayment of debt or performance of the promise, etc., but in the event of default by the pawnor in payment of the debt, or performance of the promise at the stipulated time, he may even sell the goods, after giving a due notice of sale to the pawnor.

Nature of Pledge

According to Halsbury’s Laws of England, “pawn” has been described as :

a security whereby contract, a deposit of goods is made a security for a debt and the right to the property vests in the pledgee so far as is necessary to secure the debt;

In this sense it is intermediate between a simple lien and a mortgage which wholly passed the property in the things conveyed.

The pawnee has a special property or special interest in the thing pledged, while the general property therein continues in the owner. That special property or interest exists so that, the pawnee can compel payment of the debt or can sell the goods when the right to do so arises.

This special property or interest is to be distinguished from the mere right of detention which the holder of a lien possesses, in that it is transferable in the sense that a pawnee may assign or pledge his special property or interest in the goods.

Where judgment has been obtained against the pawnor of goods and execution has issued thereon, the sheriff cannot seize the goods pawned unless he satisfied the claim of the pawnee.

On the bankruptcy of the pawnor, the pawnee is a secured creditor in the bankruptcy with respect to things pledged before the date of the receiving order and within notice of the prior available act of bankruptcy.

Essentials of pledge

In order to constitute a valid pledge, the following requirements must be satisfied :

(1) There should be bailment of goods, i.e., the delivery of goods from one person to another.

(2) The purpose of such bailment is to make the goods bailed serve as security for the payment of a debt, or performance of a promise.

(1) Delivery of goods

Since pledge is a bailment, the delivery of the goods from the pawnor to the pawnee is a must(Section 148). There must be delivery of the goods, i.e., the transfer of possession from one person to another.

The delivery may, however, be either actual or constructive. Mere agreement to transfer possession in future is not enough to constitute a pledge. In Revenue Authority v. Sudarsanam Pictures A.I.R. 1968 Mad. 319, it has been held that an agreement wherein, the producer of a film agrees to deliver final prints of the film under production, when the same are ready, to a financier-distributor in return for the finance provided by the latter, is not pledge because there is no delivery of the goods.

Delivery of the goods may be either actual or constructive. Doing of something which has the effect of putting the pawnee or his agent in possession of the goods may be treated as delivery(Section 33, Sale of Goods Act, 1930).

Handing over the key of a godown in which the goods are lying, or the transfer of a document of title, like a bill of lading or a receipt, which represents particular goods amounts to the delivery of goods (Morvi Mercantile Bank Ltd. v. Union of India, A.I.R. 1965 S.C. 1954). A bill of lading or a railway receipt are documents of title, but not a way-bill issued by a public carrier, and, therefore, transfer of a way-bill in favour of a bank does not create a valid pledge(Canara Industrial and Banking Syndicate v. Ramchandra, A.I.R. 1968 Mysore 133).

In the case of Morvi Mercantile Bank v. Union of India A.I.R. 1965 S.C. 1954, the delivery of a railway receipt was considered to be enough to constitute delivery of the goods represented by that railway receipt, for the purpose of pledge. In this case, a business firm consigned certain goods through railway for being carried from Bombay to Okhla, near Delhi, and to be delivered to self.

The firm borrowed a sum of Rs. 20,000 from the appellant bank and executed a promissory note in favour of the bank and also endorsed the railway receipt representing the goods as stated above, to constitute the railway receipt as a security for the loan. The goods were lost in transit. The appellant bank brought an action against the railway as the pledgee of the goods, which were lost during transit.

The question before the Supreme Court was whether by the transfer of the railway receipt, the possession of the goods had been transferred to the bank. The respondent contended that the endorsement of the railway receipt does not amount to pledge of the goods, and it at best means the pledge of the railway receipt and not the goods, represented by the railway receipt. Subbarao, J. gave the majority decision (Ramaswami and Mudholkar JJ.) dissented and held that according to the prevailing Indian law, railway receipt is a document of title, and, therefore, delivery of the railway receipt means delivery of the goods represented by the railway receipt. The transaction was held to be a valid pledge and as such the bank was held entitled to a claim against the railway for the value of the loan given against the security of the railway receipt.

It has been noted above that the transfer of a document of title means transfer of goods represented by the document of title. Apart from that, if the goods are in the possession of a third person, there is deemed to be no delivery of the goods unless and until the third person acknowledges to the transferee that he holds the goods on behalf of the transferee(See Section 36(3), Sale of Goods Act, 1930).

After such an acknowledgment, the third person becomes the transferee’s agent for holding the goods, and, therefore, the transferee is deemed to be having the possession through such third party. Sometimes even the bailor may hold the possession of the goods pledged in trust for the bailee. The moment an arrangement is made that the bailor is to hold the goods on the bailee’s behalf, there is constructive delivery of the goods to the bailee and, thus, it is a valid pledge (Bank of Chittoor v. Narasimhulu, A.I.R. 1966 A.P. 163).

In Bank of Chittoor v. Narasimhulu A.I.R. 1966 A.P. 163, the bailor of a cinema projector and other accessories requested the bailee bank to allow the pledged goods to remain in his possession and promised to hold the same in trust for the bailee, and also further promised to hand over the possession of the same to the bank whenever demanded. It was held that there was constructive delivery, i.e., delivery by attornment to the bailee, and the bailor’s possession was in fact the possession of the bailee. The transaction was, therefore, a valid pledge.

(2) Purpose of pledge is security for payment of debt, etc.

In a transaction of pledge, the purpose for which the goods are bailed is that the bailed goods should serve as security for the payment of a debt, or performance of a promise. When some goods are pledged, the pawnee becomes a secured creditor and he has a prior claim over the goods pledged than other creditors. Thus, in Bank of India v. Binod Steel Ltd. A.I.R. 1977 M.P. 188, it has been held that when certain movables have been pledged by a company to a bank, they cannot be attached and sold for the satisfaction of claims of other creditors of the company without first satisfying the claim of the bank.

Unlike a mortgage, a pledge or hypothecation does not transfer any “interest” in the property in favour of the pledgee hypothecatee. The pledge or hypothecation simply creates a property in the goods in favour of the pledgee or hypothecatee, i.e., it entitles him to have the possession of the goods and dispose them of for the realization of his debt, for which the goods constitute the security. If the pledgee or hypothecatee waives his right as mentioned above, his claim in respect of those goods comes to an end.

In Syndicate Bank v. Official Liquidator, M/s Prashant Engg. Co. (P) Ltd. A.I.R. 1985 Delhi 256, Syndicate Bank advanced a loan to Prashant Engg. Co. and the latter hypothecated all the machines installed in its factory in favour of Syndicate Bank as a security for the money advanced by the Bank to the company. The Bank brought an action against the said company and obtained a money decree for Rs. 2,11,89,720. It may be relevant to note that the bank neither took possession of the hypothecated property on its own, nor did it request for a possession of the same through the Court. It was held that the fact the bank did not avail of its right to have the possession of the goods, it was deemed to have waived its right as a hypothecatee. A subsequent action by the Bank to have the right as a hypothecate of those goods could not be entertained.

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