Rights of Pledgee or Pawnee is mentioned in under Secs. 173 to 176 of the Indian Contract Act 1872.
A pawnee has the following rights under the Act:
(1) Right to retain the goods pledged. (Secs. 173 and 174).
(2) Right to recover extraordinary expenses incurred by him. (Section 175).
(3) Rights of suit to procure the debt, etc., and sale of the pledged goods. (Section 176).
(1) Right to retain the goods pledged (Secs. 173 and 174)
Sections 173 and 174 make the following provision regarding the pawnee’s right of retaining the goods pledged to him:
“173. Pawner’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.”
“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.”
According to the above stated provision, the right of a pawnee to retain the goods pledged shall be not only for the payment of the debt, or the performance of the promise, but he can also exercise this right for the interest on the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.
Although, ordinarily, a pawnee can retain the goods pledged only as a security for that debt or promise for which they are pledged, but there is a presumption that if there are subsequent advances, they are also the part of the original debt, and the pawnee may retain the goods to recover subsequent advances also. This is merely a presumption which could be rebutted by a contract to the contrary.
Thus, if while advancing any further amount subsequently, the pawnor clearly points out that the goods already pledged cannot be retained in respect of the subsequent debt, then the position is governed by such a contract.
The pawnee is bound to redeliver the goods after he gets what is due to him.
(2) Right to recover extraordinary expenses incurred by pawnee (Section 175)
According to Section 175, the pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.
It has already been noted that according to Section 173, a pawnee can retain the goods for various claims, including the claim for necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. Section 175 confers an additional right, i.e., a right to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods. For example, if the pawnee has to arrange for a bank locker for the safety of the goods or he spends some amount for insuring them against theft, etc., he can recover such expenses from the pawnor. He can enforce this right by filing a suit.
Where loan was granted against hypothecated goods. There was specific agreement of hypothecation and pledge between the parties. Under such agreement, goods were required to be insured by the borrower against the fire and other risk. Bank was at liberty to get insurance at risk and expenses of the borrower only if he failed to insure goods. Held, that said clauses were only enabling clauses for the benefit of bank and same could not be used by the borrower for denying its own liability and for making claim against the Bank(Haryana Pesticides v. Bank of Rajasthan Ltd., A.I.R. 2004 P. & H. 83).
(3) Right of suit to recover the debt, etc., and sale of the pledged goods (Section 176)
Section 176 confers right on the pawnee, including the right of selling the pledged goods, if the pawnor makes a default in payment of the debt, or performance of the promise at the stipulated time.
The Section reads as under :
“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 pledged 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.”
This Section confers the following rights on the pawnee, on the pawnor’s default in fulfilling his promise:
(i) he may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or
(ii) he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.
(i) Right of suit against pawnor
A pawnee has a right to recover the debt by filing a suit against the pawnor. Section 176 does not require any notice to the pawnor before the institution of the suit.
If certain securities have been deposited with the lender and it is further agreed that the lender will have a lien over those securities, that does not debar the lender from filing a suit against the borrower and obtaining a personal money decree against the borrower(Kuri Lal Rungta v. Banarasi Devi, A.I.R. 1986 All. 94).
Apart from filing a suit, the pawnee has also a right to retain the goods pledged as a collateral security. When the pawnee sues for the recovery of the debt, it is expected that on the satisfaction of the debt, he will return the security. “The right to sue on the debt
assumes that he is in a position to redeliver the goods on payment of the debt and, therefore, if he has put himself in a position where he is not able to redeliver the goods, he cannot obtain a decree. If it were otherwise, the result would be that he would recover the debt and also retain the goods pledged and the pawnor in such a case would be placed in a position where he incurs a greater liability than he bargained for under the contract of pledge.
Pawnee can opt to file a suit and also to retain the pledged goods
Section 176 provides for pawnee’s right when the pawnor makes default. The pawnee has been empowered: (i) to bring a suit against the pawnor on the debt, and to retain the goods pledged as a collateral security, or (ii) to sell the pledged goods after giving reasonable notice to the pawnor.
In State Bank of India v. Smt. Neela Ashok Naik A.I.R. 2000 Bom. 151, it has been held that if an F.D.R. has been pledged with a Bank, the Bank is not obliged to adjust the installments of repayable installments of loan against the F.D.R. He may retain F.D.R. as such, and bring a suit to recover the loan.
Pledge by Joint-Account Holders
In Anumati v. Punjab National Bank A.I.R. 2005 S.C. 20 the question related to pledge of joint fixed deposit with the Bank. It was explained that a fixed deposit in the joint names of two persons was nothing but a joint account which was repayable on the expiration of the agreed period. The Bank is a debtor to the account holder in respect of the amount deposited. An “either or survivor” clause in such an account, the Court said, meant that the amount payable by the Bank on maturity, might be paid to either of the account holders, in order to obtain a valid discharge. It is a tripartite agreement between the joint account holders inter se and the Bank. But this tripartite agreement, the Court held, could not be bilaterally modified by one of the holders for example by pledging the account with any third party. The Bank was also held not entitled to set-off the fixed deposit against any claim in respect of one account holder.
In the instant case, the appellant and her husband made a fixed deposit with the respondent Bank. Later on, the appellant took a loan in his sole proprietary business. The loan remaining unpaid, the Bank claimed that the appellant could pledge the fixed account with the Bank without the consent of the other deposit holder since the account was “either or survivor”. Rejecting the claim of the Bank, the Apex Court ruled that the Banker had no right to set-off the credit balance in the joint account except in respect of another joint account of the same parties.
The Court reiterated and approved the Court of Appeal’s decision in Hirschorn v. Evans 1938 (2) K.B. 801 (L), wherein the facts were identical. The Court of Appeal had ruled that inasmuch as the debt which the Bank owed was not a debt due to the husband alone, but to him jointly with his wife, it could not be attached to answer the judgment against the husband.
Nature of Pawnee’s Interest
As stated above, in pledge, a special property in the goods pledged passes to the pawnee, but the general property in them remains in the pawnor and wholly reverts to him on discharge of the debt. The special property in the goods, i.e. the right to property vests in the pawnee only so far as is necessary to secure the debt. This special property vests in the pawnee in order that he may be able to sell the goods if his right to sell arises.
In Maharashtra State Co-op Bank Ltd v. Assistant P.F. Commissioner A.I.R, 2010 S.C. 868, a three Judge Bench of the Supreme Court ruled that in view of Section 11(2) of the Act, 1952, the Provident Fund dues would have priority over mortgage and pledge executed by the employer.
In the Maharashtra State Co-op Bank Ltd v. Assistant P.F. Commissioner, the appellant advanced a loan to Gangapur Sahakari Sakhar Karkhana Ltd. during the crushing season 2002-03. For securing the payment of the loan, the management of the sugar Mill executed three deeds and pledged the sugar bags lying in the godowns. On account of failure of the employer (Mill) to pay the dues of provident fund, etc., the Competent Authority passed orders and held the Mill liable to pay a sum of money towards the dues of these Funds. Thereafter, the Assistant Commissioner issued warrant of attachment and sale of the sugar bags so pledged with the Bank for realisation of P.F. dues.
The attachment and sale of the sugar bags was challenged by the Bank contending that by virtue of the deeds of pledge executed by the sugar mill, the Bank had become the owner of the sugar bags and the same could not have been attached and sold for realization
of the amount due under the Act, 1952.
Rejecting the contention of the Bank, the Apex Court held that contribution of the employer under the Act, 1952 in respect to P.F. and other Funds would have priority over the mortgage and pledge executed by the employer.
The Court observed:
…in the contract of pawn or pledges, the pawnee/pledgee has only a special property in the pledge but the general property remains with the pawner/pledger and wholly reverts to him on discharge of the debt. The right to property vests in the pledgee only so far as necessary to secure his debt.
Rights Pawnee of vis-a-vis Other Creditors
As regards the rights of the pawnee vis-a-vis other unsecured creditors of the pawnor, the Apex Court in Central Bank of India v. Sirigupta Sugars and Chemicals Ltd. A.I.R. 2007 S.C. 2804, explained that 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.
In the Central Bank of India v. Sirigupta Sugars and Chemicals Ltd., the Labour Commissioner had passed an order under Section 33(c) of the Industrial Disputes Act, 1947 against the respondent company in respect of the dues to the workmen. The cane Commissioner had passed orders for recovery of amounts due from the respondent company for being paid to the sugarcane growers for the cane supplied by them. The respondent had challenged the above orders before the High Court. During the pendency of the writ petition, the recovery authority had taken possession of stock of sugar lying pledged to the appellant Bank forcibly and without reference to the Bank. Considering that the sugar stock was liable to lose its value by being stored indefinitely, the Court directed the sale of the sugar. The High Court had ordered the disbursement of the sale proceeds, firstly to meet the employees’ dues, then the dues of the sugarcane growers and lastly to the appellant Bank.
In appeal filed by the appellant Bank, the Apex Court ruled that the rights of the Bank over pawned sugar had precedence over claims of cane Commissioner for payment to cane growers and demands made by workers. The appellant, as the pawnee, the Court said, would be entitled to the amount in satisfaction of its debt to secure which, the goods had been pawned and to appropriate the sale proceeds towards the debt due and only if there was surplus to make it available for disbursal to the cane Commissioner and to the Labour Commissioner.
The Court referred to the decision in Lallan Prasad v. Rahmat Ali A.I.R. 1967 S.C. 1322, wherein, the Supreme Court observed that there was no difference between the Common Law of England and the law with respect to pledge as codified in Sections 172 to 176 of the Contract Act, 1872. Summing up the rights of the pawnee, the Court had ruled that once the pawnee by virtue of his right under Section 176 had sold the goods, the right of the pawnor to redeem them was of course extinguished and the pawnee was bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawnor.
Pledged goods if lost or damaged
If the pledged goods have been lost or damaged due to the fault of the pawnee, for instance, he fails to take due care of the goods as are required by Section 151 of the Contract Act, he will lose his claim against the pawnor to that extent. In Central Bank of India v. Grains and Gunny Agencies A.I.R. 1989 M.P. 28, due to the negligence of the pledgee bank, the pledged goods were lost. The Bank was requested by the pawnor to sell away the goods and realize the balance, but the Bank failed to do so. Moreover, now the Bank was not in a position to redeliver the goods on the satisfaction of its claim. It was held that the Bank was liable for the loss of the goods and, therefore, he was not entitled to succeed in his claim against the pawnor.
In Lallan Prasad v. Rahmat Ali A.I.R. 1967 S.C. 1322, A borrowed from B a sum of Rs. 20,000 and in return gave a promissory note and aeroscrapes of the value of Rs. 35,000 as a collateral security, to B. B brought an action against A to recover back the loan, but himself was not in a position to return back the security, i.e., the aeroscrapes, the same having been sold by B. It was held that since B was not in a position to return the goods, he was not entitled to any decree against A.
In Gunvanti v. Mool Chand A.I.R. 2008 (NOC) 683 (Raj.), the respondent pawnee, a goldsmith, filed a suit for recovery of Rs. 50,000/- advanced against pledge of gold ornaments. In the suit for recovery of the debt, filed by him, it was held that if he had put himself in a position where he is not able to redeliver the goods pawned with him, he could not obtain a decree. Since the pawnee produced from the Court for re-delivery, the gold ornaments were not the same as given to him, his claim to the debt was rejected.
(ii) Right of sale of the pledged goods
If the pawnor makes a default in the payment of the debt, or performance of duty, as agreed, the pawnee has also the right to sell the thing pledged, on giving the pawnor reasonable notice of the sale.
A sale made by the pawnee without giving a reasonable notice to the pawnor is void. A sale without prior notice to the pawnor will confer only limited rights to the buyer of such goods. His rights will be the same as that of the pawnee. Such a buyer steps into the shoes of the pledgee (T.S. Kotagi v. Tehsildar,Gdag, A.I.R. 1985 Kant. 265, at 267).
A sale by the pledgee after a reasonable prior notice to the pawnor is valid, and confers a good title on the buyer of such goods.
In Prabhat Bank Ltd. v. Babu Ram A.I.R. 1966 All. 134, it has been held that even if an agreement between the bank and its customer authorizes the bank to sell the securities pledged with it without any notice to the pawnor if the credit balance of the pawnor falls below a certain limit, the sale of the securities by the bank without notice is bad in law and not binding on the pawnor. It was observed that an agreement authorizing the sale of goods by the pawnee without proper notice to the pawnor “would be inconsistent with the provisions of the Contract Act and as such, would be wholly void and unenforceable…….What is contemplated by Section 176 is not merely a notice but, a ‘reasonable notice’, meaning thereby a notice of intended sale of the security by the creditor within certain date so as to afford an opportunity to the debtor to pay up the amount within the mentioned time in the notice.”
However, Section 176 does not require specification of the date, time and place.
In Sunderlal Saraf v. Subhas Chand Jain A.I.R. 2006 M.P. 35, the Madhya Pradesh High Court held that what was required by Section 176 was sending a reasonable notice of the sale.
Since this Section did not speak about sending the notice of intending sale on a particular date, time and place and, therefore, if the date, time and place were not mentioned in the notice, would not render the said notice ineffective or in contravention to Section 176 of the Act, the Court ruled.
Discretion not to sell the pledged goods but to retain them and file a suit
In Bank of Maharashtra v. Racmann Auto (P.) Ltd. A.I.R. 1991 Delhi 278, the question before the Delhi High Court was as to whether the pledgee bank is duty bound to dispose of the pledged goods. Construing Section 176, it was held that the pawnee has a discretion to sell the goods if pawnor makes a default. If the pawnee prefers or opts not to sell the goods, he cannot be blamed for that. He has: (i) the right to file the suit, and (ii) retain the goods pledged as collateral security.
The Bombay High Court agreed with the above said decision of the Delhi High Court and came to a similar conclusion in State Bank of India v. Smt. Neela Ashok Naik A.I.R. 2000 Bom. 151. In this case before the Bombay High Court, it was held that Fixed Deposit Receipts are goods within the meaning of Section 176 of the Indian Contract Act read with Section 2(7) of the Sale of Goods Act.
If the F.D.Rs are pledged with the bank as a collateral security for the loan advanced by the bank, the bank is not obliged to adjust the instalments of the repayment due every month against the F.D.Rs. The bank has a right to file a suit for the recovery of the loan, and also to retain the F.D.Rs, as such, as a collateral security against the loan taken.
Remedies of filing suit and sale of goods are disjunctive
In case the pawnor commits default in the payment of debt within the stipulated time, two avenues are available to the pawnee : (i) Either, to file a suit against the pawnor, by retaining the pledged goods as collateral security; (ii) Or, to resort to sale of goods after giving reasonable notice to the pawnor.
In K.M. Hidayathulla v. Bank of India A.I.R. 2001 Mad. 251, it has been held that the two remedies available to the pawnee are disjunctive in nature. It means that if three years’ period is prescribed by the Limitation Act for filing the suit, this does not imply that the time available for sale to the pawnee will be the same and such time shall be automatically extended. It was observed :
“As per the provision contained in the Act, the two remedies provided to the pawnee are disjunctive in nature. There is absolutely no scope to hold that merely because there is a period prescribed for filing the suit, it should be held that in the event of the pawnee resorting to the alternate course of sale also, the period prescribed should be extended.”
Can a pawnee, who has a right to sell the pawned goods under Section 176, sell the same to himself?
The question was answered in the affirmative in Dhani Ram and Sons v. Frontier Bank Ltd. A.I.R 1962 Punjab 321. In this case, the defendant, who had a cash credit account with the plaintiff bank, mortgaged his immovable property and pledged 150 shares of the face value of Rs. 100 each, which the defendant held in a company. The Bank made a demand from the defendant for the amount due to the Bank, and on the defendant’s failure to pay the same, the Bank gave a notice threatening to sell the shares in the market. The defendant not having complied with the demand, the plaintiff bank, who had obtained blank transfer deeds along with the shares at the time of the pledge thereof, appropriated the shares as its own property. When the Bank applied for the registration of the shares in its name, the company who had issued the shares, refused to do so as it did not recognize the Bank as the owner of the shares. The Bank then brought an action to obtain an injunction directing the company to register the Bank as the owner of the said shares. The question which had arisen in this case was, whether the sale of the shares by the Bank to itself was valid, and the Bank had thereby become the owner of the shares?
It was held that the pledgee having an option to sell the pledged goods, could exercise this option by purchasing the goods himself, and in the present case, the sale of the shares by the Bank to itself was valid. The Bank was the owner of the said shares and the company could not refuse to register these shares in the name of the Bank.
Pawnor’s right to redeem (Section 177)
The pawnor has right to redeem the goods pledged, i.e., take back the goods from the pawnee on payment of the agreed debt, or performance of the promise in accordance with the agreement. He can exercise the right to redeem before the pawnee has made an actual sale of the goods. Section 177, which confers this right on the pawnor, is as follows:
“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 pawnor 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.”
Generally, the pawnor may redeem the goods on the payment of the debt, or the performance of the promise, for which the pledge is made, at a stipulated time. But the Act does not place any time limit for redemption. The pawnor may redeem the goods even at any subsequent time, before the pawnee has made an actual sale of them. The right of redemption is extinguished only when the pawnee makes actual sale of goods by virtue of his right under Section 176 of the Act (Lallan Prasad v. Rahmat Ali, A.I.R. 1967 S.C. 1322).
The pawnee himself cannot become the owner of the goods merely because the pawnor has not got them redeemed within the specific time. The pawnee “has only a right to retain the goods until his claim for the money advanced thereon has been satisfied, with a power to sell the goods pledged………..The pawnee acquires a right, after notice, to dispose of the goods pledged. This amounts to his acquiring only a “special property” in the goods pledged. The general property (ownership) therein remains in the pawnor and wholly reverts to him on the payment of the debt or performance of the promise.”( M.R. Dhawan v. Madan Mohan, A.I.R. 1969 Delhi 313, 315)
Accretions to the pledged goods
In Standard Chartered Bank v. Custodian A.I.R. 2000 S.C. 1488, the Apex Court ruled that accretions to the goods pledged constitute part of the pledge transaction. Thus, if shares and debentures are pledged, any bonus shares issued and dividend and interest paid will constitute part of the securities pledged and they can also be retained as security by the pawnee. Accretions are not to be delivered back separately but they are to be returned along with the main property which has been pledged when the redemption takes place.
Right of redemption of the goods thus also includes a right to any accretion to the goods pledged. If a debtor pledges his shares of a certain company with a Bank, and during the period of pledge, the company issues bonus shares and right shares, the pawnor on
redemption will be entitled to such bonus and right shares also(M.R. Dhawan v. Madan Mohan, A.I.R. 1969 Delhi 313).
Section 177 of the Indian Contract Act says that if the pawnor does not seek redemption within the stipulated time, although his right of redemption is not thereby extinguished, he, however, becomes liable to pay any expenses which may have arisen from his default.
Legal Heir’s Right to Redeem
In case of death of a pawnor, the pledge made by him, can be redeemed by his legal heirs on meeting the liabilities concerning the pledge.
In Kamili Sarojini v. Indian Bank A.I.R. 2008 A.P. 71, good ornaments were pledged by the husband of the petitioner with the respondent Bank, as security for gold loan. During his lifetime, the husband of the petitioner had executed a notarised will, whereunder she was to clear the gold loan availed by her husband and take the ornaments pledged as a surety for the loan, along with the balance amount existing in his account with the Bank. The bank insisted on production of probate of will or obtaining succession certificate. Rejecting the demand of the Bank, the Andhra Pradesh High Court directed the Bank to permit the petitioner to repay the loan amount and to hand over to the petitioner the ornaments as also amount lying in the deceased husband’s account.
It is no doubt true that the Banking Institutions are expected to follow the procedure so as to safeguard the interest of borrowers, the deceased borrowers, the legal heirs of such borrowers, but in the light of the facts and circumstances of the case, the bona fides of the petitioner could not be doubted especially when the son and daughter of the writ petitioner had raised no objection in relation thereto, the Court said. The Bank was held to have no jurisdiction to insist upon production of a succession certificate, letters of administration or probate in this case (State Bank of Hyderabad v. Gaderaju, A.I.R. 1993 A.P. 337).
Likewise, in State Bank of India v. Mangalabai G. Deshmukh A.I.R. 2005 Bom. 221, the Bombay High Court held that the legal heirs of the deceased borrower were entitled to redeem the ornaments pledged by the deceased on payment of loan amount with interest. It was further held that the legal heirs were not required to produce the Letter of Administration to redeem the pledged ornaments.