Pledges – Sec 172 - 179
Sec-172: “Pledge”, “Pawnor” and “Pawnee” defined:
• The bailment of goods as a security for payment of a debt or performance of a promise is called
“Pledge”
• The bailor is in this case called the “Pawnor”
• The bailee is called the “Pawnee”
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 advance money on them. Pledge is special kind of
bailment.
Essentials of Pledge – Sec 172
1. Delivery of goods.
• The object of the delivery of goods is to provide a security for a loan or for the fulfilment of an
obligation.
• The delivery of possession of goods may be actual or constructive.
• Delivery of the key of the godown, where the goods are stored, is an illustration of constructive
delivery.
• Delivery of railway receipt can also be treated as delivery of goods.
• Where the goods are in possession of a third person, who, on the direction of the pledger,
consents to hold them on pledgee’s behalf, that is enough delivery. Such delivery is called as
delivery by attornment.
• Delivery of documents of title which would enable the pledgee to obtain possession is equally
effective to create a pledge.
• Pledge by hypothecation – Sometimes the goods are allowed to remain in the custody of the
pledger for a special purpose. But that does not militate against the effectiveness of the pledge.
• ➢Where certain motor vehicles pledged by a motor dealer were allowed to remain in his
possession for demonstration purposes, the pledge was held to be valid.
Appa Rao V Saleem Motors and saleem Radios, AIR1955 Mad 505
A cinema projector and accessories were pledged with a bank. The bank allowed the property
remain with the pledger, since they formed the equipment of a running cinema. Subsequently
the pledger sold the machinery. The court held that the sale was subject to the pledge. There
was a constructive delivery or delivery by attornment to the bank.
Bank of Chittoor V Narasimhulu, AIR1966, AP163
2. In pursuance of contract:
• Purpose of pledge is security for payment of debt etc.,
• Delivery and advance need not be simultaneous and a pledge may be perfected by delivery after
the advance is made.
Lallan Prasad V Rahamat Ali, AIR1967SC1322
Rights of Pawnee
1. Right to sue
2. Right to sell the goods S.176
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3. Right to extraordinary expenses. S175
4. Right of Retainer
1. Right of Retainer: Secs -173 & 174
The first important right of a Pawnee is the right to retain the goods pledged until his dues are
paid.
He has a right to retain the goods not only for payment of the debt or
❖ performance of the promise
❖ but for the interest due on the debt.
❖ And all necessary expenses incurred by him in respect of the possession or
❖ For the preservation of the goods pledged.
The pledgee can retain the goods only for the payment of that particular debt for which the
goods were pledged and not for any other debt or promise, unless there is a contract to the
contrary.
The right of retainer ends on proper tender of payment.
The right of retainer is in the nature of a particular lien.
The right of the pledgee has to be distinguished from bailee’s lien. A pledge creates a special
interest in the property pledged in favour of the pledgee, giving him the right to sell, but a lien is
only a right to retain.
Alliance Bank of Simla V Ghamandi Lal Jain Lal, AIR1927 Lah 408
2. Right to extraordinary expenses - S175
The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for
the preservation of the goods pledged.
Ex: 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.
For such expenses , he does not have the right to retain the goods.
He can only sue the pawnor to recover them.
3. Right to sue to recover the debt, etc., and sale of the pledged goods: Sec-176
• Section 176 confers two distinct rights on the pawnee, if the pawnor makes a default in
payment of the debt, or performance of the promise at the stipulated time. The rights are:
a) The right of suit against pawnor or b) Right to sell.
a) The right of suit against pawnor
o Apart from filing a suit, the pawnee may retain the goods pledged, until the money due
is recovered.
o The right to sue is a personal action and rests upon the contract of loan quite apart from
the pledge. Therefore, 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
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the lender from filing a suit against the borrower and obtaining a personal money
decree against the borrower.
Kuri Lal Rungta V Banarasi Devi, AIR1986 ALL94
o Apart from filing a suit, the pawnee may retain the goods pledged, until the money due
is recovered. However, he would have to surrender the goods when the loan is realised.
If by reason of his own act, the pledgee is unable to return the goods, he cannot have
judgment for the debt.
Lallan Prasad V Rahmat Ali, AIR1967SC1322
b) Right to sell:
o Section 176 confers on the pawnee the right to sell the goods pledged, on giving the
pawnor reasonable notice of the sale.
o The pawnee while exercising the right to sell the goods pledged, must act as a man of
ordinary prudence. He must not only give a reasonable notice of his intention to sell the
goods but also all the incidences of the sale.
o The pawnee may exercise his right to sell the goods even against the time-barred debt.
o The requirement of “reasonable notice” is a statutory obligation and therefore, it cannot
be excluded by a contract to the contrary. Thus, an agreement authorising the pawnee
to sell the goods pawned, without notice to the pawnor, would be void under Section23
of the Contract Act,1872.
Prabhat Bank Ltd. V Babu Ram, AIRn1966All.134
o The question before the Delhi High Court was as to whether the pledgee bank was duty
bound to dispose of the pledged goods. Construing Section 176, the court held that the
pawnee had a discretion to sell the goods if pawnor made a default. If the pawnee
preferred or opted not to sell the goods, he could not be blamed for that. He had the
right to file the suit, and retain the goods pledged as collateral security, the court ruled.
Bank of Maharashtra V Racman Auto(P) Ltd., AIR1991 Delhi278
o If the proceeds of sale are less then the amount due in respect of the debt or promise,
the pawnor is still liable to pay the balance.
o If the proceeds of the sale are greater than the amount so due, the pawnee has to pay
over the surplus to the pawnor.
Rights of Pawnor
1. Right to get back goods
2. Rights of an ordinary debtor.
3. Right to redeem goods: Sec-177
1. Right to get back goods:
• On the performance of promise or repayment of loan and interest, if any, the pawnor is entitled
to get back the goods pledged.
2. Rights of an ordinary debtor.
• The pawner has in addition to the above rights the rights of an ordinary debtor which are
conferred on him by various statutes meant for the protection of debtors.
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3. Right to redeem goods: Sec-177
• If time is stipulated for the payment of the debt, or performance of the promise, for which
pledge is made. In such a case if the pawnor makes default to payment of debt or performance
of the promise at the stipulated time, he may still 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.
• So long the sale does not take place, the pawnor is entitled to redeem the goods on payment of
the debt.
• In case of death of the pawnor, the pledge made by him can be redeemed by his legal heirs.
Duties of Pawnee and Pawnor
Duties of Pawnee:
1. Take reasonable care of goods
2. Not to make unauthorised use
3. Not to mix with other goods
4. Not to do any act in violation of the terms of contract of pledge.
5. Duty to return goods after performance of promise by the pawnor
6. To deliver any accretion on the goods
Duties of Pawnor:
1. Fulfil his obligation within a stipulated time
2. Duty to compensate pawnee for extraordinary expenses.
Who can Pledge?
Ordinarily goods may be pledged by the owner or by any person with the owner’s authority. A pledge
made by any other person may not be valid. For instance, if a servant has the custody of the goods, or a
tenant gets the possession of a furnished house, the servant cannot pledge the goods, nor can a tenant
pledge the furnishing materials in his possession. Likewise, a person obtaining the goods fraudulently
does not have any right to pledge them. The principle is necessary to protect the individual interest in
the ownership of the property.
At the same time, interest acquired in the course of lawful commercial transactions equally deserves to
be protected. Accordingly, Sections 178 and 179 provide for certain circumstances in which a person,
being left in possession with the consent of the owner, may make a valid pledge though without the
owner’s authority.
The exceptions recognised are as follows:
1. Pledge by mercantile agent: Sec-178
2. Pledge by person in possession under a voidable contract: Sec-178A
3. Pledge by a person with a limited interest (Pledge by pledgee): Sec-179
4. Pledge by a seller in possession of goods after sale: Sec- 30 of Sale of Goods Act
5. Pledge by a buyer in possession of goods before sale: Sec-30(2) of Sale of Goods Act.
1. Pledge by mercantile agent: Sec-178
Section 178 provides that where a mercantile agent is, with the consent of the owner, in possession of
goods or documents of title to goods, any pledge made by him while acting in the ordinary course of
business shall be valid, provided that the pawnee acts in good faith and has no notice of the fact that the
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agent has no authority to pledge. Validity of such pledge depends on fulfilment of certain conditions.
They are:
a. Mercantile agent- There should be a mercantile agent. ‘Mercantile agent’ has the same meaning as is
assigned to it by Sale of Goods Act,1930. In this Act, ‘mercantile agent’ means an agent having in the
customary course of business as such agent authority either to sell goods, or to consign goods for the
purpose of sale, or to buy goods or to raise money on the security of goods. Sec2(9)
b. Possession with owner’s consent- The mercantile agent should be in possession of the goods or
documents of title with the consent of the owner.
c. In the course of business- Goods should have been entrusted to the agent and he should be in
possession in that capacity. It is further necessary that he should make the pledge in the ordinary course
of his business as such agent.
d. Good faith- The pawnee should act in good faith and should not have at the time of the pledge notice
that the pawnor has no authority to pledge.
e. Pledge by documents of title: Where a mercantile agent in possession of the documents of title
relating to his principal’s goods, and if he pledges the same, the pledgee gets a good title if he acts in
good faith and without notice.
2. Pledge by person in possession under a voidable contract: Sec- 178A
• Where goods are pledged by a person who had obtained possession under a voidable contract,
the pledge is valid, provided that the contract has not been rescinded at the time of the pledge
and the pledgee has acted in good faith and without notice of the pledger’s defect of title.
• A fraudulent person, pretending to be a man of credit, induced the plaintiff to give him a
valuable ring in return for his cheque which proved worthless. Before the fraud could be
discovered, the ring was pledged with the defendants. The pledge was held to be valid, it being
made by a person in possession under a voidable contract.
• The effect of fraud is to render the transaction voidable and not void and if, there fore, an
innocent person has taken the goods under a pledge before the transaction is avoided, the true
owner cannot claim them back
Phillips V Brooks Ltd.(1919)2 KB243
3. Pledge by a person with a limited interest (Pledge by pledgee): Sec-179
• Where a person pledged goods in which he has only a limited interest, the pledge is valid to the
extent of that interest.
• When a pledgee further pledges the goods the pledge will be valid only to the extent of his
interest and his interest is the amount for which the goods have been given to him as a security.
If he pledges for a larger amount, the original pledger will still be entitled to his goods on paying
the amount for which he himself pledged the goods.
Firm Thakur Das V Mathua Prasad, AIR1958 All66
4. Pledge by a seller in possession of goods after sale: Sec- 30 of sale of goods Act,1930
• After the seller has sold certain goods and the property in respect of them has passed to the
buyer, the seller has no right to deal with such goods.
• If the seller after selling the goods, continues or is in possession of the goods or the documents
of title in respect of the goods, then any sale or pledge or other disposition of the goods by him
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or a mercantile agent on his behalf, will convey a good title to the transferee, provided that the
transferee is acting in good faith and without notice of the previous sale.
5. Pledge by a buyer in possession of goods before sale: Sec-30(2) of sale of goods Act.
• A buyer of the goods, who may have obtained the possession of the goods, but has not yet
become the owner of those goods, cannot deal with such goods.
• Provided if a buyer has obtained the possession of the goods with the consent of the seller, if
such a buyer makes pledge of the goods, it will be valid.
• Provided, that the pledgee is acting in good faith and without any notice of the rights of the
original seller.