PLEGDE UNDER INDIAN CONTRACT ACT- 1872

Pledge-

Pledge is a kind of bailment. Pledge is also known as Pawn. It is defined under section 172 of the
Indian Contract Act, 1892. By pledge, we mean bailment of goods as a security for the
repayment of debt or loan advanced or performance of an obligation or promise. The person who
pledges the goods as security is known as Pledger or Pawnor and the person in whose favor the
goods are pledged is known as Pledgee or Pawnee.

Essentials of Pledge-

Since Pledge is a special kind of bailment, therefore all the essentials of bailment are also the
essentials of the pledge. Apart from that, the other essentials of the pledge are:

 There shall be a bailment for security against payment or performance of the promise,
 The subject matter of pledge is goods,
 Goods pledged for shall be in existence,
 There shall be the delivery of goods from pledger to pledgee,
 There is no transfer of ownership in case of the pledge.

o Exception: In exception circumstances pledgee has the right to sell the movable
goods or property that are been pledged.

Rights of Pawnor-

As per Section 177 of the Indian Contract Act, 1872 the Pawnor has the Right to Redeem. By this,
we mean that on the repayment of the debt or the performance of the promise, the Pawnor can
redeem the goods or property pledged from the Pawnee before the Pawnee makes the actual sale. The
right of redemption is extinguished once the actual sale is done by the Pawnee as per his right under
section 176 of the Indian Contract Act, 1872.
Rights of a Pawnee-

The rights of the Pawnee as per Indian Contract Act, 1872 are:

 Right to retain the goods: If the Pawnor fails to make the payment of a debt or does
not perform as per the promise made, the Pawnee has the right to retain the goods
pledged as security. Moreover, Pawnee can also retain goods for non-payment of
interest on debt or non-payment of expenses incurred. But Pawnee cannot retain goods
for any other debt or promise other than that agreed for in the contract. (Section 173-
174)
 Right to recover extraordinary expenses: The expenses incurred by Pawnee on the
preservation of goods pledged can be recovered from Pawnor. (Section 175)
 The right of suit to procure debt and sale of pledged goods: On the failure to make
repayment to Pawnee of the debt, the Pawnee has two right: either to initiate suit
proceedings against him or sell the goods. In the former case, the Pawnee retains the
goods with himself as collateral security and initiate the court proceedings. He need
not provide any notice of such proceedings to the Pawnor. And in the latter case, the
Pawnee can sell the goods after giving due notice of sale to the Pawnor. If the amount
received from the sale of goods is less than the amount due then the rest amount can
be recovered from Pawnor. And if the Pawnee gets more amount than the due amount
then such surplus is to be given back to Pawnor. (Section 176).

Prominent Indian cases related to the subject-

1. State Bank of Saurashtra vs. Chitranjan Rangnath Raja-

Facts:
The appellant-bank allowed a cash credit facility limited to Rs.75,000/- to the Principal
Debtor (PD) on his pledging 5,000 tins of groundnut oil under the lock and key of the
Bank and on personal guarantee of the Respondent-Surety. However, afterwards when
the Bank lost the pledged tins and sued the legal representative of PD (after the death of
PD) and the Surety to repay the debt, Surety contested discharge of his liability.
 HELD:
High Court- On account of the conduct of the parties, the pledge of the goods and
subsequent contract of guarantee (entered into within the same time frame) were part of
the one composite transaction and they evidenced that the principal debtor had offered
two securities, one the pledge of oil tins and another personal guarantee of the surety:
since the bank was utterly negligent in dealing with the pledged goods leading to their
loss, therefore, surety is discharged under Section 139 and 141 of the Indian Contract
Act.

2. Bank of Rajasthan v. Hajarimal Milap C. Surana-

FACTS:

The respondents (R) (Hajarimal Milap C. Surana) were indebted to the appellants (A) (Bank of
Rajasthan) and had deposited precious stones as security. For the recovery of the debt, a suit had
been filed in the court by A. Pending the suit, the parties came to an agreement, for the
enforcement of which another suit was filed by A.

HELD:

Debts Recovery Tribunal: favored R

Rejected A’s claim on two grounds; (a) Bank had taken the precious stones as full and final
settlement (b) Suit was barred under order 23 rule 1(4) of the CPC.

Appellate Tribunal (favored R)

Recognized the second suit i.e. did not consider it barred on the basis of CPC provisions but
dismissed the appeal maintaining that the bank had taken the precious stones in full and final
settlement of the debt.
 3. Lallan Prasad v. Rahmat Ali and Anr-

FACTS:
 The appellant advanced Rs.20,000 to the first respondent against a promissory note and a
‘receipt. The first respondent executed an agreement whereby he agreed to pledge as
security-for the debt aeroscapes, to deliver them to the appellant, and to keep them in the
appellant’s custody.
 The appellant filed a suit on the promissory note claiming that the first respondent failed
to deliver the goods, that the agreement therefore did not ripen into a pledge, and that
consequently, he was entitled to recover the amount advanced by him. It was found on
the evidence that the goods were delivered to the appellant, and that he was it pledgee
thereof.

HELD:

 Trial Court: favored the appellants

 High Court: favored the respondents