Concept of Pledge

 Q.10. Define the terms "Pledge", "pownee" and "pawnor" giving illustrations. What are rights of pownee and powner? Differentiate between Hypothecation and Pledge?

'Pledge' or 'Pawn' is a kind of bailment of goods with the object that those goods shall serve as a security for the payment of a debt or performance of a promise. The bailor is called the 'Pawnor' and the bailee is called the 'Pawnee' or 'Pledgee.' (Sec. 172).

Essentials of pledge

 

For a valid pledge, there should be: (1) Delivery of the goods, 2) for the purpose that they serve as security for the payment of debt, etc.

 

(1) Delivery of goods. Since pledge is a bailment. the delivery of the goods from the pawnor to the pawnee is a must. Mere agreement to transfer possession in future is not enough. If the producer of a film agrees to deliver final prints of the film under production, when they are ready, to a financier distributor, it is not pledge as there is no delivery of goods. Delivery of goods may be actual or constructive. Handing over the key of a godown containing the goods, or the documents of title like Railway Receipt or a Bill of Loading, representing certain goods, amounts to delivery of goods.

 

(2) Purpose of pledge is security for payment of debt, etc. The purpose in case of pledge is that the goods bailed should serve as security for the payment of a debt, or performance of a promise. The pawnee becomes secured creditor in respect of such goods.

 

Who can pledge? Ordinarily, an owner or his agent can pledge the goods. A person fraudulently getting possession of the goods has no right to pledge them. In exceptional cases, a non-owner may pledge the goods. The exceptions are:

(1) Pledge by a mercantile agent:- A mercantile agent who is in the possession of the goods or the documents to the title of the goods with the consent of the owner can pledge these goods while acting in the ordinary course of business. This pledge is as valid as if the owner of the goods expressly authorizes him to do so. But, this pledge is valid only when the Pawnee acts in good faith and at the time of pledge is unaware of the fact that the mercantile agent did not have the authority to pledge.

 (2) Pledge by a person in possession under a voidable contract,

A person may get the possession of the goods under a contract that is voidable at the option of the lawful owner. The contract is voidable on the grounds of fraud, misrepresentation, etc. The pledge by the person in possession of goods is valid until the contract  is void.

 (3) Pledge by a person with a limited interest, for example, a pledgee may further pledge the goods,

When the pawnor not being the owner of the goods and having limited interest pledges the goods, the pledge is valid only to the extent of such limited interest.

 (4) Pledge by seller in possession after sale,

A pledge by a seller who is in the possession of the goods after the sale is valid only when the Pawnee acts in good faith and at the time of pledge is unaware of the sale of goods to the buyer.

 

  (5) Pledge by buyer in possession after sale, but before the buyer has become the owner of the goods.

 

Rights of Pledgee or Pawnee

 

(1) Right to retain the goods pledged.-The pledgee has a right to retain the goods pledged not only for the payment of debt. or the performance of the promise, but also for the interest on the debt and all necessary expenses incurred by him in respect of the possession or the preservation of the goods pledged. (Sec. 173). In case of subsequent debts, there is a presumption that they are also part of the original debt, and pawnee may retain the goods to recover subsequent advances also. The presumption may, however. be rebutted. (Sec. 174).

 

(2) Right to recover extraordinary expenses incurred by pawnee. 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.

 

(3) Right of suit to procure the debt, etc. and sale of the pledged goods. 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 are pledged, the pawnee has the following rights :

 

(i) He may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security. He shall, however, return the goods when his debt, etc. is paid. If he is not able to return the goods due to loss or damage to the goods because of his negligence, his claim against the pawnor is affected thereby.

 

(ii) He may sell the thing pledged, on giving the pawnor reasonable notice of sale. (Sec. 176). If the circumstances are such that the pledgee has an option to sell the pledged goods, the pledgee can exercise this option by purchasing the goods himself. (Dhani Ram v. Frontier Bank).

 

Pawnor's right to redeem

 

The pawnor has a right to redeem the goods pledged, Le., 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 this right to redeem, before the pawnee has made an actual sale of the goods. (Sec. 177). Right of redemption of the goods also includes a right to any accretion to the goods pledged. Thus, 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 Lal).

 

Hypothecation and Pledge distinguished

 

In pledge, the possession of the goods is given to the pledgee as a security. In hypothecation, the goods serve as a security but their possession remains with the owner of the goods. Moreover, in case of pledge, since the goods are in pledgee's possession, he can exercise the right of lien over them. Hypothecatee cannot exercise lien over the goods, but he can only sell them in default.