LEGAL & REGULATORY ASPECTS OF BANKING - JAIIB

COMMERCIAL LAW WITH REFERENCE

TO BANKING OPERATIONS

(MODULE – D)

LEGAL & REGULATORY ASPECTS OF BANKING - JAIIB

CONTRACT OF PLEDGE

CHAPTER - 44

CHAPTER 44 CONTRACT OF PLEDGE

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CONTENTS

1. INTRODUCTION

2. WHAT IS PLEDGE

3. INGREDIENTS OF PLEDGE

4. NATURE OF PLEDGE


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CONTRACT OF

PLEDGE

INTRODUCTION

Pledge means bailment of goods for the

purpose of providing security for payment

of debt or performance of promise.

Section 172 of Indian Contract Act, 1872

defines pledge. There should be delivery of

goods (bailment). The bailment (delivery

of goods) must be by or on behalf of the

debtor. The bailment (delivery of goods)

must be for the purpose of providing

security for the payment of a debt or

performance of a promise. A valid pledge

can be created by (i) the owner of the

goods (ii) a mercantile agent, subject to

the following terms and conditions are

satisfied (iii) the seller of goods, who

continues to hold the goods even after

sale, can create a valid pledge. The

pledgee must act in good faith and without

notice of the previous sale.


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WHAT IS PLEDGE?

Pledge is a bailment that conveys possessory title to property owned by a debtor (the pledger) to a

creditor (the pledgee) to secure repayment for some debt or obligation and to the mutual benefit of both

parties. The bailor is in this case called the "Pawnor". The bailee is called "pawnee".

Example

Mr. Shukla (Pawnor) borrows Rs. Ten thousands from Mr. Pritam (Pawnee) and keeps his motor cycle

as security for payment of the debt. The bailment of motor cycle is called pledge.

INGREDIENTS OF PLEDGE

To constitute a valid pledge, there must be

1. A contract in relation to an identified chattel to be delivered to the pledgee as security.

2. Actual delivery of possession of the identified chattel in pursuance of the contract.

The essential ingredients of a valid pledge are

1. The property pledged should be actually or constructively delivered to the Pawnee; and

2. Pawnee has only a special property in the pledge while the general property remains with the

powner and hold revert to him on discharge of debt.

The major distinction between a pledge and lien is that in Lien there is no power of sale or disposition of

the goods where as in case of pledge there is power to sell on default. In case of Lien, there is no

transfer of any interest; the person exercising the Lien has only the right to retain the subject matter of


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Lien until he is paid. A Lien disappears the moment the possession is lost and there is no right of sale.

While in case of pledge, sale can be made in the event of default. A pledge is assignable.

NATURE OF PLEDGE

1. If the pawnor makes default in payment of the debt in respect of which the goods were pledged,

the Pawnee may bring a suit against the pawnor and retain the goods pledged as a security (or) he

may sell the goods pledged, after giving notice of the sale to the pawnor.

2. If the proceeds of such sale are less than the amount due, in respect of the debt, 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.

For example

Say A takes a loan of Rs. 20,000 from B. As an assurance that he will pay this money back, A

keeps his car, as security, with B. Thus, if after the fixed date, if A is unable to pay the money back

to B, B can either bring a suit for this purpose while he retains the car, or he can sell the car for the

purpose of recovering his dues. If B chooses to sell the car, the two possibilities are as follows: He

may receive less than the amount due, in which case, A will still have to pay him the balance, or he

may receive more than the amount due, in which case he must return the excess amount to A.

3. It is important to note, that in all contracts of bailment, the bailee, while he is in possession of the

goods, steps into the shoes of the owner for the purpose of legal remedy. Thus, if any person were

to deprive the bailee of the goods - by way of theft, etc. - the bailee, himself, would have the right

to file a suit against such other person. If, any damages are received from such a suit, it would be

split between the bailor and the bailee, according to the proportion of their losses or damages.


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4. The Pawnee can retain the goods pledged, not only for payment of the debt/interest on the debt

but also for all necessary expenses incurred by him in preservation of the goods pledged. The

Pawnee is entitled to receive from the pawnor, extraordinary expenses incurred by him for the

preservation of the goods pledged.

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Instruction of banks etc.

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