pledge.pptx

8/10/2019 pledge.pptx

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PLEDGE


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PLEDGE (S.172)

Literal meaning can be related to Promise

Also known as PAWN

A pawn or a pledge is a bailment of personal

property as a security for some debt or

engagement.

Definition: the bailment of goods as security for

the payment of a debt or performance of a

promise is called pledge.


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Pledge is a special kind of

bailmentand the maindistinction is the object of the

contract.

The object of the

delivery of goodsPLEDGETo provide a securityfor a loan or for the

fulfilment of an

obligation


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(Book)

(For reading)

GOODS

PURPOSE

CONTRACT OF BAILMENT

BAILOR BAILEE

BAILMENT


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(jewellery)

(to provide a security for a loan)

GOODS

PURPOSE

CONTRACT OF PLEDGE

PAWNER PAWNEE

PLEDGE


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PARTIES TO THE CONTRACT

The person who

delivers goods as

a security for

payment of hisdebt.

The person to

whom the goods

are delivered as a

security for the

loan he raised.

PAWNER

or

PLEDGER

PAWNEEor

PLEDGEE


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Thus, a pledge constitutes the delivery of

goods by the pawnor to the pawnee as a

security under a contractual obligation that

the goods shall be returned or disposed off

as per pawnorsdirection on the debt being

discharged or the fulfilment of the obligation


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FEATURES:

Only the real owner can pledge

Movable propertyThe pledgee retains the possession of the goods until

the pledgor (i.e. borrower) repays the entire debt

amount.

In case there is default by the borrower, the pledgee hasa right to sell the goods in his possession and adjust its

proceeds towards the amount due (i.e. principal and

interest amount).

Some examples of pledge are Gold /Jewellery

Loans, Advance against goods,/stock, etc.


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MODE OF DELIVERY

two modes by which shares can be pledged to a

pawnee

Actual delivery

(S.149)

Eg: pawner

hands over

the gold

ornament to

pawnee

Constructive

delivery(S.149)

Eg: pawner

gives the key

of the

godown

where goods

are kept

Delivery by

attornment

Eg: pawner

consents to a

third person

to hold the

documents

in behalf of

the pawnee


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SUBJECT MATTER OF PLEDGE

All MOVABLE goods, capable of actual or constructive delivery

form the subject-matter of a pledge.Though the term goods has not been defined under the

Contract Act, the Sale of Goods Act, 1930 defined the term

goods as follows:

every kind of movable property other than actionable

claims and money; and includes stock and shares,

growing crops, grass, and things attached to or formingpart of the land which are agreed to be severed before

sale or under the contract of sale;


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ESSENTIAL CHARACTERISTICS

1.SECURITY FOR A DEBT2.SPECIFIC MOVABLE PROPERTY

3.AGREEMENT TO RETURN GOODS

4.DELIVERY OF POSSESSION5.IN PURSUANCE OF A CONTRACT


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SECURITY FOR A DEBT

The goods should be given as a security to the pawnee for payment of

the debt taken or the performance of the obligation.

SPECIFIC MOVABLE PROPERTY

The goods passed as security to the pawnee must be movable

property and ascertainable at the time of the contract.

AGREEMENT TO RETURN GOODS

The essence of a contract of pledge is that the pawnee should agree

to return the goods on the satisfaction of the debt or theperformance of obligation. In absence of such agreement, a valid

pledge cannot come into existence.

A pledge, being essentially a contract of bailment, the pawnee is

under a duty to take care of the goods pledged as a man of ordinaryprudence would take under similar circumstances.


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DELIVERY OF POSSESSION

The goods have to be deliveredby the pawnor to the pawnee.

Delivery is necessary for a

complete pledge and it may be

either actual or constructive

POSSESSION


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MORVI MERCHANTILE BANK v UNION OF INDIA, AIR 1965 SC 1954

A firm doing business in Bombay entrusted goods worth Rs. 35,500

to the Railway for delivery in Delhithe firm endorsed the railway receipts to a Bank as a security against

an advance of Rs. 20,000 made by the Bank to the firm.

When the goods reached the destination, the Bank refused to take

delivery, on the ground that they were not the goods consigned by

the firm.

Meanwhile the goods were lost in the transit

The Bank, thereafter filed a suit for the recovery of the value of the

goods.

The trial court dismissed the suit and on an appeal by the Bank, theHigh Court allowed the appeal and decreed the claim for Rs. 20,000

on the ground that as pledgee of the goods, the Bank suffered loss

only to the extent of the loss of its security.

Both the Bank and the Railway appealed to the Supreme Court


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CONTENTIONS

The endorsement of the railway receipt in favor

of the Bank, did not constitute a pledge of thegoods covered by the receipt and that the Bank

had no right to sue for compensation.


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COURT HELD:

When goods are carried by railways over long

distances and remain in transit for long period of

time, the railway receipt is regarded as the symbol

of the goods for all purposes.

Delivery of railway receipts therefore was thesame thing as delivery of goods.

A pledge being a bailment of goods as security for

payment of a debt, the pledgee will have the sameremedies as the owner of the goods would have

against third person for deprivation of the said

goods or injury to them.


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REVENUE AUTHORITY v SUDARSANAM PICTURES, AIR 1968 Mad 319

FACTS:The producer of a film borrowed a sum of money

from a Financier-distributor, and agreed to deliver

the final prints of the film when ready.ISSUE: whether this amounts to a contract of

pledge?

OBSERVATION: there being no actual transfer of

possession it cannot be considered as a contract

pledge.

JUDGEMENT: there is no contract of pledge


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PLEDGE BY HYPOTHECATION:

Goods are allowed to remain in the custody of the

pledger for a special purpose.

REEVES v CAPPER

FACTS: The captain of a ship pledged his chronometerwith the ship owner who allowed him to use the

instrument for the purpose of the voyage. The captain

pledged it over again with another person.

ISSUE: Whether the first pledge was valid?OBSERVATION: According to the concept of hypothecation

the pledge is valid


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BANK OF CHITTOOR v NARASIMBULU, AIR 1966 AP

163FACTS: a cinema projector and accessories were

pledged with a bank. The bank allowed the

property to remain with the pledgers, since they

formed the equipment of a running cinema.

Subsequently the pledgers sold the machinery.

OBSERVATION: the sale was subject to the pledge.There was a constructive delivery.


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IN PURSUANCE OF THE CONTRACT

For a valid contract of pledge it is essential thatthe delivery has to be made in pursuance of the

contract of pledge.

It is not necessary that delivery and advance has

to be contemporaneous.

Delivery may be made before or in

contemplation of an advance, which ripens into apledge as soon as the advance is made.

Illustrative case: BLUNDELL LEIGH v

ATTENBOROUGH, (1921) 3 KB 233


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FACTS:

The plaintiff gave her jewellery to one Miller to lend her

some money after he estimates the value of the jewellery.He was given a right to keep the jewellery as security if he

made the advance.

That very same day Miller plledged the jewellery with a

pawnbroker (defendants), who in good faith advanced

1000 euro.

After 5 days Miller advance 500 euro to the plaintiff on

the security of the jewellery.

Later Miller died and she came to know about the facts.

She paid the amount and sue the defendant for the

return of her jewellery.


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CONTENTIONS BY PLAINTIFF

When she gave the jewellery to the Miller

for examination there was no valid pledge

and he became only a gratuitious bailee

having no right to deal with it.

Since he had already parted with the

possession of the goods at the time of

advancing money, no valid pledge could

arise.


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OBSERVATION BY COURT

it is clear that the plaintiff intented, whenshe handed over the jewellery to Miller, to

create a valid pledge as between him and her

from the moment when he handed her themoney by way of loan which she was

prepared to accept

The court held the pledge as valid.


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RIGHT OF PAWNER

RIGHT OF REDEMPTION

(S.177)

Normally, the right to redeem the pledge continues upto the

time on the expiry on which the pawnee has notified that the

goods would be sold.But under S.177, It is open to the pledger to redeem the

pledge by full payment of the amount for which the pledge

has been made at any time after the fixed date and the right

continues until the thing pledged is lawfully sold.When the pawner redeems after the expiry of the specified

time, he is bound to pay to the pawnee such expenses as

have arisen.


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A suit for right to redemption has to be filed for

excercising this specific remedy.

The pawner has the right to take back with the

goods the increase, if any , that the goods have

undergone during the period of pledge.

M.R.Dhawan v. Madan Mohan, AIR 1969 Del 313 -

where certain shares of a company were pledged and

bonus shares were issued during the period of

redemption, it was held that the pawnor is entitled

to the bonus shares so issued.


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UNION OF INDIA v DEEP CHAND, AIR 2007 Uttr 455-The provisions of the IT Act could not defeat the

right of the pawnor to institute the suit for recovery.

LEGAL HEIR: KAMALI SARJONI v. INDIAN BANK, AIR

2008 AP 71- certain gold ornaments were pledgedwith the bank as security for gold loan. The pawner

died. He left behind a will enabling his widow to

redeem. The bank demanded probate. The court

held that the bank has no right to do so. Neitherprobate nor succession certificate was necessary.


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OTHER RIGHTS

Right to sue: within a period of 3 years

under limitation act if the pawnee rufusesto return the goods even after returning

the whole amount.

Right to take care of goods: right to

demand the pawnee to take reasonable

care and preservation of the goods

pledged.

Right to receive increase or profit from

the goods


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RIGHTS AND LIMITATIONS OF PAWNEE

1.RIGHT OF RETAINER (Ss.173 and

174)

2.RIGHT TO EXTRAORDINARYEXPENSES (S.175)

3.RIGHT WHERE PAWNOR MAKES

DEFAULT. (S.176)a) Right to sell

b) Right to sue

G O O


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RIGHT OF RETENTIONS.173:

The most important right of a pawnee is the right to retain the

goods pledge until the dues are paid.

The right to retain is not only for payment of the debt or

performance of the promise, but for the interestdue on the debt

and all necessary expenses incurred by him in respect of the

possession or for the preservation of the goods pledged.

S.174The 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 contrary.

However after a pledge is created, a subsequent advance is made

without any other security, a contract to burden the same goods

shall be presumed.


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The pawnee has the option of exercising his right to

retain the pledged goods in relation to the following:

payment of the debt or performance of the promise

for which the pledge was created;

(ii) interest on the debt;

(iii) all necessary expenses incurred by the pawnee in

respect of the possession or preservation of the goods

pawned.


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Lien and Pledge

The right of retainer can be related to the

nature of a particular lien. Yet lien is

different from pledge.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 onlya right to retain.

SPECIAL PROPERTY IN GOODS


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RIGHT OF POSSESSION

RIGHT OF ENJOYMENT

SPECIAL PROPERTY IN GOODS:

special property or interest exists in the goods pawned so

that the pawnee can compel payment of the debt, or can

exercise his right to sell the goods as and when it arises.

It is to be noted that only a special property and no legal

titleto the goods pledged is vested in the pawnee.

NATURE OF SPECIAL PROPERTY


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NATURE OF SPECIAL PROPERTY

Bank Of Bihar vs State Of Bihar & Ors, 1971 AIR 1210

Certain sugar was pledged with the plaintiff bankPart of the said sugar was seized under the Public Demands

Recovery Act in connection with a demand of sugar cess by

the Cane Commissioner (state).

The sugar was sold and the sale proceeds were attached

towards the payment of cess. No payment was made to the

plaintiff bank, which thereupon filed a suit to enforce its

claim.

The trial court granted a decree against the State of Bihar for

the price of the sugar.

The High Court however held that no decree could be

granted against the State as the seizure was lawful.


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REASONING BY THE SC: so long as the

pawneesclaim is not satisfied no othercreditor of the pawner has the right to take

away the goods or their price.

The seizure could not deprive the pledgee ofhis right to realise the amount for which the

goods were pledged and therefore, the state

was bound to indemnify him up to theamount which would have been realised

from the goods.

HYPOTHECATION AND RIGHT OF SEIZURE


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HYPOTHECATION AND RIGHT OF SEIZURE

When the pledge is by way of

hypothecation, the pledgee

cannot directly seize the goods

by entering premises or

otherwise. It can be done either

with the consent of the borrower

or through a court order.

The pledgee does not have the

right to enter the premises, lock

and seal the same.


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RIGHT TO EXTRAORDINARY EXPENSES (S.175)

The pawnee is entitled to receive any

extraordinary expenses incurred by him for the

preservation of the goods pledged.But he does not have the right to retain the

goods for the recovery of the extraordinary

expenses. The right of lien can be excercised only

for necessary expenses.


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Illustration 1: A bank took over the possession of the

hypothecated truck but thereafter neither sold it according to

the agreed terms nor took care of it, leaving it in open place.HELD: The bank was liable for the extraordinary depreciation.

(Central Bank of India v Abdul Mujeeb Khan, (1997) AIHC 299

Illustration 2: A bank provided money for purchase of a lorry and also

paid insurance premium and subsequently the lorry was lost by theft.

Held: insurance company was liable to pay the insurance money to the

bank irrespective of the fact that the insurance was not in the name of

the bank. Insurance company and the borrower were joint debtors.

Insurance company to the extent of insured value and the borrower for

the advance. (SBI V Suresh Kumar, (1995) AIHC 3889)


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RIGHT WHERE PAWNOR MAKES DEFAULT (S.176)

This enables the pawnee to take certain measures

in case of default made by the pawnor in the

repayment of debt or performance of the

obligation at the stipulated time.

when the time has not been stipulated in the

agreement, the debtor is not in default until noticehas been given by the creditor asking the debtor to

repay the loan by a certain time and that time has

passed.


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The pledgee gets two distinct rights under S.176

of the Act.

The pledgee may

sueupon the

debt and retain

the goods as a

collateralsecurity.

He may sellthe

goods after

reasonable notice

of the intended

sale to thepawner


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RIGHT TO SELL

The power of sale is conferred for the benefit of the pawnee, and can

be exercised at his discretion.

A pawnor cannot force the pawnee to exercise the right of sale as a

means for discharging the debt or satisfying the decree

If the proceeds of such sale are:

Less than the amount of

the debt = pawner liable to

pay the balance

Greater than the amount

so due = the pawnee

shall pay over the

surplus to the pawner.

RIGHT TO SUE


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RIGHT TO SUEThe pawnee has been conferred with the right to

institute a suit claiming the repayment of debt in theevent of default by the pawnor

An express authority given by the pawnor to the pawnee

to sell the goods does not take away his right to institute

proceedings against the pawnor.

If by reason of his own act, the pledgee is unable to

return the goods, he cannot have judgement for the debt

Supreme Court in Lallan Prasad v Rahamat Ali (AIR

1967 SC 1322)

Lallan Prasad v Rahamat Ali (AIR 1967 SC 1322)


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Lallan Prasad v Rahamat Ali (AIR 1967 SC 1322)

FACTS:

The defendant borrowed Rs.20,000 from the plaintiff ona promissory note and gave him aeroscrapes worth

about Rs. 35,000 as security for the loan. The plaintiff

sued for the repayment of the loan, but was unable to

produce the security, having sold it, therefore, his actionfor the loan was rejected.

REASONING: if a creditor holding security sues for the

debt, he is under an obligation on payment of the debt

to hand over the security, and that if, having improperly

made away with the security he is unable to return it to

the debtor he cannot have judgement for the debt

THE RIGHT TO SELL AND RIGHT TO SUE ARE


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THE RIGHT TO SELL AND RIGHT TO SUE ARE

DISJUNCTIVE

Both the rights are disjunctive and

independent from each other.The right to sue and the right to sell are

not concurrent rights and the pawnee

can only exercise either of them.Lallan Prasad v. Rahmat Ali


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Requirement of notice

Before making the sale he is required to

give to the pawner, a reasonable notice of

his intention to sell.

Reasonable notice is a statutory obligation

nd thus cannot be excluded by a contract to

contrary.

Requesting the pawnee to postponethe

sale could not deprive the bank of its right to

proceed with the sale.


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LOSS OF SECURITY DUE TO

PLEDGEES NEGLIGENCE:

Where goods are lost due to the

negligence of the pledgee, theliability of the pledger is reduced

to the extent of the value of suchgoods.


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PRABHAT BANK v BABU RAM

FACTS: One of the terms of the agreement of loanenabled the lending baker to sell the securities

without any notice to the pawner,. The pawner

defaulted in payment. The bank sent a reminder,

but the pawner asked for more time. The bank

thereupon disposed of the securities.

HELD: Notice is not a mere notice. It has to be a

reasonable one. Such notice has to be clear andspecific in language. The court held the sale as

bad under law.


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LIMITATIONS ON THE RIGHT TO RETAIN

The right of retention is not absolute and comes withcertain limitations. These limitations have been established

through interpretation of the provision in various judicial

precedents.

In Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322 it has

been held that a pledgee cannot maintain a suit for

recovery of debt as well as retain the pledged property. He

is only entitled to recover the difference between the debt

and the price of the goods if it is less than the debt.


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Where a suit has been filed by the pawnee for

realisation of the debt, it is to be presumed that he

has not sold the pledged article, and will returnthesame to the pawnor on the suit claim being

satisfied.

Furthermore, Section 174 of the Contract Act

specifically provides that in the absence of any

contract to the contrary, a pawnee cannot exercise

his right of redemption for any other debt or

promise except that for which the goods have been

pledged.


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Can pledgee buy the goods himself?

While exercising the right of sale of pledged

goods, the pawnee is restricted from making a

sale of the pledged goods to himself, thoughsuch a restriction has not been explicitly

provided in the Contract Act with respect to

pledge of goods in general, the followingapproach has been adopted through various

judicial precedents.


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Privy Council in Neikram Dobey v. Bank of Bengal, (1891)

19 Cal 322:

The facts of the case are that certain governmentsecurities were pledged with the defendant bank, who

exercised its right to sell the pledged securities on default

by the pawnor.

However, instead of selling the pledged securities to athird party, the same was appropriated by the bank

towards itself. Thus, a suit was filed by the plaintiff before

a Single Bench of the Calcutta High Court contending that

such a sale was void and unauthorised. The Single Bench

upheld the contention in favour of the plaintiffs. Later, an

appeal was also preferred before the Privy Council.


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The punjab high court in Dhani

Ram & Sons v. Frontier Bank, (AIR1962 Punj 321) held that such an

act is not void. But the pledger mayhold the pledgee liable for any loss

he may have suffered for the goods

have been given a value less than

the market price.


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It has been held in Shatzadi Begum Sahiba v. Girdharilal

Sanghi (AIR 1976 AP 273) by the Andhra Pradesh High Court

that under a contract of pledge, 'While the owner has theright of possession as well as the right of enjoyment and right

of disposition, the pledgee has only the right of possession

but not the right of enjoyment. The pledgee's right of

disposition is governed by the terms of the pledge and is

limited to the recovery of the amount due to him under that

pledge.' Furthermore, in Chetty v. M.S.A.PS.L. Ramaswamy .L.

Palaniappa Chettiar, it has been held by the Madras High

Court that a sale by the pledgee of the pledged goods to

himself amounts to unauthorized conversion and the pledger

is rightfully entitled to have his property back on full value.


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Thus the appropriation of pledged shares by the

pawnee does not amount to a sale and does not

fall within the ambit of sale by the pawnor to

himself.

Thus, the rights conferred upon the pawnee are

not absolute in nature and bring along with it

reasonable restrictions with a view to protect the

interest of the pawnor as well so that the pawneecannot take undue advantage of the pawnors

disability.

WHO CAN PLEDGE?


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WHO CAN PLEDGE?

Usually owner or a person authorised by theowner.

Pledge made by any other person may be

invalid.

Eg: where some goods were left in the

possession of the servant. If the servant makes

a pledge in the absence of owner it will be an

invalid pledge.Yet, some are given authority to have a

juridical possession other than a mere physical

possession or bare custody.


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PLEDGE BY MERCHANTILE AGENT

(S.178)

PERSON IN POSSESSION UNDER

VOIDABLE CONTRACT (S.178-A)

PLEDGE BY PLEDGEE (S.179)



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(S.178)

MERCHANTILE AGENT:

An agent having in the customary course of

business as such agent authority either to sellgoods, or to consign goods for the purpose of

sale, or to buy goods or to raise money on the

security of the goods.Same definition as in the sale of goods act,

1930


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A merchantile agent, with the consent of the

owner, in the possessionof 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

faithand has no notice of the fact that the agenthas no authority to pledge.

Explanation to S.178: definition as same as

under sale of goods act,1930


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The necessary conditions of the

validity are:

1.Merchantile agent

2.Possession with ownersconsent

3.In the course of business4.Good faith

Merchantile agent


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Merchantile agent

There should be a merchantileagent as defined under the

Sale of goods act, 1930


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Possession with owners consent

As under S.13 of the contract act,1972, consent =

agreeing on the same thing in the same sense.

If consent is real, how it is got becomes immaterial

though it makes a person in possession liable for

many crimes. The consent given is not annulled.

Eg: a goldsmith obtained possession of certain

jewellery under the pretence that he had a customer,

and instead pledged with a third person. The pledgee

here was held to have a good title.


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SHARA DIN v GOKUL CHAND, AIR

1931 Lah 526

Possession under S.178 Is juridicalpossession as distinguished from

mere physical possession or bare

custody.

I th f b i


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In the course of business

Entrustment made in his capacity as a

merchantile agent

Q1: the plaintiffs dealer in diamonds at

Amsterdam, sent some diamonds to a

diamond broker in London for sale. The

broker asked a friend of his to pledge the

diamonds for him. The friend pledged them

with the defendants who were pawnbrokers.

f


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Good faith

Good faith and notice not

defined under the act. As pergeneral clauses act, 1895, good

faith- when done honestly,

whether negligently or not.



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VOIDABLE CONTRACT (S.178-A)

Goods are pledged by a person who has

obtained possession under a voidable

contract, the pledge is valid , provided that

the contract has not been rescindedat the

time of the pledge and the pledgee has

acted in good faith and without notice of

the pledgersdefect of title.


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PHILIPS v BROOKS Ltd, (1919) 2 KB 243

A fraudulent person, pretending to be a manof credit, induced the plaintiff to give him a

valuable ring in return for his cheque which

proved worthless. Before the fraud could bediscovered, the ring was pledged with the

defendants.

HELD: the pledge was held to be valid, itbeing made by a person in possession under

a voidable contract.

PLEDGE BY PLEDGEE (S 179)


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PLEDGE BY PLEDGEE (S.179)

S.179: PLEDGE WHERE PAWNOR HAS ONLY ALIMITED INTEREST- where a person pledges goods

in which he has only a limited interest. Therefore

when a pledgee further pledges the goods thepledge 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.

But an effective pledge in favour of the pledgee has

not taken place, any repledge made by him will be

equally ineffective.


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ADDITIONAL EXCEPTIONS UNDERTHE SALE OF GOODS ACT

S.30(1) and (2): A pledge by a sellerremaining in the possession after

sale and the buyer obtaining

possession before sale is valid.


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DIFFERENCE BETWEEN BAILMENT

AND PLEDGE

BAILMENT PLEDGE


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BAILMENT PLEDGEAS TO PURPOSE

Goods bailed for the

purposes such as safe

custody, repairs etc

It is a variety of bailment.

Goods are bailed as a

security for loan orperformance of a promise

AS TO RIGHT OF SALE

No right to sell. Only right

to retain or sue

Right of pledgee only on

default of pledgor and on

a reasonable notice.

BAILMENT PLEDGE


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CONSIDERATION

BAILMENT PLEDGE

There may or may not

with consideration Always with consideration

DISCHARGE OF CONTRACT

Discharged as the purpose

is fulfilled

Discharged on payment of

debt

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