IGNOU SOLVED ASSIGNMENTS

Pledge

Pledge can be defined as a special kind of bailment. Pledge is a transfer of goods as a security for the payment of a debt or for the performance of a promise. According to Section 172 of the Indian Contract Act, 1872, pledge is the bailment of goods as security for the payment of a debt or performance of a promise. In case of the contract of pledge the bailor is called pledger or powner and the bailee is called pledgee or pawnee. The contract of pledge can be only of movable properties. Transfer of goods in pledge can be either actual or constructive. The pledger should have judicial right on the goods pledged.

Example: X borrows a loan of Rs. 1, 00,000 from Y and X give his car as security. It is a valid pledge. In this case X is “pledger” and Y is the “pledgee”.

Who may make a pledge?

Only an owner according to the strictest principle is able to pledge his goods or any person expressly authorized by him in that behalf. Thus, a servant who has the custody of the goods of his master cannot pledge the goods on behalf of his master.

Similarly, where certain goods are left in the care of a person for some special purpose, he cannot pledge. Thus, the general rule is that only the owner or his authorized agent can create  a valid pledge.

In the following 6 cases, a person who is neither the owner of the goods nor having the express authority from the owner to pledge the goods, but having the possession of the owner’s goods has the right to confer rights upon the pledgee.

PLEDGE BY NON-OWNERS

1. Pledge by mercantile agent (Section 178): Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge.

Explanation : In this section, the expressions ‘mercantile agent’ and ‘documents of title’ shall have the meanings assigned to them in the Indian Sale of Goods Act,1930.

2. Pledge by person in possession under voidable contract (Section 178A): When the pawnor has obtained possession of the goods pledged by him under a contract voidable under section 19 or section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor’s defect of title.

3. Pledge by person with limited interest (Section 179) Section 179 says that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.  Thus, when a car worth 100,000 is owned jointly by A and B both having 50% interest in the car, and if A pledges the car for 60000, the value of the pledge that the pledgee can receive upon default is only 50% of the value received by sale.  Thus, if a pledgee further pledges the goods, his interest is only the amount for which the first pledger pledged the goods. For example, if A pledged his car worth 100000 for 20000 to B. B's interest in the car is only 20000. He can further pledge it but if he pledges it for more than 20000, A will be liable only for 20000. 

In Jaswantrai Manilal Akhney vs State of Bombay 1956, a cooperative bank had an overdraft account with the Exchange Bank, which was secured by the deposit of certain securities. After many dealing and adjustments the last position of the account was that the overdraft limit was set at Rs 66150 and the securities under the pledge of the bank were worth Rs 75000. The cooperative bank did not make use of this overdraft for a long time and when it attempted to use it, the Exchange Bank was itself in financial crisis and had pledged the securities first with Canara Bank and then after having redeemed them, pledged them again with a private financier. The SC held that the pledge was invalid.

4. Pledge by a co-owner in possession: In case one of the joint owners is in possession of the goods with the consent of the others, he can make valid pledge.

5. Pledge by seller in possession of goods after sale: Very often A after purchasing the goods, leaves the goods with the seller. In such a case, the seller can make a valid pledge provided the pawnee acts in goods faith and without knowledge of the pawnor's defect of title.

6. Pledge by buyer in possession of goods before sale: Sometimes, a buyer may obtain possession of the goods with the consent of the seller before sale. In such a case also, a valid pledge can be created by the prospective buyer provided the pawnee acts in good faith and has no knowledge of the pawnor's defect of title.