Pledge is only a special kind of bailment where the object of the delivery of assets/goods is to provide a security for a loan or for the fulfillment of an obligation.
Section 148 of the Indian Contract Act, 1872 defines the” bailment”. Section 172 to 176 of the Indian Contract Act, 1872 deals with pledge and pledgee’s right and duties on goods pledged.
Section 148 of Indian contract Act defines Bailment which is summarized below:
I) There must be delivery of goods either actual or constructive
II) Delivery of goods should be for some purpose and based on contract
III) When the purpose is accomplished, the goods must either be returned or disposed of as per the terms of the contract.
Section 172 of the Indian Contract Act, 1872 defines pledge as “the bailment of goods as security for payment of a debt or performance of a promise.”
We may observe from the above sections, the essence of a pledge is that the goods must be delivered to the possession of pledgee, as a security for payment of debt and there should be a contract to return the same goods which were pledged after the debt is repaid.
The delivery of goods may be actual or constructive. The delivery of godown keys, where the goods are stored, in the case of Key Cash Credit/key loan, is an illustration of constructive delivery of goods. As the pledge is not a transfer of property, the pledgee bank only retains possession of the goods, but the right of ownership remains with the borrower who pledged the goods. In order to constitute a valid pledge, delivery of goods, and release of advance need not be simultaneous. Delivery of goods can be subsequent to making the advance (Case study Laun Parshad Vs Rahamat Ali-SC-1967).
Section 173 to 176 of Indian Contract act 1872 states the rights and duties of bank as pledgee which are as under;
- Pledgee can retain the goods not only for payment of the debt or performance of the promise but also for interest and all necessary expenses incurred in respect of possession and/or preservation of pledged goods (Case study Satyanarayana Vs SBI-AP HC -1975).
- Pledgee can file a suit against the borrower for recovery of shortfall of balance if any, after disposal of pledged goods (Case study Haridas Mundra Vs National Grindlays Bank Ltd.-Calcutta HC-1963)
- Pledgee can sell the goods without intervention of Court, after giving due or reasonable notice to the pledger,
- Pledgee has a special property in the goods pledged. So long as his claim was not satisfied, no other creditor including Government Authorities has authority to supersede the bank’s right to pledged security. Pledgee Bank has the first charge on goods pledged. (Case study Bank of Bihar Vs State of Bihar-SC-1971).
- Pledgee is not entitled to enjoy any accretions on pledged security. Pledgee must re-deliver the goods after the debt is repaid. A pledge cannot retain goods for any debt other than the debt for which goods are pledged. However, if the pledgee is a bank, the operation of General Lien (u/s 171) would be applicable unless the bank has expressly agreed to waive its right of general lien.
- Pledgee must take the same care of the pledged assets, as a man of ordinary prudence would take his own goods.
- Goods pledged can be sold by private sale or by public auction.
- Any person, who is in valid possession of the goods/security, can create a valid pledge. Pledge by an agent or power of Attorney holder is treated on par with a pledge by the owner of goods provided by the existence of agency can be provided/power to pledge is clearly expressed in the power of attorney (U/S.178A).
The granting of the loan, execution of the promissory note and endorsement and delivery of the document of title to goods together form pledge transactions. Their combined effect is that bank would be in control of goods till the debt is discharged (U/S.180). To draw the bills in favour of the bank and give notice of banks interest in the relative goods to the carrier is advisable so that unpaid seller or a fraudulent person cannot take re-delivery of the goods. The bank must exercise extra care while accepting documents like Lorry Receipts, Airway bill because they are not considered as “document to title” under the sale of goods Act. The bank which has security interest must invariably notify the carrier of its interest in relative goods, (Case study: Canara Industrial & Banking Syndicate Ltd Vs R.G.Prabhu, Mysore HC-1968).