Pledge

1. Definition: section 172

The bailment of goods as security for payment of a debt or performance of a promise is called a pledge. The bailor is the pawnor and the bailee is the pawnee. The essentials are therefore those of bailment (delivery of possession of movable goods under a contract) plus the security purpose. Delivery may be constructive: handing over the key of a godown, or a document of title such as a railway receipt or bill of lading.

In Morvi Mercantile Bank Ltd. v. Union of India, 1965 INSC 55, AIR 1965 SC 1954, the Supreme Court held that a railway receipt is a document of title to goods and that its pledge operates as a pledge of the goods themselves. The pledgee bank could therefore sue the railway for the full value of the goods lost, rather than only the amount of its advance, holding any surplus for the pawnor.

2. Pledge and bailment compared

• Purpose. Bailment: Any purpose: repair, custody, carriage, use. Pledge: Only security for a debt or promise.
• Use of goods. Bailment: Bailee may use them if the terms allow. Pledge: Pawnee may not use them.
• Consideration. Bailment: May be gratuitous. Pledge: Always for consideration: the debt or promise.
• Right to sell. Bailment: None; only a lien under s.170/171. Pledge: May sell on default after reasonable notice (s.176).
• Lien. Bailment: Particular lien for labour or skill. Pledge: Holds goods for debt, interest and expenses (s.173).
• Termination. Bailment: On purpose accomplished or time expiring. Pledge: On repayment of the debt.

Pledge must also be kept apart from hypothecation, where the borrower keeps possession and the lender has only a charge, and from mortgage, which transfers an interest in property (usually immovable). Without delivery of possession there is no pledge.

3. Who can pledge

The general rule is that only the owner, or a person authorised by him, can pledge: no one can give a better title than he has. The Act makes exceptions to protect a pawnee who takes in good faith.

• Mercantile agent, section 178. Where a mercantile agent is, with the consent of the owner, in possession of goods or of documents of title to goods, any pledge made by him when acting in the ordinary course of business of a mercantile agent is as valid as if he had been expressly authorised by the owner, provided the pawnee acts in good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge.
• Person in possession under a voidable contract, section 178A. Where the pawnor has obtained possession of the goods under a contract voidable under section 19 or 19A (coercion, fraud, misrepresentation, undue influence), but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title, provided he acts in good faith and without notice of the pawnor's defect of title.
• Pawnor with limited interest, section 179. Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest. A bailee with a lien for repair charges can pledge the goods to that extent.
• Seller or buyer in possession after sale. Under sections 30(1) and 30(2) of the Sale of Goods Act, 1930, a seller left in possession after sale, or a buyer who has obtained possession before the property passes, can make a valid pledge to a person taking in good faith without notice.
• Co-owner in sole possession with the consent of the others may pledge the goods.

4. Rights of the pawnee

• Retainer, section 173. He may retain the goods for payment of the debt or performance of the promise, and also for the interest on the debt and all necessary expenses incurred by him in respect of the possession or preservation of the goods.
• Retainer for subsequent advances, section 174. He shall not, in the absence of a contract, retain the goods for any debt or promise other than the one for which they were pledged; but such a contract is presumed for subsequent advances made by him.
• Extraordinary expenses, section 175. He may recover from the pawnor extraordinary expenses incurred for the preservation of the goods, though he has no right to retain the goods for them.
• Remedies on default, section 176. If the pawnor makes default, the pawnee may either bring a suit on the debt or promise and retain the goods as collateral security, or sell the goods on giving the pawnor reasonable notice of the sale. If the proceeds fall short, the pawnor remains liable for the balance; if they exceed what is due, the pawnee must pay the surplus to the pawnor.

5. Duties of the pawnee

• To take reasonable care of the goods (section 151) and not to use them.
• To give reasonable notice before selling (section 176). A sale without notice is wrongful.
• To return the goods on payment, together with any accretion (sections 160 and 163).
• To account for the surplus on sale.

The duty to return lies under the right to sue for the debt. In Lallan Prasad v. Rahmat Ali, 1966 INSC 261, AIR 1967 SC 1322, the pawnee sued to recover a loan advanced against a pledge of goods, but had meanwhile disposed of the goods and was not in a position to return them. The Supreme Court held that when a pawnee sues on the debt under section 176 while retaining the goods as collateral security, he must be able to return the goods on payment. Having disabled himself from doing so, he could not recover the debt; his remedy of sale is available only after reasonable notice to the pawnor.

6. Rights and duties of the pawnor

• Right to redeem, section 177. If a time is fixed for payment and the pawnor defaults, he may still redeem the goods at any later time before their actual sale, but he must pay any expenses arising from his default.
• Right to the surplus on sale, to notice before sale, and to the return of the goods and their increase on repayment.
• Right to hold the pawnee to reasonable care (section 151), and to sue a pawnee who sells without notice.
• Duties: to repay the debt with interest, to disclose known faults in the goods (section 150), and to meet extraordinary expenses of preservation (section 175).

7. Problem

P pledges gold ornaments with a moneylender M for a loan of Rs 1 lakh repayable in six months. P fails to repay. Without telling P, M sells the ornaments for Rs 1.4 lakh and keeps the whole amount. P then offers to repay the loan and demands the ornaments.

Issue. Whether M's sale was valid, and what P can recover.

Law. Section 176 allows sale on default only after reasonable notice and requires the surplus to be paid to the pawnor. Section 177 allows redemption until actual sale. Lallan Prasad requires the pawnee who claims the debt to be able to return the goods.

Application. The sale without notice was wrongful, and it cut off P's right to redeem under section 177. M cannot both keep the price and recover the loan. At the least he must account for the surplus of Rs 40,000; P may also claim damages if the market value of the ornaments exceeded the price obtained.

Conclusion. P is entitled to the surplus and to damages for the wrongful sale, with the loan set off against the value of the ornaments. M cannot sue for the loan as if the pledge still subsisted.

How this is examined

January 2026 asked “Define pledge. Who can pledge?” and “Discuss the rights and duties of a pawnee.” For the first, give section 172, the comparison with bailment, and the exceptions in sections 178, 178A, 179 and the Sale of Goods Act. For the second, sections 173 to 176 for rights, the duty of notice and return for duties, and Lallan Prasad. A short note on “pledge by non-owners” is also common.