A pledge is a specific type of bailment where personal property is delivered as security for a debt or performance of a promise. It plays a significant role in securing loans and obligations in commercial transactions.
What is a Pledge?
A Pledge is defined under Section 172 of the Indian Contract Act, 1872 as the bailment of goods as security for the payment of a debt or performance of a promise.
The person who pledges the goods is called the pawnor, and the person to whom the goods are pledged is called the pawnee.
Essentials of a Valid Pledge
- Delivery of goods (physical or constructive)
- Ownership retained by the pawnor
- Purpose: As security for a debt or obligation
- Consent of parties to treat the goods as a pledge
- Only movable property can be pledged
Legal Provisions Governing Pledge
- Section 172 to 179 of Indian Contract Act, 1872
- Indian Sale of Goods Act, 1930 (in cases of commercial pledges)
- Related case laws and banking regulations
Rights of Pawnee (Pledgee)
- Right of Retention (Section 173): Pawnee can retain goods until debt, interest, and expenses are paid.
- Right to Recover Expenses (Section 175): Pawnee can recover extraordinary expenses incurred for preservation of goods.
- Right to Sell (Section 176): In case of default, pawnee can:
- Sue the pawnor and retain the goods, or
- Sell the goods after giving reasonable notice.
Duties of Pawnee
- Take reasonable care of the pledged goods.
- Not to use the goods pledged for personal use.
- Return goods upon satisfaction of the debt.
- Deliver any increase or profit (if any) from the goods, e.g., dividends on pledged shares.
Rights of Pawnor (Pledger)
- Right to redeem goods before actual sale (even after default, until the goods are sold).
- Right to get notice before sale.
- Right to claim surplus if goods sold fetch a price higher than the debt.
Who Can Pledge Goods?
- The owner of goods
- A person in possession with the owner’s consent
- Mercantile agent (under Section 178)
- A person with voidable title under good faith (Section 178A)
- A co-owner with possession and consent
Difference Between Pledge and Bailment
| Basis | Bailment | Pledge |
|---|---|---|
| Purpose | General safekeeping or use | Security for debt or obligation |
| Right of Sale | Not allowed | Pawnee can sell goods after default |
| Consideration | May or may not involve consideration | Always involves a debt or promise |
| Legal Sections | Section 148–171 of ICA | Section 172–179 of ICA |
Example of Pledge
Mr. X pledges his gold ornaments to a bank to secure a loan of ₹5,00,000. Here:
- Mr. X is the pawnor
- The bank is the pawnee
- The gold is the pledged property
If X fails to repay, the bank can sell the ornaments after giving X a reasonable notice.
Case Law on Pledge
Lallan Prasad v. Rahmat Ali (AIR 1967 SC 1322)
Held: The pawnee’s right to sell the pledged goods exists only after giving reasonable notice to the pawnor.
Pledge in Banking and Commercial Use
- Gold loans
- Pledging shares for margin trading
- Warehouse receipts as pledge in trade finance
- Pledge of documents of title in shipping or exports
Modern Trends and Digital Pledging
- E-pledging of demat shares (under SEBI regulations)
- Digital gold pledge in fintech platforms
- Use of electronic warehouse receipts