Understanding the Concept of Pledge
In commercial transactions, the transfer of goods as security for a debt or performance of a promise is a common practice. One such arrangement is known as a pledge. The concept of pledge forms an integral part of the Law of Contract under the Indian Contract Act, 1872, specifically governed by Sections 172 to 179.
A pledge is a special kind of bailment where goods are delivered as security for the repayment of a debt or the fulfillment of an obligation. The ownership of the goods remains with the pledgor, but the possession is transferred to the pledgee until the debt is repaid. This arrangement safeguards both the lender and the borrower — the borrower can access funds while the lender has security against default.
In modern commerce, pledges play a vital role in banking, finance, and business operations, serving as the legal foundation for secured loans and credit facilities.
Definition of Pledge under the Indian Contract Act, 1872
According to Section 172 of the Indian Contract Act, 1872:
“The bailment of goods as security for payment of a debt or performance of a promise is called a pledge.”
Here, the bailor is called the pawnor or pledgor, and the bailee is called the pawnee or pledgee.
The essential features of a pledge are:
- Delivery of possession: The goods must be delivered by the pledgor to the pledgee.
- Purpose of security: The delivery must be for securing a debt or obligation.
- Ownership remains with the pledgor: Only possession passes to the pledgee.
- Redelivery after fulfillment: The pledgee must return the goods once the debt is repaid or the obligation is met.
A pledge is, therefore, a type of bailment where the bailment is for securing repayment or performance. It differs from an ordinary bailment because it is specifically created to serve as collateral.
Rights and Duties of the Parties in a Pledge
Rights of the Pledgee (Pawnee):
Under Sections 173 to 176, the pledgee enjoys the following rights:
- Right of Retainer: The pledgee may retain the goods for the payment of the debt, interest, and any necessary expenses.
- Right to Recover Extraordinary Expenses: The pledgee can recover expenses incurred in preserving the pledged goods.
- Right to Sell: If the pledgor defaults, the pledgee can sell the goods after giving reasonable notice to the pledgor (Section 176).
Duties of the Pledgee:
- The pledgee must take reasonable care of the goods as an ordinary prudent person would.
- He cannot use the goods for personal purposes.
- He must return the goods after the debt or obligation is fulfilled.
Rights of the Pledgor (Pawnor):
- Right to Redeem: Even if the pledgor defaults, he can redeem the goods any time before actual sale by paying the debt and expenses (Section 177).
- Right to Recover Damages: If the pledgee misuses or damages the goods, the pledgor can claim damages.
Thus, both parties have reciprocal rights and obligations, making the contract of pledge a balanced and secure transaction.
Who Can Pledge?
As per the Indian Contract Act, a valid pledge can generally be made only by the owner or by someone who has the authority or consent of the owner. However, in certain cases, even non-owners can create a valid pledge under specific circumstances provided in Sections 178, 178A, and 179.
1. Pledge by Mercantile Agent (Section 178)
A mercantile agent who is in possession of goods or documents of title to goods can make a valid pledge if:
- He is acting in the ordinary course of business,
- The pledgee acts in good faith, and
- The pledgee has no notice of the agent’s lack of authority.
Example:
If a car dealer (mercantile agent) pledges cars kept for sale as security for a business loan, and the bank acts in good faith, the pledge is valid.
2. Pledge by Person in Possession under a Voidable Contract (Section 178A)
If a person has obtained possession of goods under a voidable contract (e.g., fraud, coercion, misrepresentation) and the contract has not yet been rescinded, he can make a valid pledge provided the pledgee acts in good faith and without knowledge of the defect in title.
Example:
If A obtains goods from B by misrepresentation and pledges them to C (who acts in good faith), C’s pledge is valid, and B cannot recover the goods without settling C’s interest.
3. Pledge by a Person with Limited Interest (Section 179)
A person having only a limited interest in goods (like a bailee or finder of goods) can make a pledge only to the extent of that interest.
Example:
A finds a diamond ring and incurs ₹5,000 to safeguard it. If he pledges the ring for ₹5,000, the pledge is valid only to that extent.
4. Pledge by Joint Owner in Possession
If one of the joint owners is in possession of goods with the consent of the other co-owners, he can make a valid pledge of the goods.
Example:
If A and B jointly own a car and A has possession with B’s consent, A can pledge it for a loan.
These provisions ensure commercial flexibility while protecting the rights of the true owner and the pledgee.
Distinction Between Pledge and Mortgage
| Basis | Pledge | Mortgage |
|---|---|---|
| Nature | Bailment of goods as security | Transfer of ownership in property as security |
| Possession | Transferred to pledgee | Usually retained by mortgagor |
| Ownership | Remains with pledgor | Passes conditionally to mortgagee |
| Governing Law | Indian Contract Act, 1872 | Transfer of Property Act, 1882 |
Thus, a pledge is a transfer of possession as security, while a mortgage involves transfer of ownership interest.
Real-Life Example: Pledge in Modern Banking
Let’s take a real-world scenario to understand how pledges function in today’s business world.
Example:
Rahul owns a jewelry shop and needs a loan of ₹10,00,000 from a bank. He pledges gold ornaments worth ₹15,00,000 as security for the loan. The bank keeps the ornaments in its locker until repayment. Here, Rahul is the pledgor, and the bank is the pledgee. Once Rahul repays the loan, the bank must return the gold. If Rahul defaults, the bank can sell the gold after giving due notice.
This real-life example mirrors how banks commonly provide “gold loans” based on the principles of pledge under Section 172.
Recent Case Law Example
Case: ICICI Bank Ltd. v. Sidco Leathers Ltd. (2006) 10 SCC 452
The Supreme Court held that a pledgee has a special property right over pledged goods and can sell them after giving due notice to recover the debt. The pledgee is not the owner but has priority over other creditors.
This case reinforces the legal sanctity of pledges in India’s financial system.
Mnemonic to Remember — “P-L-E-D-G-E”
To easily remember the essentials of a pledge, use this mnemonic:
- P – Possession transferred but ownership remains.
- L – Law under Section 172 of the Indian Contract Act, 1872.
- E – Entrusted as security for debt or obligation.
- D – Delivery of goods is essential for validity.
- G – Good faith pledge by non-owner may also be valid.
- E – Entitlement to sell after default with notice.
Mnemonic Sentence:
“Possession Loan Ensures Debt’s Guaranteed Execution.”
This simple phrase helps remember that a pledge is the bailment of goods as security, governed by Sections 172–179, protecting both the lender and the borrower.
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