What is Pledge? Definition Under the Indian Contract Act, 1872
Introduction
A pledge is a special type of bailment where movable goods are delivered by one person to another as security for the repayment of a debt or the performance of a promise. It is one of the most important concepts under the Indian Contract Act, 1872, particularly in commercial and banking transactions. Banks, financial institutions, and lenders commonly accept gold, shares, or other movable assets as security through a pledge.
The law relating to pledge is contained in Sections 172 to 181 of the Indian Contract Act, 1872.
Definition of Pledge
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.”
The person who delivers the goods is called the Pawnor (Pledgor), while the person who receives the goods as security is called the Pawnee (Pledgee).
Parties to a Pledge
1. Pawnor (Pledgor)
The pawnor is the owner or person in possession of the goods who delivers them as security for a debt or the performance of a contractual obligation.
Example:
Ramesh borrows ₹2,00,000 from a bank and pledges his gold jewellery as security. Ramesh is the Pawnor.
2. Pawnee (Pledgee)
The pawnee is the person or institution that receives the pledged goods as security and has the right to retain them until the debt is repaid.
Example:
The bank that accepts Ramesh’s gold jewellery as collateral is the Pawnee.
Essential Elements of a Valid Pledge
A valid pledge must satisfy the following conditions:
1. Delivery of Movable Goods
Only movable goods can be pledged. Possession of the goods must be delivered to the pawnee.
2. Purpose of Security
The goods must be delivered as security for:
- Repayment of a debt, or
- Performance of a promise.
3. Ownership Remains with the Pawnor
The pawnor continues to be the owner of the goods. Only possession is transferred to the pawnee.
4. Return of Goods
Once the debt is repaid or the promise is performed, the pawnee must return the pledged goods to the pawnor.
5. Contract Between the Parties
A pledge arises from a valid contract, which may be express or implied.
Example of Pledge
Suppose Anita needs ₹1,00,000 for her business. She approaches a bank and pledges her gold ornaments as security for the loan.
- Pawnor: Anita
- Pawnee: Bank
- Goods Pledged: Gold ornaments
- Purpose: Security for repayment of the loan
After Anita repays the loan with interest, the bank is legally bound to return the gold ornaments.
Rights of the Pawnee
The Indian Contract Act grants several rights to the pawnee.
1. Right of Retention (Section 173)
The pawnee has the right to retain the pledged goods until:
- The debt is repaid.
- Interest is paid.
- Necessary expenses relating to the possession or preservation of the goods are reimbursed.
2. Right to Recover Extraordinary Expenses (Section 175)
If the pawnee incurs extraordinary expenses to preserve the pledged goods, they can recover those expenses from the pawnor.
Example:
The pawnee spends money to protect pledged machinery from flood damage.
3. Right to Sell the Goods (Section 176)
If the pawnor defaults in payment or performance, the pawnee may:
- File a suit to recover the debt while retaining the goods, or
- Sell the pledged goods after giving the pawnor reasonable notice.
If the sale proceeds exceed the debt, the surplus must be returned to the pawnor. If the proceeds are insufficient, the pawnor remains liable for the balance.
Duties of the Pawnee
The pawnee must:
- Take reasonable care of the pledged goods.
- Avoid unauthorized use of the goods.
- Return the goods upon repayment of the debt.
- Return any increase or profit arising from the goods, unless otherwise agreed.
Rights of the Pawnor
The pawnor enjoys several legal rights.
1. Right to Redeem the Goods (Section 177)
The pawnor has the right to redeem the pledged goods by repaying the debt before the actual sale of the goods, even if the payment is made after the stipulated time, provided any additional expenses arising from the delay are also paid.
2. Right to Receive the Surplus
If the pledged goods are sold and the sale proceeds exceed the amount due, the pawnor is entitled to receive the surplus amount.
3. Right to Proper Care
The pawnor has the right to expect that the pawnee will take reasonable care of the pledged goods while they remain in the pawnee’s possession.
Duties of the Pawnor
The pawnor must:
- Repay the debt as agreed.
- Disclose known defects in the pledged goods.
- Compensate the pawnee for losses caused by defective title or undisclosed defects, where applicable.
Pledge by Non-Owners
Although generally only the owner can create a valid pledge, the Indian Contract Act recognizes certain exceptions where a non-owner may create a valid pledge.
Examples include:
- Mercantile agent acting within authority (Section 178).
- Person in possession under a voidable contract before it is rescinded (Section 178A).
- Person having limited interest in the goods (Section 179).
These provisions protect bona fide commercial transactions while balancing the rights of the true owner.
Difference Between Bailment and Pledge
| Basis | Bailment | Pledge |
|---|---|---|
| Meaning | Delivery of goods for any lawful purpose | Delivery of goods as security for a debt or promise |
| Governing Sections | Sections 148–181 | Sections 172–181 |
| Purpose | Repair, storage, transportation, custody, etc. | Security for debt or obligation |
| Right to Sell | Generally not available | Pawnee may sell after giving reasonable notice upon default |
| Parties | Bailor and Bailee | Pawnor and Pawnee |
Key Point: Every pledge is a bailment, but every bailment is not a pledge.
Important Case Law
Lallan Prasad v. Rahmat Ali (1967)
The Supreme Court of India held that a pawnee who has lost or wrongfully parted with possession of the pledged goods cannot both retain the value of the security and recover the full debt without accounting for the loss. The decision emphasizes the pawnee’s duty to preserve the pledged goods and the importance of maintaining possession.
Practical Examples of Pledge
- Gold jewellery pledged for a bank loan.
- Shares pledged as collateral for a business loan.
- Goods pledged to secure a working capital facility.
- Agricultural produce pledged for obtaining finance.
- Warehouse receipts pledged to financial institutions.
Frequently Asked Questions (FAQs)
1. What is a pledge under the Indian Contract Act?
A pledge is the bailment of movable goods as security for the repayment of a debt or the performance of a promise.
2. Which section defines pledge?
Section 172 of the Indian Contract Act, 1872 defines pledge.
3. Who are the parties to a pledge?
The parties are:
- Pawnor (Pledgor): The person delivering the goods.
- Pawnee (Pledgee): The person receiving the goods as security.
4. Can the pawnee sell the pledged goods?
Yes. Under Section 176, the pawnee may sell the pledged goods after giving the pawnor reasonable notice if the pawnor defaults.
5. Is every pledge a bailment?
Yes. A pledge is a special form of bailment created specifically for securing a debt or the performance of a promise.
Conclusion
A pledge is a legally recognized form of security under the Indian Contract Act, 1872, providing protection to both borrowers and lenders. By transferring possession—but not ownership—of movable goods, the law ensures that creditors have adequate security while safeguarding the rights of owners. The provisions contained in Sections 172 to 181 establish a balanced framework governing the rights and obligations of pawnors and pawnees, making the concept of pledge indispensable in modern banking, finance, and commercial transactions.
