Pledge of Security :

Pledge means bailment of goods for the purpose of providing security for payment of debt or performance of promise. Section 172 of Indian Contract Act, 1872 defines pledge.

Valid Pledge – Important requirements

There should be delivery of goods (bailment). The bailment (delivery of goods) must be by or on behalf of the debtor. The bailment (delivery of goods) must be for the purpose of providing security for the payment of a debt or performance of a promise.

For example, an agriculturist is sanctioned a gold loan by his banker. The borrower delivers his gold ornaments to the bank as a security for the gold loan. The borrower pledges gold ornaments to raise the loan. In this case, the agriculturist has created a valid pledge.

(1) there is bailment of gold (delivery of gold)

(2) The bailment of gold is made by the debtor (borrower)

(3) The bailment of gold is provided as a security to the gold loan (debt)

Pledge – important features

(i) The person, whose goods are bailed is called pawnor or pledger, and to whom the goods are pledged as pawnee or pledgee.

(ii) Ownership of the property is retained by the pledger, which is subject only to the qualified interest which passes to the pledgee by the bailment.

(iii) The essential feature of a pledge is the actual or constructive delivery of the goods to the pledgee. By constructive delivery it is meant that there will be no physical transfer of goods from the custody of the pledger/ pawnor to the pledge/ pawnee. All that is required is that the goods must be placed in the possession of the pawnee or of any person authorized to hold them on his behalf.

(iv) The delivery of the goods may be ‘physical’ when goods are actually transferred and ‘symbolic’ as in the case of delivery of the key or ‘constructive’ as in the case of attornment.

(v) Pledge can be created only in the case of existing goods (and not on future goods) which are in the possession of the pledger himself.

(vi) Since the possession of goods is the important feature of pledge and therefore, pledge is lost when possession of the goods is lost.

(vii) An agreement of pledge also known as deed of pledge may be implied from the nature of the transaction or the circumstances of the case

(viii) To protect the interests of the concerned parties the agreement in writing should clearly indicate the terms and conditions.

A valid pledge can be created by (i) the owner of the goods (ii) a mercantile agent, subject to the following terms and conditions are satisfied (iii) the seller of goods, who continues to hold the goods even after sale, can create a valid pledge. The pledgee must act in good faith and without notice of the previous sale.

The Rights of Pledgee are as follows:

1. Right of Retainer: As per Section 173 of the Indian Contract Act, the pawnee or pledge is entitled to the good pledged not only for non-payment of debt or non- performance of promise, but also for the interest on the debt and for all expense incurred for preservation of the goods pledged.

2. Right against Third Parties: A pledge has the same remedies against third persons, as the owner himself would have, if he is deprived of his goods.

3. No Right to Retain in case of Other Debts: In the absence of a contract to the contrary, the pledge cannot retain goods for a debt or a promise, other than the promise or debt for which the said goods are pledged.

4. Other rights: In case the Pledger makes default, then the Pledgee has three important rights:

(i) He may sue the pawnor upon the debt or promise

(ii) He may retain the pledged goods as collateral security; or

(iii) He may sell it after giving the pledger reasonable notice of the sale

Pledge – Precautions required:

(i) Banks, as pledgee should ensure that the pledger has good title to the goods/assets

(ii) Bank verifies and satisfies that the contract of pledge (deed of pledge) is complete in all respects, and it covers all important clauses to protect the interest of the bank.

(iii) Bank carryout regular inspection of goods pledged to ensure the quality, quantity, value, and insurance of such goods are as required and as per the stock statements.

(iv) Bank takes reasonable care of the goods (like a man of ordinary prudence would under similar circumstances take) to protect the value of the goods and prevent any loss