legal & regulatory aspects of banking - jaiib
TRANSCRIPT
COMMERCIAL LAW WITH REFERENCE
TO BANKING OPERATIONS
(MODULE – D)
LEGAL & REGULATORY ASPECTS OF BANKING - JAIIB
CONTRACT OF PLEDGE
CHAPTER - 44
CHAPTER 44 CONTRACT OF PLEDGE
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CONTENTS
1. INTRODUCTION
2. WHAT IS PLEDGE
3. INGREDIENTS OF PLEDGE
4. NATURE OF PLEDGE
CHAPTER 44 CONTRACT OF PLEDGE
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CONTRACT OF
PLEDGE
INTRODUCTION
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. 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. 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.
CHAPTER 44 CONTRACT OF PLEDGE
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WHAT IS PLEDGE?
Pledge is a bailment that conveys possessory title to property owned by a debtor (the pledger) to a
creditor (the pledgee) to secure repayment for some debt or obligation and to the mutual benefit of both
parties. The bailor is in this case called the "Pawnor". The bailee is called "pawnee".
Example
Mr. Shukla (Pawnor) borrows Rs. Ten thousands from Mr. Pritam (Pawnee) and keeps his motor cycle
as security for payment of the debt. The bailment of motor cycle is called pledge.
INGREDIENTS OF PLEDGE
To constitute a valid pledge, there must be
1. A contract in relation to an identified chattel to be delivered to the pledgee as security.
2. Actual delivery of possession of the identified chattel in pursuance of the contract.
The essential ingredients of a valid pledge are
1. The property pledged should be actually or constructively delivered to the Pawnee; and
2. Pawnee has only a special property in the pledge while the general property remains with the
powner and hold revert to him on discharge of debt.
The major distinction between a pledge and lien is that in Lien there is no power of sale or disposition of
the goods where as in case of pledge there is power to sell on default. In case of Lien, there is no
transfer of any interest; the person exercising the Lien has only the right to retain the subject matter of
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Lien until he is paid. A Lien disappears the moment the possession is lost and there is no right of sale.
While in case of pledge, sale can be made in the event of default. A pledge is assignable.
NATURE OF PLEDGE
1. If the pawnor makes default in payment of the debt in respect of which the goods were pledged,
the Pawnee may bring a suit against the pawnor and retain the goods pledged as a security (or) he
may sell the goods pledged, after giving notice of the sale to the pawnor.
2. If the proceeds of such sale are less than the amount due, in respect of the debt, the pawnor is still
liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the
Pawnee shall pay over the surplus to the pawnor.
For example
Say A takes a loan of Rs. 20,000 from B. As an assurance that he will pay this money back, A
keeps his car, as security, with B. Thus, if after the fixed date, if A is unable to pay the money back
to B, B can either bring a suit for this purpose while he retains the car, or he can sell the car for the
purpose of recovering his dues. If B chooses to sell the car, the two possibilities are as follows: He
may receive less than the amount due, in which case, A will still have to pay him the balance, or he
may receive more than the amount due, in which case he must return the excess amount to A.
3. It is important to note, that in all contracts of bailment, the bailee, while he is in possession of the
goods, steps into the shoes of the owner for the purpose of legal remedy. Thus, if any person were
to deprive the bailee of the goods - by way of theft, etc. - the bailee, himself, would have the right
to file a suit against such other person. If, any damages are received from such a suit, it would be
split between the bailor and the bailee, according to the proportion of their losses or damages.
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4. The Pawnee can retain the goods pledged, not only for payment of the debt/interest on the debt
but also for all necessary expenses incurred by him in preservation of the goods pledged. The
Pawnee is entitled to receive from the pawnor, extraordinary expenses incurred by him for the
preservation of the goods pledged.
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