Pledge / Pignus /

A pledge (or pawn) is the bailment of goods as security for the payment of a debt or performance of a promise. Section 172 of the ICA, 1872 defines pledge as the bailment of goods as security for payment of a debt or performance of a promise. The pledgor (debtor) delivers possession of the goods to the pledgee (creditor) as security; the pledgor retains ownership — the pledgee acquires only a special property interest (a security interest) in the goods, entitling them to retain possession until the debt is repaid or the promise performed. On repayment, the pledgee must return the goods; on default, the pledgee has specific rights against the goods.

The pledgee's rights on the pledgor's default are specified in Section 176 ICA: (1) right to sue the pledgor upon the debt or promise and to retain the goods as collateral security; (2) right to sell the goods, after giving the pledgor reasonable notice of the intended sale; and (3) right to apply the sale proceeds to the debt, returning any surplus to the pledgor. If the sale proceeds are insufficient to cover the debt, the pledgee can sue the pledgor for the balance. The right to sell — without the court's intervention — is a significant advantage of pledge over other security arrangements (mortgage, hypothecation) where enforcement typically requires court proceedings or registration.

Pledge by persons other than the owner raises difficult questions of title. Section 178A ICA provides that where a mercantile agent is, with the owner's consent, in possession of goods or documents of title to goods, any pledge made by the agent in the ordinary course of business is as valid as if the agent were expressly authorised by the owner — a bona fide pledgee without notice of the agent's lack of authority gets a good title. This exception to the nemo dat rule protects the pledgee who takes in good faith from mercantile agents holding goods with the owner's consent.

In banking practice, pledge is used extensively: (1) Pledge of goods — banks advance loans against pledge of goods stored in the bank's or a warehouse keeper's custody; this requires actual control over the goods (own godown or registered warehouse receipt); (2) Pledge of shares — banks take pledge of shares by requiring delivery of physical share certificates with blank transfer forms (for old-style physical shares) or by getting a pledge notation on dematerialised (demat) shares through the depository system; (3) Pledge of gold and jewellery — traditional and still widespread; the pledgee (bank/NBFC) takes physical custody of the gold and has the right to sell on default.

For advocates, pledge disputes commonly involve: (1) Validity of the pledge — whether proper delivery was made (Lallan Prasad test); (2) Sale of pledged goods — whether reasonable notice was given before sale; (3) Surplus after sale — the pledgee's obligation to account for the surplus proceeds; and (4) Pledge by non-owners — whether the pledgor had authority to pledge under Section 178A (mercantile agent exception).