Definition: Pledge can be defined as that special form of bailment in which goods are bailed as security by one party to another, for the repayment of debt or performance of a promise.
The party who deposits the goods is the bailor, called as pawnor, whereas the party who takes the possession of the goods or the one to whom the goods are deposited is the bailee, called as pawnee.
What can be pledged?
Any movable item such as assets, documents, valuables, receipt of fixed deposit account or savings bank account and securities can be deposited with the moneylender or promisee, as collateral, against the repayment of loan or fulfilment of the obligation.
There must be actual or constructive delivery of the goods to be pledged. However, government securities are to be pledged by endorsement and delivery.
Joseph is in urgent need of money so he deposits his gold watch to Michael as security for the money lent. This is a case of pledge whereby gold watch is bailed as a security for the amount lent. Here, Joseph is the pawnor and Michael is the pawnee.
Characteristics of Pledge
- Bailment of property for securing the payment of amount lent or performance of a promise.
- The asset is delivered to the pawnee by the pawnor as collateral, in pursuance of a contract and upon a condition to return on the realisation of debt or performance of the promise.
- The subject matter of the contract is the asset or property given as collateral.
- The property pledged with the pawnor must be in existence.
The ownership of the asset remains with the pawnor, accept in some circumstances, where the pawnee gets the right to sell the asset pledged. Further, the pawnee is obliged to take reasonable care of the asset pledged.
Rights of Pawnee
The right of the pawnee are discussed as under:
- Right to retain the goods: The pawnee has the right to retain the pledged article, not just for the repayment of the loan advanced or fulfilment of the obligation, but also for the interest accrued and all the relevant expenses incurred in connection to the possession and safekeeping of the article.
- Right to the retention for subsequent loan: The pawnee can also retain the goods pledged towards the further amount lent to the pawnor. Nevertheless, it is required to be specifically stated in the contract.
- Right in connection to additional expenses borne: Any expenses made by the pawnee for the safekeeping of the goods pledged are to be recovered from the pawnor.
- Right in case of default: When the pawnor makes default in the repayment of the amount lent or in the performance of the obligation within the stated time, the pawnee can file a suit against pawnor and retain the goods pledged, or he/she has the right to sell the property pledged, after giving a reasonable notice of the sale to the pawnor.
Further, if the sale proceeds are less than the amount lent, the pawnor has to pay the remaining sum, but if the sale proceeds are higher than the money lent, then the pawnee should refund the surplus amount to the pawnor.
Rights of Pawnor
The rights of the pawnor are explained in the points below:
- Right to redeem: When there is a time specified for the repayment of loan or performance of the obligation and the pawnor does not realise the dues within that time, then he may redeem the item at any time before the goods are sold by the pawnee. However, the pawnor has to pay the expenses incurred to the pawnee, due to his default.
- Right to limited interest: When the pledge made by the pawnor for limited interest, then its validity will be limited to that extent only.
- Rights in case of unauthorized sale: If the pawnee sells the pledged item wrongfully, without giving notice, the pawnor has the right to file suit against pawnor for the redemption of the item by depositing the amount and treating the sale as if it has never taken place.
Alternatively, the pawnor can ask for the damages on the ground of conversion of the property pledged.
Pledge acts as a security, which assures that the pawnor will repay the debt or perform the obligation. These are mainly used in securing loans and if the loan is not repaid when due, the pawnee has the right to sell the pledged article, in order to discharge the dues.