Pledge, Pledgor, Pledgee And Bank Loans

Pledge is a popular method adopted in banking to create charge on a security. It is a specific form of bailment. Pledge is defined under the Indian Contract Act as a form of bailment of goods where the goods are bailed as security for payment of a debt or performance of a promise. When a borrower carries out a pledge with a bank, either the goods itself or the lock and key of the godown where the goods are stored are handed over to the bank.

Pledgor (pawnor) and pledgee (pawnee) in a pledge

Pledgor in a pledge transaction is the person bailing the goods by way of security. He is also known as pawnor. The person receiving possession or delivery of the goods is called the pawnee or pledgee.  (Please refer Bailment, Bailor And Bailee also for clarity)

The pledgee never becomes the owner of the goods pledged. He gets only the right to retain the goods till repayment of amount advanced. He gets the right to dispose of the good, with proper notice to the pledgee in case the repayment is defaulted.

In a pledge security is handed over with the primary purpose of putting the goods in the custody of pawnee to reimburse himself the money advanced, in case the debt remains unpaid.

What are the conditions to be satisfied under a valid pledge?

In order to constitute a valid pledge, it should satisfy the following three conditions:
a.    Bailment of goods pledged should happen
b.    Bailment should be by way of security and
c.    The security transfer should be for payment of a debt.

Who can pledge the goods?

Any of the following can pledge goods if they have legal possession:
a.    The owner of the goods
b.    The agent of the owner.
c.    Any of the joint owners with the consent of other co-owners.

What are the rights and duties of a pledgee and pledgor under pledge?

a.    The pledgee can retain the goods not only for payment of the debt or performance of promise, but also for the interest of debt and expenses incurred in respect of the possession or for preservation of pledged goods
b.    In the absence of a specific contract, a pledgee cannot retain the goods for any debt or promise other than for the debt or promise for which the goods were pledged. Pledgor should return the pledged goods to the pledgor on payment of debt or performance of promise.
c.    The pledgee shall take reasonable care as a man of ordinary prudence in safeguarding the pledged goods.
d.    The extraordinary expenses incurred for the preservation of pledged goods can be collected from the pledgee.
e.    In case of default in payment or performance by pawnor, pledgee can sue the pawnor or sell the pledged good after giving reasonable notice to the pawnor. The goods can be sold by private sale or public auction.
f.    The pledgor has the right to recover losses if any in the goods pledged, due to the negligence of the pledgee.
g.    The pledgor has the right to receive increase in the goods pledged, in the absence of an agreement to the contrary.

What is right of redemption?

If the pledgor has performed his promise or repaid the debt and interest, then he has the right to get back the pledged good. This right of pledgor is known as right of redemption.