Detailed Discussion about Pledge Mortgage and Definition

Pledge mortgage is a famous bank loan system. In this system a bank sanction long by mortgaging goods. So, let’s know the definition of a pledge mortgage first.

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Definition of pledge mortgage

The usual method of obtaining a title to goods offered as security is by way of a pledge.

Under Section 172 of Contract Act, 1872, pledge or a pawn is defined as “A bailment of goods as security for payment of a debt or performance of a promise”.

The person who delivers the goods (bailor) as the security is called the pawnor or ledger and the person to whom the goods are so delivered (bailee) is called the pawnee or the pledgee. Thus, in the case of a pledge-

There should be a bailment of goods; and
the objective of such bailment should be to hold the goods as security fourth payment of a debt or the performance of a promise. In other words, the bailment should be on behalf of a debtor or an intending debtor.

A bailment of Goods:

Under Section 148 of contract Act “Bailment is the delivery of goods by one person to another for some purpose, under a contract that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of, according to the directions of the person delivering them”.

The person delivering the goods is called the bailor. The person to whom they are delivered is called the bailee.

In the pledge, the ownership remains with the pledger. It is only a qualified property that passes to the pledgee who acquires a special priority and lien which is not of ordinary nature and, so long as his loan is not repaid, no other creditor or authority can take away the goods or its price. In case of default, the pledgee has the power to sell the goods after giving due notice.

The essential characteristics of bailment can be summarized as follows:

Bailment is always based upon a contract.
There can be a bailment of movable properties only, but money is not included in the category of movable goods.
Delivery of goods is essential for a contract of bailment. Delivery means the transfer of possession, actual or constructive (symbolic), from one person to another. Delivery of goods is said to be actual when the pledger hands over the physical possession of the goods to the pledgee as security. Delivery is constructive when the pledger does something with the intention of placing the pledgee in possession of the goods. Handing over the keys of the godown with the intention of transferring possession of the goods kept therein or, delivery of documents of title to goods such as a bill of landing, railway receipt, etc. duly endorsed, are cases of constructive delivery.
In bailment, ownership is not transferred, but only the special right of retaining the goods for the security is passed on to the lender until payment of a debt. The bailor continues to be the owner.
Goods are delivered upon a condition that on the accomplishment of the purpose the very goods in their original form are to be returned by the bailee or are otherwise to be disposed of according to the directions of the bailor.

For Security

As already stated, the goods bailed must be movable property including stocks and shares, negotiable instruments as well as documents of title to goods, such as bills of lading, railway receipts, dock warrants, warehouse keeper transferable receipt duly endorsed in the bank’s favor.

The purpose of such goods bailed in a pledge is to secure the payment of a debt or performance of a promise. If the goods are left with the banker for safe custody or for any other purpose, it does not constitute a pledge.

Who can create a pledge mortgage?

Anyone who is in legal possession of the goods can pledge them to anybody. The following are the parties who can legally pledge goods.

1. The owner of the goods himself.

2. Mercantile agent provided the following conditions are satisfied.

He should be in possession of the goods, or the documents of title to goods, with the consent of the owner.
The goods must have been entrusted to him in his capacity as a mercantile agent.
The mercantile agent should create the pledge in the ordinary course of his business as such an agent.
The pledgee or the pawnee acts in good faith and has no notice at the time of pledge that the pledger has no authority to pledge.

3. A person, who has obtained possession of goods by fraud, misrepresentation, coercion, or undue influence, such a contract is voidable at the option of the lawful owner. However, such a person shall create a valid pledge to provide the following conditions are fulfilled.

The contract has not been rescinded before he enters into the contract of pledge.
The pledgee acts in good faith without knowledge of the defective title of the pledger. This principle does not apply to a thief who has no title to goods and can give none.

4. If there are several joint owners of goods and goods are in sole possession of one of the co-owners, such a co-owner can make a valid pledge of goods.

5. A person who, with the consent of the seller, obtains possession of the goods or documents of title to the goods for which the title has not yet passed to that person provided the pledgee acts in good faith and without notice of the pledger’s defect in the title thereto.

6. A seller who is in possession of the goods after selling them can create a valid pledge provided the pledgee must act in good faith and without notice of the previous sale.

7. A pledgee may repledge the goods for borrowing money to the extent of his interest in the said goods. When the original pledger repays the debt to the first pledgee, he is entitled to the return of the goods although they may be in the hands of the second pledgee to whom the first pledgee has not repaid the debt.

Right/Obligation of Pledger mortgage

Rights:

The pledger has a right to claim back the security pledged on repayment on repayment of the debt with interest and other charges.
The pledger has a right to receive a reasonable notice in case the pledgee intends to sell the goods and, in case he does not receive the notice, he has a right to claim any damages that may result.
In case of a sale, the pledger is entailed to receive from the pledgee and surplus that may remain with him after the debt is completely paid up.
If the debt is satisfied from the sale of a portion of the pledged security, the pledger is entitled to receive back the remaining unsold security.
If any loss is caused to the goods, because of mishandling or negligence on the part of the pledgee, the pledger has the right to claim the same.

Obligations:

A pledger must disclose to the pledgee any material faults or extraordinary risks in the goods pledged to which the pledgee may be exposed. If he fails to do so, he may be responsible for the pledgee for damages.
A pledger is responsible to meet any extraordinary expenditure incurred by the pledgee for the preservation of the goods.
Where the pledgee has exercised his right of the sale of goods the pledger is liable to make goods the shortfall if there be any.
The pledger is liable for any loss caused to the pledgee because of defects in his (pledger’s) title to the goods. In other words, he guarantees his clean title to goods pledged.

Rights and Obligations of Pledge mortgage

Rights

The pledgee has a right to retain the goods pledged to him by the pledger till the debt, together with the interest due thereon and the expenses for preservation of the goods, are fully repaid by the pledger (Section 173 of the Contract Act).
The pledgee has no right to retain his possession over the goods pledged for any debt or promise other than the debt for which they were pledged unless otherwise provided for, by a contract (section 174). The pledgee can also claim extraordinary expenses incurred by him for the preservation of the goods pledged. In respect of such expenditure, he cannot claim a lien over the goods but can only sue to recover the money.
In case of default by the pledge, rot makes payment of the debt within the time fixed, or within which he is required to pay by a notice given by the banker, the pledgee has a right (Section 176) either.
- To file a suit against the pledger for the amount due and retain the goods as collateral security, or,
- To sell the goods pledged after giving the pledger reasonable notice for sale. The notice has to be clear and specific in language indicating the intention of the pledgee to dispose of the security.
The pledgee has the same remedies against the third person, as the owner himself would have if he is deprived of his goods.

Obligations

The pledge is to take much care of the goods pledged to him as a man of ordinary prudence would under similar circumstances take care of his own goods of similar nature (Section 151).
The pledgee cannot make unauthorized use of the pledged goods. If he violates any of the conditions of the pledge, the contract would be voidable at eh option of the pledger. He is also liable to make compensation to the pledger if he suffers any damage due to the unapproved use of the goods pledged (sections 153 and 154).
The pledgee is bound to return the goods on payment of the debt. If he fails to do so, he is responsible for the pledger for any loss, destruction, or deterioration of the goods from that time (Section 161).
The pledgee is also to pay the pledger any benefit accrued from the pledged goods in absence of an agreement to the contrary (Section 163).
The pledgee is to refund to the pledger the surplus of the sale proceeds of the securities after full liquidation of the debt against which the said securities were pledged.

While conducting a limit for an advance against the pledge of goods, the banker will follow the above-mentioned principles.

Please let us know if this information is helpful for you regarding the pledge mortgage.

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