What is pledge? – a bailment of a chattel as security for a debt or other obligation without involving transfer of title. How to use pledge in a sentence. we also discuss about hypothecation in our next Article and also discuss for “what is the difference between pledge and hypothecation.
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What is pledge?
Recently I was requested by someone to write an article on pledge and hypothecation . Here I’m discussing about pledge and later in my subsequent posts I will explain what is hypothecation with an example.
To understand the concept of pledge first we should be aware of what is a bailment?
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Bailment :
As per Indian contract act 1872 bailment means “the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished be returned or otherwise disposed off according to the directions of the person delivering them”
Pledge :
Section 172 of the Indian Contract Act 1872 defines pledge as “The bailment of goods as a security for the payment of a debt or performance of a promise”
The term pledge is used for creating a charge on the assets which is given by the borrower to the lender as a security for any loan.
“when the person who is lending the loan takes actual possession of assets submitted by the person taking the loan, then it is called as pledge.”
The point to be noted here in the pledge is with whom the physical possession of goods charged is, If the physical possession is not with the lender then it should be called as pledge. And the goods involved in charge are movable.
If there is any default by the borrower, the lender has a right to sell the goods in his possession and adjust its proceeds towards the amount of loan.The bailor in pledge is called as Pawnor and the bailee is called as Pawnee
Examples :
- 1) Loans & Advances against stock
- 2) Advances & loans against jewelry
- 3) Advance & loans against Any bonds and securities.
Possession :
Possession may be actual or constructive .
Actual possession means the lender actually has the physical possession with him. Where in constructive possession pledgee has control over the property. For example in a case where gold jewelry is charged against the loan as security and the same is with bank for safe custody. In such case the borrower hands over the keys of the bank locker where the jewelry is kept. Thus the lender has control over the property pledged by constructive possession.
How to decide whether a bailment is pledge or not ?
Following points to be considered to decide whether a bailment is pledge or not. :
1) Delivery of Possession of charged property at the time of entering into contract.
If the goods are not delivered either through actual possession or through constructive possession at the time of entering into the agreement then it should not be treated as pledge.
2) There should be an oral or written contract for the entire things involved.
3) Delivery of goods should be against some loan or promise to be fulfilled. A mere delivery without any promise or obligation to perform any activity then it is not called as pledge.
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