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Unit 11: Contract of Pledge

Bihar and Ors. (1971) Company Cases 591, where sugar pledged with the Bank was seized by the Notes
Government of Bihar, the Court ordered the State Government of Bihar to reimburse the bank
for such amount as the Bank in the ordinary course would have realized by the sale of sugar
seized.
11.1.1 Delivery Essential

A pledge is created only when the goods are delivered by the borrower to the lender or to
someone on his behalf with the intention of their being treated as security against the advance.
Delivery of goods may, however, be actual or constructive. It is constructive delivery where the
key of a godown (in which the goods are kept) or documents of title to the goods are delivered.
The owner of the goods can create a valid pledge by transferring to the creditor the documents
of title relating to the goods.

Example: A businessman pledged a railway receipt to a bank, duly endorsed. Later he was

declared bankrupt. The Official Assignee contended that the pledge of the railway receipt was
not valid. Held, that the railway receipts in India are title to goods, and that the pledge of the
railway receipt to the bank, duly endorsed, constituted a valid pledge of the goods.
Similarly, where the goods continue to remain in the borrower’s possession but are agreed to
be held as a ‘bailee’ on behalf of the pledgee and subject to the pledgee’s order, it amounts to
constructive delivery, and is a valid pledge.

11.1.2 Advantages of Pledge

To a creditor, pledge is perhaps the most satisfactory mode of creating a charge on goods. It offers
the following advantages:
1. The goods are in the possession of the creditor and therefore, in case the borrower makes a
default in payment, they can be disposed of after a reasonable notice.

2. Stocks cannot be manipulated as they are under the lender’s possession and control.
3. In the case of insolvency of the borrower, lender can sell the goods and prove for the
balance of the debt, if any.

4. There is hardly any possibility of the same goods being charged with some other party if
actual possession of the goods is taken by the lender.

11.2 Pledges by Non-owners

The general rule is that it is the owner of the goods who can ordinarily create a valid pledge.
However, in the following cases, even a pledge by non-owners shall be valid:
1. Pledge by a mercantile agent: Where a mercantile agent is, with the consent of the owner,
in possession of goods or the documents of title to goods, any pledge made by him, when
acting in the ordinary course of business of a mercantile agent, shall be as valid as if he
were expressly authorized by the owner of the goods to make the same. Such a pledge
shall, however, be valid only if the Pawnee acts in good faith and has not at the time of the
pledge notice that the pawnor has no authority to pledge (s.178)
A ‘mercantile agent’ as per s.2(9) of the Sale of Goods Act, 1930, means a mercantile agent
having, in the customary course of business as such agent, authority either to sell goods or
to consign goods for the purpose of sale or to buy goods or to raise money on the security

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