Right of Sale of Pledged Goods

By | September 11, 2019
Pledged Goods

Introduction – Right of Sale of Pledged Goods

The article discusses the right of sale of pledged goods. In today’s time, each and every person is undertaking different types of contract for fulfilling different objectives. Undertaking contract has become part of daily life and for some person; it’s a way of earning money. One of the contracts among them is a contract of pledge. Contract of a pledge is nothing but a special kind of pledge.

In this case, their delivery of goods is there, but it differs from the contract of bailment on the point of object of the delivery. In bailment, the delivery of the goods is done for the completion of some purpose, but here the goods are delivered to provide some kind of security for a loan taken or for a performance of a promise.

Like, suppose, A takes a loan from B for Rs 50,000 for a certain purpose. Now for the security of that loan B delivers the papers of his property to A so that A can ensure that B will return the money loaned or else he can sell off his property and recover his money.

This type of contract exists so that the interest of both the parties are secured; pawnor’s interest is secured in sense, he gets the loan for the required amount for the fulfilment of his objective and pawnee’s interest gets secured as he gets security against the debt he has given so that in case the pawnor fails in repayment of the debt then pawnee can use the security to satisfy his claim.

Now, it’s imperative to understand that both the pawnor and pawnee have some right & liabilities in this whole transaction so that their respective interest gets secured. This article shall be concerned only in regard to the one of the specific right of the pawnee and that is his right to sell. This right as stated in section 176 of the Contract Act stets that pawnee has the right to sell the security provided he gives notice to the pawnor regarding it.

Like, if A owns B a certain amount of money and gives the title of his property as security for the debt amount. Now, if A doesn’t pay his debt within the reasonable time period, then B shall have the right to sell the house, provided B gives reasonable notice to A that his house will be sold if he doesn’t pay his debt as quickly as possible. The detailed aspect of it shall be analysed in the following sections.

II. Section 176 of the Act

Section 176 of the Act states regarding the pawnee’s right to sell the lodged goods. The section states that “If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.”

This section states that in case the pawnor fails in the repayment of the debt then pawnee shall have two options: –

  1. Either bring the suit against the pawnor and retain the goods or,
  2. Sell the goods so pledged after giving reasonable notice of the sale to the pawnor.

It further states if the pawnee takes the second option then in that case three alternatives arise:-

  1. If the amount receives is more than the amount in debt, then, in that case, the pawnee shall pay back the excess amount to pawnor
  2. If the amount received is less than the amount in debt then, in that case, pawnor swill still be liable for the remaining of the amount
  3. If the amount received is exactly the same to that of the amount in debt then, in that case, the debt will stand to be discharged.

Now, as already discussed, goods can be retained till the time amount is paid, and after the payment of the goods the pledgee is unable to return the goods then he shall be liable to pawnor. It was held in the case of Lallan Prasad v. Rahmat Ali,[1]  where the defendant has borrowed Rs 20,000 from the plaintiff and in return gave Rs 35,000 worth of aeroscrapes as security.

Plaintiff sued for the repayment of the loan but he failed to produce the security as he has already sold the security. The court rejected his action for the loan. The underline principle is that pawnee would be getting a double benefit, first from the sale of the security and then recovering his debt and the pawnor would be in greater liability than what he and bargained when he entre dint the contract of pledge.[2]

The same decision was held in the case of Dodla Bhaskar Rao v. SBI[3], where the court decided that the bank holding gold by way of collateral security & suing the borrower on the promissory note would get a decree conditional upon return of the gold to the borrower.

Furthermore, in the case of SBI v. Neel Ashok Nair[4], it was held by the court that the receipt of fixed deposit that was pledged by the pawnor to the bank as the collateral security is in the nature of goods and bank can exercise its right by retaining the property and filing the suit against the pawnor for the recovery of the debt. This same provision is applicable to hypothecation of movable property as well.[5]

A. The two rights are disjunctive

The rights of the pawnee-that either retain the security and sue for the recovery of the debt or sell the goods after giving seasonable notice are disjunctive, meaning that they are independent of each other. It further means that if a prescribed period is mentioned for filing the suit, it doesn’t mean that the time period restriction would apply to the alternative remedy of selling the security after giving reasonable notice.[6]

It’s not like that the pawnee is bound either to proceed against the security first or surrender it before maintaining a summary suit against the buyer.[7]

B. Reasonable notice

One of the important aspects of the right to sell is that pawnee should give reasonable notice to the pawnor. Now, this right to reasonable notice is a statutory obligation and can’t be excluded from the terms of the contract.

Such character of notice has to be clear and specific and can’t be implied. In the case of the Prabhat Bank v. Babu Ram[8], here the lending banker had entered into a contract of pledge. One of the terms of the contract was that in case of the default the bank shall sell the securities without any notice. The pawnor defaulted on the payment and bank send a remainder, but the pawnor asked for more time. The bank thereupon disposed of the securities.

The court held that the term ‘notice’ is prefixed by reasonable which means that a notice of intended sale of the security by the creditor within a certain date so as to afford an opportunity within the time mentioned in the notice. And it was held that the sale was bad in law.

The right to sale of security can also be exercised even against a time-barred debt. In lieu of sale, the court can order the pawnor to pay-off the time-barred but such an order must inevitably be accompanied with an order to the pawnee to return the pledged articles.[9] The notice doesn’t become nullified only on the ground that the time, place, date of the sale were not mentioned in the notice.

And furthermore, courts have held that even after rendering the notice no payments have been made and the pawnor has asked for an extension of the time period doesn’t deprive the right of the pawnee from selling the security to recover the debt.

One of the important aspects of this right was can the pawnee sell the goods to himself after tendering the notice to sell to the pawnor? This question was answered in the case of Dhani Rani v. Frontier Bank[10], where the Punjab High Court following the Privy Council decision[11], held that a sale to pledgee himself is not a void sale. It further held that it doesn’t terminate the contract of the pledge to make the pledger have back the pledged goods without making the payment.

C. Loss in the value of security

When the goods which are delivered as security to the pawnee gets damaged either/ or deprecates in their value either because of the negligence of the pawnee or due to any other cause then it’s the liability of the pawnee and he has to reduce the value of the debt to that extent. Like in the case of Gurubax Rai v. PNB[12], here certain goods were given to the ban as pledged by the pawnor and it was kept in the godown.

The godown was insured against any damage related to fire. Now, there was a fire in that godown which resulted in the destroying of the goods and thus decreasing the value of it. The court ordered in the reduction the debt amount to the extent to which the values of the good has been depreciated.

[1] Lallan Prasad v. Rahmat Ali AIR 1967 SC 1322

[2] Trustees of the Property of Ellis & Co v. Dixon Johnson 1925 AC 489

[3] Dodla Bhaskar Rao v. SBI AIR 1992 Ori 161

[4] SBI v. Neel Ashok Nair AIR 2000 Bom 151

[5] Gulamhussain Lalji Sajan v. Clara D’Souza AIR 1929 Bom 471

[6] KM Hidayatullah v. Bank of India AIR 2000 Mad251

[7] Suraj Sanghi Finance Ltd v. Credential Finance Ltd AIR 2002 Bom 481

[8] Prabhat Bank v. Babu Ram AIR 1966 All 134

[9] TS Kotagi v. Tahsildar Gadag AIR 1985 Kant 265

[10] Dhani Rani v. Frontier Bank AIR1962 Punj 321

[11] Neckram Dobey v. Bank of Bengal ILR (1891) 19 Cal 323

[12] Gurubax Rai v. PNB (1984) 3 SCC 96

  1. Rights of The Pawnor & Pawnee(Opens in a new browser tab)

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