Pledge
As per the Contract Act, 1872, pledge means bailment of goods for the purpose of providing security for payment of a debt or performance of a promise.
Bailment is nothing but delivery of goods to the financier. The person offering the goods as security is the bailer, pawner or pledger. The person to whom the goods are given is the bailee, pawnee or pledgee.
At times, the delivery of goods may not be actual, but constructive. For instance, goods in a warehouse may be pledged by handing over the warehouse receipt. This constructively implies delivery of goods of the pledgee.
There is no legal necessity for a pledge agreement; pledge can be implied. However, it is always preferable for the banker to insist on a pledge agreement.
The pledger is bound to inform the pledgee about any defects in the goods pledged, or any risks that go with possession of the goods. He is also bound to bear any incidental expenses that arise on account of such possession.
Pledge becomes onerous for the pledger, because he has to part with possession. For the same reason, the pledgee is generally comfortable with a pledge arrangement. He does not need to take any extra effort or incur any cost for realizing the security. He is however bound to take reasonable care of the goods.
The pledgee has a general lien on the goods i.e. he is not bound to release the goods unless his dues are fully repaid. A point to note is that the banker’s lien is limited to the recovery of the debt for which the pledge is created – not to other amounts that maybe due from the borrower. This is the reason that banks often provide a protective clause in their pledge agreement that the pledge extends to all dues from the borrower. In the event of default by the borrower, the pledgee can sell the assets to recover his dues.The dues may be towards the original principal lent, or interest thereon or expenses incurred in maintaining the goods during the pledge.
