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This article is written by Khushi Agrawal, a student of Symbiosis Law School, Noida. In this article, she has discussed the concepts of rights of the Pawnee on default by the Pawnor in detail.

Introduction

Pursuant to Section 172 of the Indian Contract Act, 1872, a Pledge is a contract where a person deposits an item or good with a lender of money as security for repayment of a loan or performance of a promise. Pledge is also known as a peon. The depositor or bailor is the Pawnor and the bailee or the depository is the Pawnee. The Pawnee is under the duty to take reasonable care of the goods pledged to him.

Rights of the Pawnee on default by the Pawnor

The rights of Pawnee where Pawnor makes default is given under Section 176 of the Indian Contract Act, 1872.

If the Pawnor fails to pay the debt or fulfil the promise at the specified time:

  • the Pawnee may bring a suit against the Pawnor on debt or promise;
  • retention of the pledged goods as collateral security;
  • may sell the pledged goods by giving reasonable notice of sale to Pawnor. If the proceeds of the sale are less than the amount of the debt or promise, the Pawnee is entitled to claim the balance from the Pawnor, if the proceeds are greater, the surplus belongs to the Pawnor.

The rights to retain or sell the pawn are not concurrent, but the rights to sue and sell are concurrent rights, i.e. he may sue and retain the goods as collateral security or sell them after notice has been given. Using the word or in relation to two or more alternatives does not necessarily imply mutual exclusion. It depends on the ascertainable intention of the provision as a whole.

Once the Pawnee, after having given reasonable notice to the Pawnor of his intention to sell the pawned goods, sells them in pursuant to Section 176 of the Contract Act, the right of redemption of the Pawnor shall be extinguished, but his right of redemption shall continue until the sale, i.e. at any time until the Pawnee exercises his power of sale by entering into a valid contract of sale.

In the case of the pledge where the borrower had died, it was held that the bank was not entitled by the heirs to pay the loan and interest and could not insist that the letter of administration should be issued in its favour as a condition for the return of the ornaments.

Default by Pawnor

A pledgee is not entitled to sell the goods pledged to him before the amount of the loans becomes due. Section 176 and 177 also apply to cases where no time is stipulated for payment of the debt for which goods have been pledged as security. Where no time is originally stipulated for payment, the debtor is not in fault until notice is given by the creditors that he requires payment on a certain day, and that day is past. The debtor is then in default and is in the same position as if a day for repayment had been fixed in the original contract.

In a contract of pledge, goods were required to be insured by the borrower. Bank was also given the liberty to get insurance at risk and expenses of borrower. The goods were destroyed due to fire. The borrower took no insurance policy and claimed that he was not liable since the bank failed to get the goods insured. It was held that provision regarding getting insurance by the bank was only enabling provision for the benefit of the bank, and it could not be used by the borrower for denying his own liability.

Right to sue

This enables the Pawnee to institute a suit independently of the pawn. The power conferred upon the Pawnee under this section to sell the property without reference to the court does not take away his right to sue the Pawnor on the debt or bring a suit for the sale of the property pledged to him. The Pawnee can sue on the debt, retaining the pledged goods as collateral security, even without first selling the goods pledged. If the debt is paid, the goods have to be delivered, and if sold, the Pawnee can appropriate the sale proceeds towards the debt. He cannot retain the goods pledged and also sue for his debt. The right to sue on the debt assumes that he is in position to deliver the goods on payment of the debt and, therefore, if he has put himself in a position where he is not able to redeliver the goods he cannot obtain a decree. He cannot have both the payment of the debt, and also the goods.

Any suit by a Pawnee for a declaration of his right to sell the article pledged for the satisfaction of his claim is one to enforce his charge upon the said article.

A bank chose to seek a simple money decree without seeking to enforce the security of goods hypothecated to it. It was held that the bank would be deemed to have waived its right as hypothecate.

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Notice before suit

The section does not contemplate any notice before the institution of the suit. A suit for the debt due can be brought through notice is not given. The Pawnee can also bring a suit to sell the goods pledged. However, a suit to recover the debt by sale of pledged articles must be preceded by notice.

Right of sale

On the debtor’s default, the Pawnee has the right to sell the goods pledged for debt repayment or promise performance. He may sell the goods by private sale. He must give reasonable notice to the Pawnor before selling the goods.

The power of sale is granted to the Pawnee and can be exercised at his discretion. Merely because the Pawnee gave a notice that he would sell the goods, cannot compel that Pawnee to effect the sale. The Pawnor has no right to call upon the Pawnee to sell the goods pledged except as provided in Sections 161 and 176 and if the Pawnee does not exercise that discretion, the Pawnee cannot be blamed. If fixed deposit receipts are taken as collateral security for repayment of a loan, it is not obligatory on the bank to adjust the instalment due every month from this security.

A pledge cannot compel the pledge to exercise the power of sale as a means of discharging or fulfilling the decree. His only rights are the following:

  • In the event that the pledgee exercises the power to insist that it be done honestly and properly and that the sale proceeds be applied to the debt;

  • In the event that the pledgee does not exercise the power to redeem the pledge on payment of the debtor so much of it as otherwise remains unpaid;
  • and in the event that the sale is improperly exercised, damages are caused by it.

However, if the pledgee agrees to sell part of the pledged goods, he cannot then raise a plea for the right of lien and he is bound to sell the property within a reasonable time. In Vimal Chandra Grover v Bank of India, the pledgor asked the pledgee bank to sell the pledged shares at the prevailing price of Rs 2400 per share. The pledgor, quite wrongly, indicated that the share was at the head office of the bank. The bank took nine months to locate the shares and to sell them, at which time the price of the shares had fallen to Rs 700 per share. Observing that it was for the bank to locate where the pledged shares are kept, the supreme court upheld the claim of the pledgor for this loss.

Right of sale by Hypothecation

A hypothecate has the right of private sale and he can take possession and proceed to sell the hypothecated property without the intervention of the court, on default by the debtor, or on a breach by the debtor of any condition of the agreement, but only if the hypothecate has that power under the hypothecation agreement. If he fails to take possession of the hypothecated property on his own or to enforce it as security in a suit, the right of private sale stands waived, and he would rank like others as a secured creditor.

Notice before sale

If the Pawnee wants to sell articles, without the intervention of the court, he can do so, only after issuing a notice of sale to the Pawnor. The word sale in Section 176 means intended sale and not a sale actually arranged on a particular date. However, no fresh notice is necessary for an adjourned sale nor is it necessary to make the debt due recoverable. It is only necessary to make the debt due recoverable; it is only necessary before goods are sold.

This section is mandatory and the required notice must be given. The requirement cannot be waived at the of making the contract of a pledge and supersedes any contract to the contrary. An agreement authorizing the Pawnee to sell the goods pawned, without notice, is void under Section 23 of the Contract Act.

Requisites of a valid notice

This notice must be clear and specific in its language and must indicate the Pawnee’s intention to dispose of the security. It can’t be implied. The notice must be reasonable and not vague under this section. The debt for which the pledged goods are being sold must be mentioned. Thus, a notice stating failure to arrange for the sale of hypothecated stock is merely an intimation that arrangements would be made for sale, not notice for sale. However, a notice, that in case of default the Pawnee would send its representative to the place where goods were pledged, to sell them at market price, was a notice of actual sale, not just an intimation of arrangement.

A notice is not valid if it does not specify the amount payable. It is not vague and ineffective, nor is it unreasonable because it gave six days’ period in which to pay when repeated demands had previously been made and the sale was seven months later, nor is it invalid where it makes a demand for payment of the amount for which the goods are pledged, and also refers to and demands payment of another debt.

Reasonable notice

Since the word sale in the section refers to the intended sale, and not as arranged on a particular date, reasonable notice, therefore, it does not require a date, time and place specification. The law stipulates that the Pawnee should give Pawnor a reasonable time to exercise his right of redemption and proceed to sell if the property is not redeemed. A Pawnee’s notice to the Pawnor that unless the Pawnee redeems the pledged items within a fortnight, the Pawnee will sell them is a good notice, although the Pawnee may not sell the goods until a few days after the fortnight’s expiration. Reasonable notice was held to have been given where on 11th August, notice was given for payment of money by 18th August, failing which the pledged shares would be sold without further reference to the debtor, and shares were sold on 20th August. A Pawnee entitled to sell is not bound to sell within a reasonable time after the expiry of the period mentioned in the notice. He is entitled to choose his own time to sell after he has given notice of the sale.

Effect of Sale without Notice

Sale without notice is invalid and cannot be upheld. Such a sale would amount to conversion giving rise to damages to be assessed at the market rate on the date of conversion, i.e. at the date of sale. Sale without notice is void, and a vendee without notice of the pledgee, takes only the limited rights or interest of the Pawnee, in other words, he steps into the shoes of the Pawnee.

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