Rights of The Pawnor & Pawnee

Introduction

The article discusses the rights of the pawner and pawnee. 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 right of the pawnor and pawnee.

I. Rights of the pawnee

The pawnee has been given some right under the Indian Contract Act so that his interest doesn’t get hurt unduly. Indian Contract Act provides for 3 rights to the pawnee which are as follows:-

A. Right to retainer

Pawnee’s right to retain the security has been discussed in section 173 & 174 of the Act. 173 of the Act states that “The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.”

Section 174 of the Act states that “The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.”

Section 173 states that pawnee has the right to retain the goods not only for the payment of the debt but also for the interest of the debt or for any necessary expenses incurred for the preservation of the goods pledged.[1] Also, section 174 of the Act states that pawnee doesn’t have the right to retain the goods for any other debt other than the one for which the security has been provided by the pawnor.

But if the pawnor takes any subsequent debt after depositing the security with the pawnee, then it would be implied that the security is also for the current and the subsequent debt as well, if anything to the contrary has not been entered into by both the parties.[2]

The right to retainer is thus in the nature of a particular lien, but still, it has been differentiated between the lien and pledge. A pledge is an intermediate between a simple lien and mortgage. The pawnee gets the special property in the goods pledged.

The general property remains in the pawnor and wholly reverts to him on the discharge of the debt, the right to property vests in the pledgee only so far as is necessary to secure the debt.[3] So, as long the pawnee’s claim is not satisfied, no creditor shall have any right to take away the goods and their price.

When the pledge has taken place through the way of hypothecation, then the pawnee can’t simply seize the goods by walking into the premise of the pawnor. He has to have either the consent of the pawnor or has to obtain the court order for seizing of the goods.

The same goes for any fixed property namely, like the building where the creditor can’t simply go into the premise and put a lock and seal of the same. He can do that provided he has the consent of the pawnor or the court order to do so. In the case of Union of India v Shenthilnathan[4], there was an agreement between the pawnor & pawnee wherein case the pawnor fails in the payment of the debt then pawnee shall be at the liberty to seize the goods.

The court held that this power is not directly exercisable as on the date of the hypothecation no possession of the goods was delivered to the pawnee. What was contemplated was a future overt act on the part of the pawnee to sequester the goods, if so desired and that too by a process known to law. The court further held that what the plaintiff can do is file a suit in the court and obtain a decree to proceed against the property specified in the realisation of the decree.

It was further held by the court in the case of State Bank of Mysore v Amarnath[5], that when in the terms of the contract states that hypothecate shall have the power to take the possession of the goods and sell it without any interference of the court then the court held that any issue arising from that contract is outside the scope in determination in a writ jurisdiction.

B. Right to extraordinary expenses

Right to extraordinary expenses has been stated in section 175 of the Act. The section states that “The pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged.”

This section states that when the pawnor pledges ay good and the pawnee has to bear any extraordinary expenses regarding the preservation of the good, then he pawnee shall have the right to receive such expenses from the pawnor. But for such act, he doesn’t have the right to retain the goods to recover them.[6]

C. Right to sell

Pawnee’s right to sell the lodged goods has been stated in section 176 of the Act. 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,[7] 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.[8]

Now, when the pawnee decides to sell the pledged goods, he has to give reasonable notice to the pawnor. It’s a statutory obligation and can’t be excluded by any terms of the contract. In the case of the Prabhat Bank v Babu Ram[9], 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.

II. Rights of the pawnor

Some rights are also assigned to the pawnor so that pawnee doesn’t get unduly benefit at the expense of the pawnor. The rights are as follows:-

A. right to receive back the goods

The pawnor after the due payment of the debt has the right to receive back the goods which have been delivered to him as security. The underlying principle is that the basic motive of giving security is not to sell tat good to satisfy the claim but to give it as security to ensure that due payment is made.

And once the due payment is made the goods need to be returned. Now if the pawnee as sold the goods or is unable to return the goods then the debt against the pawnee shall be deemed to be have been satisfied.

B. Pawnor’s right to redeem

Pawnor’s right to redeem is stated in section 177 of the Act. Section 177 states that “If a time is stipulated for the payment of the debt, of performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them; but he must, in that case, pay, in addition, any expenses which have arisen from his default.”

The section states that if the pawnor fails in the payment of the debt at a stipulated time then he shall have the option to redeem his security any time before the sale takes place provided he shall be liable to pay the debt amount along with any additional expenses which the pawnee has incurred.

The principle is that pawnee has the absolute right to redeem the property pledged upon tender of the amount advanced. It has been held in the case of Jaswantrai Manilal v. State of Bombay[10], where the court held that the special interest of the pledgee in the property comes to an end as soon as the debt for which security has been given has been discharged.

Now, it’s open for the pledgee to redeem his security any time if no such rime is mentioned by paying the debt amount. And if a certain time is mentioned, then at any time after the fixed time and before the goods are lawfully sold. It’s important to note that right to redeem is not extinguished by the mere expiry of time but the moment the goods are actually sold.

Where the pawnee redeems the good after the fixed period of time, then he shall have extended liability of paying not only the debt amount but also any additional expenses which pawnor has incurred. Another aspect of his section is that, while redeeming of the goods, the pawnor has the right to take back not only the security but also any increase with the security which have taken place during the period of the pledge.

C. Right to suit

This right is indirectly discussed above that pawnee has the right to sell but after giving reasonable notice. This right entails that the pawnor cannot sell that good as and when he wants but he should give some notice to the pawnor so that if he wants then he can pay the debt amount and free his security. So if the pawnee makes any unauthorized sales then pawnor has the right to file the suit against that sale.

D. Care & Maintenance

The pawnee has the duty to take proper care and maintenance of the security so that the security doesn’t depreciate its values as that would mean that pawnor incurs additional expenditure over & above the debt amount and that would be an injustice to him. Then, in that case, pawnor can ask pawnee to reduce the value of the debt to the amount to which the good has lost his value.

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[1] Alliance Bank of Simla v Ghamandi Lal Jain Lal AIR 1927 Lah 408

[2] Cowasiji Muncherji Banaji v Official Assignee of Bombay AIR 1928 Bom 507

[3]Sarvopari Investments Ltd v Soma Textiles (2003) 4 ICC 604 (Cal)

[4] Union of India v Shenthilnathan (1977) 2 MLJ 499

[5] State Bank of Mysore v Amarnath (2003) 2 Kant LJ 31 (DB)

[6] Syndicate Bank v Mahalaxmi Ginning Factory AIR 2004 Kant 3155

[7] Lallan Prasad v Rahmat Ali AIR 1967 SC 1322

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

[9] Prabhat Bank v Babu Ram AIR 1966 All 134

[10] Jaswantrai Manilal v State of Bombay AIR 1956 SC 575

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