Pledge is defined as the bailment of goods as a security for payment of a debt or performance of a promise in section 172 of Indian Contract Act.
The party who deposits the goods is the bailor, called as pawnor, whereas the party who takes the possession of the goods or the one to whom the goods are deposited is the bailee, called as pawnee.
It is commonly used for goods or securities such as gold, stocks, certificates etc. The lender (pledgee) holds the actual possession of such securities till the time the borrower (pledger) has the borrowed amount with him. Once the borrowed amount has been returned, the securities are returned as well.
In case there is default by the borrower, the pledgee has a right to sell the goods in his possession and adjust its proceeds towards the amount due (i.e. principal and interest amount). Some examples of pledge are Gold /Jewellery Loans, Advance against goods,/stock, Advances against National Saving Certificates etc.
RIGHTS OF BANKER IN CASE OF PLEDGE-
- In the case of pledge, ownership of goods remains with the borrower, only the possession is transferred to the banker.
- The bank as a pledge must take care of the goods pledged as a person of ordinary prudence would take care of his own goods of the same value.
- Bank can sell the goods without court’s intervention in case of any default on repayment of bank loan is made by the pledgor only after giving a reasonable notice to the pledgor.
- Bank as a pledgee has a priority in right over the goods & bank’s right of sale cannot be extinguished even by lawful seizure of goods pledged to it.
Thus in simple words, pledge acts as a security, which assures that the pawnor will repay the debt or perform the obligation. These are mainly used in securing loans and if the loan is not repaid when due, the pawnee has the right to sell the pledged article, in order to discharge the dues