http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: BANK OF BIHAR

       Vs.

RESPONDENT: STATE OF BIHAR  & ORS.

DATE OF JUDGMENT01/04/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S.

CITATION:  1971 AIR 1210            1971 SCR  299  CITATOR INFO :  R          1985 SC 520  (33)  D          1992 SC1740  (23)

ACT: Contract  Act, 1872, ss. 172, 173, 176, 180 and  181-Pledge- Special  property of pawnor-Pawnee’s rights whether  can  be extinguished by lawful seizure of pawned goods by Government to satisfy its claims against pawnor.

HEADNOTE: Certain sugar was pledged with the plaintiff bank (appellant herein)  by Defendant No. 2 under a cash  credit  agreement. Part  of the said sugar was seized under the Public  Demands Recovery  Act in connection with a demand of sugar  cess  by the  Cane  Commissioner.  The sugar was sold  and  the  sale proceeds  were  attached towards the payment  of  cess.   No payment  was  made to the plaintiff  bank,  which  thereupon filed  the  present suit to enforce its  claim.   The  trial court  granted a decree against the State of Bihar  for  the price  of  the sugar.  The High Court however held  that  no decree could be granted against the State as the seizure was lawful. HELD:The  pawnee had special property and a lien  which was  not of ordinary nature on the goods and so long as  his claim was not satisfied no other creditor of the pawnor  had any  right to take away the goods or its price.  After  the, goods had been seized by the Government it was bound to  pay the  amount due to the plaintiff and the balance could  have been  made available to satisfy the claim of other  creditor of  the  pawnor.  But by a mere act of  lawful  seizure  the Government  could  not deprive the plaintiff of  the  amount which was secured by the pledge of the goods to it.  As  the act of the Government resulted in deprivation of the  amount to  which  the  plaintiff  was  entitled  it  was  bound  to reimburse the plaintiff for such amount which the  plaintiff in ordinary course would have realized by sale of the  goods pledged  with  it  on the pawnor making  a  default  in  the payment of debt. [303E-G] The  trial court was right in holding that  the  plaintiff’s right  as a pawnee could not be extinguished by the  seizure of the goods in its possession inasmuch as the pledge of the goods was not meant to replace the liability under the  cash credit  agreement.  It was intended to give the plaintiff  a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

primary  right  to  sell the goods in  satisfaction  of  the liability  of the pawnor.  The Cane Commissioner who was  an unsecured creditor could not have any higher rights than the pawnor  and  was entitled only to the  surplus  money  after satisfaction of the plaintiffs dues. [303G-304B]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1942 of 1966. Appeal from the Judgment and decree dated April 23, 1963  of the Patna High Court in First Appeal No. 420 of 1955. Sarjoo Prasad and R. C. Prasad, for the appellant. U.   P. Singh, for respondent No. 8. 300 The Judgment of the Court was delivered by Grover, J.-This is an appeal by certificate from a decree of the  Patna High Court in a suit instituted by the  appellant against the State of Bihar which was impleaded as  defendant No.  1, the other defendants being the Jagdishpur  Zamindari Co.  Ltd.  (defendant  No.  2) and  some  of  its  directors defendants 3 to 5. According  to  the  allegations in the  plaint  one  of  the methods  of making advances followed by the  plaintiff  Bank was  that  the constituents pledged their merchandise  on  a cash  credit system with the Bank and took advances  on  the pledged goods.  The Bank held the goods as security for  the advances made and ,’be constituents either provided the Bank with godown or the Bank kept the pledged goods in godowns of its  own  and  charged rents  from  the  constituents.   The defendant No. 2 entered into a cash credit system  agreement with  the  plaintiff’s Arrah Branch, the  arrangement  being that  the  sugar  would be pledged  under  the  cash  credit system.  On December 16, 1946 the advance made to  defendant No. 2 stood at Rs. 3,20,486-2-0 and the Bank held 6239  bags of  different  varieties of sugar as security.   These  bags were kept in godowns provided by defendant No. 2. The key of the lock of each godown was in the custody of the Bank.   It was alleged that in December 1949 under cover of an  illegal seizure  order  issued  by defendant  No.  1  the  Rationing Officer and the District Magistrate, Patna, got the locks of the  godown broken open and forcibly and  illegally  removed 1818  bags  of 27D quality of sugar.   They  total  quantity removed weighed about 5,000 maunds.  No payment was made  to the  plaintiff Bank which held the bags of sugar as  pledgee under the cash credit agreement.  It is unnecessary to refer to  other facts stated in the plaint except to mention  that according  to the plaintiff it was entitled to  recover  the sugar  which  had been seized illegally or  to  recover  the price  of that sugar as per schedule 2 of the  plaint  which the plaintiff would have got if the quantity of sugar  which had been seized had been sold in the market on the  material day.   The plaintiff prayed for a decree for the  return  of 1818  bags of 27D quality sugar and, alternatively  for  re- covery  of Rs. 1,81,700-9-3 with interest by way of  damages for  illegal  removal  and  detention  of  sugar  or.  price thereof.   Alternatively  a decree for Rs.  93,910-10-9  was claimed against defendant No. 2 and the other defendants. The suit was resisted by defendant No. 1 on the ground  that the  seizure  had been effected pursuant  to  lawful  orders which had been made and that the sale proceeds of about 5000 mds. of sugar were included in the sum of Rs.  1,50,039-10-9 which  was deposited in the treasury but which was later  on attached  under  the orders of Certificate  Officer,  Patna, under the Public Demands

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

301 Recovery  Act on account of arrears of sugar cess  amounting to  Rs. 2 lakhs due from the Bhita Sugar Factory with  which defendant No. 2 had entered into an arrangement pursuant  to which  the  entire quantity of sugar including  5000  maunds which had been seized had come into possession of  defendant No. 2. The other defendant also resisted the suit on various grounds.  A number of issues were framed on the pleadings of the parties.  We may only mention issue No. 6(a) which  will be  material for determination of the points which  we  have been called upon to decide               "Was  the  sugar seized by the  government  in               possession  of  the Bank as a pledgee  at  the               time of the seizure and have the rights of the               Bank  as such pledgee been determined  by  the               seizure in question?" The trial court held that the order of seizure in respect of the stock of sugar was valid.  It was further held that  the plaintiff’s right as a pledgee could not be extinguished  by seizure  of  the  sugar in its  possession  and  though  the attachment  order of the Certificate Officer was  legal  and binding  on defendant No. 2 it was not binding on  the  Bank (plaintiff)  and  it could be effective only in  respect  of that  portion of the price which was not necessary  for  the liquidation of the dues of the plaintiff from defendant  No. 2.  A decree was passed in favour of the  plaintiff  against defendant No. 1 only for Rs. 93,910-10-9 with interest at 6% per  annum  from  the date of  the  suit  till  realisation. Defendant No. 1 (State of Bihar) filed an appeal to the High Court.  The High Court was of the view that in the  presence of  the finding that the plaintiff had not  been  wrongfully deprived  of the sugar on account of the lawful  seizure  or its  price owing to the certificate proceedings  started  by the Cane Commissioner the plaintiff was not entitled to  any decree  against the State.  But it was entitled to a  decree against   defendant   No.  2  and  the   other   defendants. Consequently a decree against defendant No. 1 was set  aside and  instead  of  decree  was  granted  against  the   other defendants. Now  it  is common ground that the plaintiff (which  is  the appellant  before us) held the sugar which was  seized  from its custody as security for payment of the debts or advances made  to defendant No. 2 in its cash credit account.   There were  arrears of certain cess due from defendant No.  2.  As stated before, the Cane Commissioner took proceedings  under the  Public Demands Recovery Act and attached the  price  of the  sugar  which  had been  deposited  by  the  appropriate authorities in the Government Treasury instead of being paid to  the plaintiff.  The Cane Commissioner  indisputably  did not  have any right of priority over the other creditors  of defendant  No. 2 and, in particular, the secured  creditors. Section 172 of the Contract Act defines a pledge to mean the bailment of goods as security for payment of debt or 302 performance of a promise.  The bailor is called the "pawnor" and the bailee is called the "pawnee".  Section 173 of  that Act  provides that the pawnee may retain the  goods  pledged not  only for the payment of the debt or performance of  the promise but also for the interest of the debt etc.   Section 176 is in the following terms :               "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 pawner upon the debt or  promise,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

             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." Section  180  is  to  the effect  that  if  a  third  person wrongfully deprives the bailee of the use of the  possession of  the  goods bailed or does him any injury the  bailee  is entitled  to use such remedies as the owner might have  used in the like case if no bailment had been made and either the bailor or the bailee may bring a suit against a third person for  such deprivation or injury.  According to  Section  181 whatever is obtained by way of relief or compensation in any such suit shall, as between the bailor and bailee. be  dealt with  according to their respective interests.   Relying  on the above two sections the High Court came to the conclusion that a pawnee has merely the possession of the goods coupled with  a power to sell them on default by the pawnor but  the latter retains the ownership subject to a lien to the extent of  the debt enforceable by exercise of the power  of  sale. In the present case the sugar had been seized and then sold. The sale proceeds would have been available to defendants  2 to 5 subject to the claim of the plaintiff against them  but it  ceased to have any lien on the pledged property  or  the sale proceeds against any third party including the State as soon  as  it was legally deprived of the possession  of  the pledged goods. According  to  the Statement in Halsbury’s Laws  of  England "Pawn" has been described as a security where by contract  a deposit of goods is made a security for a debt and the right to the property vests in the pledgee so far as is  necessary to secure the debt; in this sense it is intermediate between a simple lien and a 303 mortgage  which  wholy  passed the  property  in  the  thing conveyed(1).  "The Pawnee hag a special property or  special interest  in the thing pledged, while the  general  property therein  continues in the owner.  That special  property  or interest exists so that the Pawnee can compel payment of the debt  or can sell the goods when the right to do so  arises. This  special  property or interest is to  be  distinguished from the mere right of detention which the holder of a  lien possesses,  in that it is transferable in the sense  that  a Pawnee may assign or pledge his special property or interest in the    goods  (2)  "where  judgment  has  been   obtained against the pawnor-of  goods  and  execution  has   issued thereon, the sheriff cannotseize the goods pawned  unless he  satisfied  the claim of the pawnee".  (based  mainly  on Rogers  v. Kennay(3).  "On the bankruptcy of the pawnor  the Pawnee is a secured creditor in the bankruptcy with  respect to things pledged before the date of the receiving order and without  notice of a prior available act of bankruptcy.  (4) It  has  not been shown how the law in India is in  any  way different from the English law relating to the rights of the Pawnee vis-a-vis other unsecured creditors of the pawnor. In  our judgment the High Court is in error  in  considering that  the rights of the Pawnee who had parted with money  in favour  of  the pawnor on the security of the goods  can  be defeated   by  the  goods  being  lawfully  seized  by   the Government  and  the  money being made  available  to  other

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

creditors  of  the pawnor without the claim  of  the  Pawnee being fully satisfied.  The Pawnee has special property  and a  lien which is not of ordinary nature on the goods and  so long as his claim is not satisfied no other creditor of  the pawnor  has any right to take away the goods or  its  price. After  the  goods had been seized by the Government  it  was bound to pay the amount due to the plaintiff and the balance could have been made available to satisfy the claim of other creditors  of  the  pawner.  But by a  mere  act  of  lawful seizure  the Government could not deprive the  plaintiff  of the  amount which was secured by the pledge of the goods  to it.  As the act of the Government resulted in deprivation of the amount to which the plaintiff was entitled it was  bound to  reimburse  the  plaintiff  for  such  amount  which  the plaintiff in ordinary course would have realized by sale  of the goods pledged with it on the pawnor making a default  in payment of debt. The  approach of the trial court was  unexceptionable.   The plaintiff’s  right as a Pawnee could not be extinguished  by the  seizure of the goods in its possession inasmuch as  the pledge of the (1)  3rd Edn.  Vol. 29 page 211. (2)  Halsbury’s Laws of England 3rd Ed.  Vol. 29 p. 218-219. (3)  [1846] 9 Q. B. 592. (4)  Halsbury’s Laws of England 3rd Ed.  Vol. 29 p. 222. 304 goods was not meant to replace the liability under the  cash credit  agreement.  It was intended to give the plaintiff  a primary  right  to  sell the goods in  satisfaction  of  the liability  of the pawnor.  The Cane Commissioner who was  an unsecured creditor could not have any higher rights than the pawnor  and  was entitled only to the  surplus  money  after satisfaction of the plaintiff’s dues. Defendants  3  to  5 did not file  any  appeal  against  the judgment  of the High Court.  The decree passed by the  High Court  against  them would, therefore, stand.  In  the  view that  we have taken the appeal is allowed, the judgment  and decree  of  the High Court dismissing the suit  against  the State, of Bihar is hereby set aside and a decree is  granted against the State of Bihar in the same terms as was  granted by the trial court.  The appellant will be entitled to costs throughout. G.C.                        Appeal allowed. 305