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PETITIONER: LALLAN PRASAD

       Vs.

RESPONDENT: RAHMAT ALI & ANR.

DATE OF JUDGMENT: 13/12/1966

BENCH: SHELAT, J.M. BENCH: SHELAT, J.M. BACHAWAT, R.S.

CITATION:  1967 AIR 1322            1967 SCR  (2) 233  CITATOR INFO :  F          1985 SC 520  (33)

ACT: Indian  Contract  Act (9 of 1872),  s.  176--Pawnee  denying pledge--Right to maintain suit for recovery of amount  front pawner.

HEADNOTE: The  appellant advanced Rs. 20,000 to the  first  respondent against  a  promissory  note  and  a  ’receipt.   The  first respondent executed an agreement whereby he agreed to pledge as  security-for the debt certain goods, to deliver them  to the appellant, and to keep them in the appellant’s  custody. The  appellant filed a suit on the promissory note  claiming that the first respondent failed to deliver the goods,  that the  agreement  therefore did not ripen into a  pledge,  and that  consequently,  he was entitled to recover  the  amount advanced  by him.  It was found on the evidence.,  that  the goods  were delivered to the appellant, and that he  was  it pledgee thereof. On  the  question whether the appellant was  entitled  to  a decree  in view (A his denial of the pledge and his  failure to offer to redeliver the goods, HELD  : The appellant would not be entitled to a  decree  on the promissory note and also retain the goods found to  have been delivered to him and to be in his Custody. [240 F.G] Section 176 of the Indian Contract Act, 1872, deals with the rights  of a pawnee and provides that in case of default  by the pawner the pawnee has (1) the right to sue upon the debt and to retain the goods as collateral security, and (2)  the right  to-sell the goods after reasonable  notice  of  the intended sale to the pawner.  So long, however, as  the sale does  not take place, the pawner is entitled to  redeem  the goods on payment of the debit.  Therefore, the right to  sue on  the debt assumes that be is in a position  to  redeliver the  goods  on payment of the debt, and if  by  denying  the pledge  or  otherwise,  he has put  himself  in  a  position whereby  he is not able to redeliver the goods,  he  cannot obtain a decree. [240 A-C]

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JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 776 of 1964. Appeal from the judgment and decree dated September 15, 1961 of the Allahabad High Court in First Appeal No. 280 of 1952. O.P. Rana, for the appellant. J.   P. Goyal, for respondent No. 1. The Judgment of the Court was delivered by Shelat,  J. This appeal by certificate is  directed  against the  judgment  and  decree  passed  by  the  High  Court  of Allahabad  reversing the judgment and decree passed  by  the Civil Judge, Allaha-- 234 bad,  directing the respondents to pay to the appellant  Rs. 18,142/and costs. Two  questions arise in this appeal : viz., (1) whether  the first  respondent  pledged certain  quantity  of  aeroscraps purchased  by  him  from military  authorities  at  Bamrauli Depot,  Allahabad  and delivered possession thereof  to  the appellant under an agreement of pledge entered into  between them  and  (2)  whether the appellant was  entitled  to  any relief  when  his case was that the first  respondent  never delivered to him the said goods and the said agreement never ripened into a pledge. On  January 10, 1946 the appellant advanced Rs. 20,000/-  to the  first  respondent  against  a  promissory  note  and  a receipt.   The first respondent also executed  an  agreement whereby  he  agreed to pledge as security for the  debt  the said aeroscraps and to deliver them at the appellant’s house and  keep them there in his custody.  The appellant’s  case, however, was that the first respondent failed to deliver the said  goods  to him, stored them in a plot adjacent  to  the aerodrome at Allahabad and therefore the said agreement  did not  ripen into a pledge.  Consequently, he was entitled  to recover the amount advanced by him in the suit based on  the said  promissory note and the said receipt.  In his  written statement  the first respondent admitted the said  loan  but alleged that in pursuance of the said agreement he delivered 147 tons of aeroscraps of the value of Rs. 35,0001/- to  the appellant.   He claimed that the appellant was not  entitled to  obtain a decree unless he was ready and willing  to  re- deliver the said goods pledged with him. In  the Trial Court the appellant besides examining  himself also  led the evidence of other witnesses.  The  respondents in  their  turn led both documentary and oral  evidence  and relied in particular on certain notices served upon them  by the  appellant  as  also  certain  receipts  issued  by  the appellant  in  respect  of payments made  to  the  appellant against sales by him of part of the said goods. The Trial Judge, however, rejected the respondent’s case and held  that there was no completed contract of pledge as  the first respondent had failed to deliver the said goods,  that the  second  respondent had agreed to become  a  surety  for repayment of the said loan and that thereupon the  appellant did  not insist on possession of the said goods being  given to  him and that therefore he was entitled to  maintain  the suit  and  recover the said monies.  On an :,appeal  by  the respondents, the High Court disagreed with the said findings and set aside the said decree.  The High Court held that the said  goods were delivered to the appellant, that the  said agreement  ,,did not rest at a mere agreement to pledge  but ripened  into  a  pledge :and that  the  appellant  was  not entitled  to any relief in view of his ,stand that the  said goods were never pledged with him and were 235 therefore  not in his possession.  In the result,  the  High

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Court dismissed the appellant’s suit with costs. Mr. Rana, for the appellant, challenged both the findings of the High Court and contended (1) that the High Court was not justified in finding that the first respondent had delivered the said goods to the appellant and the said goods therefore remained in his custody and (2) that even if the goods  were delivered to the appellant the appellant could under section 176 of the Contract Act still maintain his suit on the  said promissory note and recover the amount due thereunder. As  the  High Court’s judgment is one of reversal  Mr.  Rana took  us through the relevant portions of the  evidence  and submitted  that  on- the evidence the findings of  the  High Court cannot be sustained. The  first  question is whether the first  respondent  after obtaining  the  aeroscraps  from  the  military  authorities delivered them to the appellant.  Before however we  proceed to  consider  this  question we may first  set  out  certain undisputed  facts.  There is no dispute that  the  appellant advanced  Rs.  20,000/- to the first respondent.   There  is also no, dispute that the first respondent executed the said agreement  agreeing  to  pledge the said  goods.   There  is further no dispute that the said goods were stored in a plot near  the aerodrome.  The dispute between the  parties  lies therefore within a short compass, viz., whether the  custody of  the said goods after they were stored at  the  aforesaid place was with the appellant or with the first respondent. The  first  broad fact that inevitably strikes one  is  that though the first respondent had agreed to hand over the said goods  to the appellant and though he failed to do  so,  the appellant  did not at any time protest or call upon  him  to deliver  the  goods.  Since he had advanced a  fairly  large amount it would be somewhat unusual, if the said goods  were not  placed  in his possession, not to call upon  the  first respondent  to forthwith deliver the goods.  Since  a  large amount  was  advanced by him the appellant  also  would  not ordinarily be content merely with a promissory note from the first  respondent.  The appellant’s case, however, was  that since   he  had  obtained  a  guarantee  from   the   second respondent,  the father of the first respondent, he did  not worry even if the said transaction remained at the stage  of an agreement to pledge.  But the letter under which the  2nd respondent  agreed  to  be the  surety  was  obtained  under different  circumstances.   Under  the  said  agreement  the appellant  was to permit the first respondent to remove  and sell  part  of  the  said goods  provided  he  paid  to  the appellant  34th of the sale proceeds.  This by itself  would presuppose that the goods were under the control and custody of   the  appellant,  for  otherwise  no  question  of   any permission from the appellant would arise.  The letter of. 236 surety  from  the second respondent itself states  that  the goods  were pledged with the appellant, that  the  appellant was  not  allowing the first respondent to remove  them  for sale  and that with a view to assure the appellant that  his monies  were not in danger the second respondent  agreed  to make himself responsible for payment of the said loan.  This again  presupposes that the goods were under the control  of the appellant. Apart from these broad facts there were also other facts  on record  on the strength of which the High Court  arrived  at its a foresaid findings. Since  as  a pledgee the appellant was entitled  to  recover from the first respondent such expenses as might be incurred by him for the preservation and safety of the said goods  he had appointed certain watchmen whose salaries he claimed  in

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the suit.  According to the appellant, he had employed these watchmen  in the hope that the goods would be placed in  his custody  and would require to be watched for  their  safety. His  case further was that as the first respondent  did  not deliver them and stored them near the Aerodrome, lie placed, on  a  request  by  the respondents,  the  services  of  the watchmen at their disposal.  But he could not explain as  to why  lie  continued  to pay the salaries  of  the  watchmen, though  their services were no longer required by him.   The explanation given by him in this regard did not impress  the High  Court and in our view rightly.  If the goods were  not delivered  to  the appellant and were never in  his  custody there  was  no  reason why he should  continue  to  pay  the watchmen’s salaries.  Even assuming that he had engaged  the watchmen  in the first instance in the hope that  the  goods would be placed in his possession, he would have  discharged them on the first respondent failing to hand over the  goods to him.  The only explanation that appears to be  acceptable in these circumstances is that he continued to employ  those watchmen as the goods were in his possession and required to be safely kept as security. The  evidence  shows that on or about August  18,  1946  the first  respondent removed part of the said goods but he  did so  after  paying to the appellant Rs. 1,000/-  towards  the principal  and  Rs. 200/towards interest.   The  removal  of these  goods and the said payment were simultaneously  made. That  fact  would  indicate that the  first  respondent  had removed  the said goods with the appellant’s  consent  which again  envisages  that the goods were at that  time  in  the appellant’s  charge.   In November 1947, 100 maunds  of  the said aeroscraps were sold to one Amrit Lai for Rs. 1,400/--. It  is significant that Amrit Lai paid Rs. 200/-  by  cheque out  of the said Rs. 1,400/directly to the  appellant.   The receipt Ex.  D in respect of this amount indicates that  the appellant  was concerned with the sale.  If the  goods  were not  in  his  possession and they were  sold  by  the  first respondent  without the appellant being concerned  with  the sale,                             237 Amrit  Lal would not have directly given the cheque  to  the appellant.   That the appellant was concerned with the  said sale becomes also apparent from the fact that in the  notice Ex.  P given by him to the first respondent he had intimated that he intended to sell 100 maunds out of the goods. Two  notices given by the appellant to the first  respondent dated  August 4, 1947 and September 11, 1947  furnish  clear indications that the appellant was in possession of the said goods.  In the first notice he reminded the first respondent that "the aeroscraps purchased from the Bamrauli Depot  were pawned in lieu of the amount due", that the first respondent had  continued to remove part of the said goods and  dispose them of contrary to the said agreement, that "accordingly my client  engaged servants there for safety of the  goods  and you are liable for payment of their salaries also in  accor- dance  with the terms of the agreement." By this notice  the appellant intimated to the first respondent that unless  the latter  made up the account and paid the  remaining  balance including  interest  and the salaries of the  said  watchmen within a week from the date of the service of the notice  he would  dispose of "the entire goods pawned and’ realise  his entire dues on account of principal, and interest" etc.  The second notice was in the same vein again informing the first respondent  that  the  appellant  would  settle  with   some customer  and  dispose of the said aeroscraps, that  he  had arranged a customer for 100 maunds, that the said 100 maunds

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would  be  sold on the 12th of September 1947 and  that  the first  respondent  could remain present at the time  of  the sale if he so desired.  These two notices were followed by a telegram Ex.  C which also gave a similar intimation to  the first respondent.  It cannot be, disputed that through these notices  the  appellant was informing the  first  respondent that  he  intended to exercise his right to  sell  the  said goods   pledged  with  him.   These  notices   are   clearly inconsistent with the position adopted by him that the goods were  never delivered to him or that they were  not  pledged with   him  or  that  the  transaction  of  pawn   had   not materialised.  His explanation that these notices were  sent at the instance of the first respondent to compel the second respondent to pay up the said debt is without any foundation and was rightly rejected by the High Court. Apart  from this documentary evidence  which  satisfactorily established  that  the said goods were  in  his  possession, there was also oral evidence, which if accepted, would prove that  the said goods were handed over to the  appellant  and remained  in  his control.  The most important part  of  the oral   evidence   was  that  of   Manmohan   Banerjee,   the Commissioner  appointed by the Court in a suit filed by  the Calcutta  National  Bank against the respondents.   In  that suit  the  Court had passed an order  of  attachment  before judgment  of  the goods belonging to the  first  respondent. The evidence 238 of  Banerjee was that when he went to attach the  aeroscraps belonging to the first respondent he was informed that  part of  the said goods were in possession of the  appellant  and that  thereupon  he refrained from  attaching  those  goods. This  evidence shows that at that time it was a  well  known fact  that the aeroscraps in question were in possession  of the appellant. There  were  two items of evidence, however,  on  which  the appellant  relied to establish that the goods were never  in his  possession.  The first was the evidence of Kedar  Nath, the owner of the plot where the said goods were stored.  His evidence  was that the first respondent had taken  the  said plot on rent from him in October 1946 and that he was paying the  rent  therefor.   The  evidence  of  Kedar  Nath,  was, however,  rejected by the High Court on the ground  that  he was  not in a position to give the exact date on  which  the said plot was leased to the first respondent and also on the ground that his evidence was not satisfactory to show  that the  said goods were not stored before October  1946.   The second  fact  relied on by the appellant was that  the  suit filed by the Calcutta National Bank ultimately failed,  that the goods attached by the Bank were thereafter released  and some of the goods were thereafter removed by the respondents and  the  rest  by some other  persons.   It  was  therefore alleged  that the respondents could not have  removed  those goods  if in fact they had been pledged with the  appellant. But  there  was no satisfactory evidence to  show  that  the goods  attached by the said Bank were the very  goods  which had  been  pledged  with the  appellant.   The  evidence  of Banerjee  on  the other hand shows the contrary.   The  fact therefore   that  the  goods  attached  by  the  Bank   were subsequently  released and removed by the respondents  would not assist the appellant.  In view of these facts we are  of the view that the High Court was right in its findings  that the said goods were delivered to the appellant, that he  was a  pledgee thereof and that the said agreement did not  rest at the stage of a mere agreement to pledge. The second question would then be whether the appellant  was

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entitled to recover the balance of the said loan in view  of his  denial  of  the  pledge and his  failure  to  offer  to redeliver  the  goods.   Under the Common Law a  pawn  or  a pledge is a bailment of personal property as a security  for some  debt or engagement.  A pawner is one who being  liable to an engagement gives to the person to whom he is liable  a thing to be held as security for payment of his debt or  the fulfilment of his liability.  The two ingredients of a  pawn or a pledge are : (I ) that it is essential to the  contract of  pawn  that the property pledged should  be  actually  or constructively delivered to the pawnee and (2) a pawnee  has only  a  special  property in, the pledge  but  the  general property therein remains in the pawner and wholly reverts to him  on  discharge  of  the debt.  A  pawn  therefore  is  a security,  where, by contract a deposit of goods is made  as security  for  a debt.  The right to property vests  in  the pledgee only                             239 so far as is necessary to secure the debt.  In this sense  a pawn or pledge is an intermediate between a simple lien  and a  mortgage  which wholly passes the property in  the  thing conveyed. (See Halliday v. Holygate.(1) A contract to pawn a chattel even though, money is advanced on the faith of it is not  sufficient in itself to pass. special property  in  the chattel to the pawnee.  Delivery of the chattel pawned is  a necessary element in the making of a pawn.  But delivery and advance  need  not  be  simultaneous and  a  pledge  may  be perfected   by   delivery  after  the   advance   is   made. Satisfaction of the debt or engagement extinguishes the pawn and  the pawnee on such, satisfaction is bound to  redeliver the  property.  The pawner has an absolute right  to  redeem the property pledged upon tender of the amount advanced  but that  right would be lost if the pawnee has in the  meantime lawfully sold the property pledged.  A contract of pawn thus carries  with  it  an  implication  that  the  security   is available to satisfy the debt and under this implication the pawnee  has  the power of sale on default in  payment  where time  is  fixed  for  payment and where  there  is  no  such stipulated  time on demand for payment and on notice of  his intention  to sell after default.  The pawner however has  a right to redeem the property pledged until the sale.  If the pawnee, sells, he must appropriate the proceeds of the  sale towards  the pawner’s debt, for, the sale proceeds  are  the pawner’s monies to be so applied and the pawnee must pay  to the  pawner  any  surplus after satisfying  the  debt.   The pawnee’s right of sale is derived from an implied  authority from the pawner and such a sale is. for the benefit of  both the  parties.   He  has  a right  of  action  for  his  debt notwithstanding possession by him of the goods pledged.  But if the pawner tenders payment of the debt the pawnee has  to return. the property pledged.  If by his default the  pawnee is  unable  to, return the security against payment  of  the debt,  the pawner has a good defence to the action.(2)  This being the position under the common law, it was observed  in Trustees of the Property of Ellis & Co. v.  Dixon-Johnson(3) that if a creditor holding security sues for the debt, he is under an obligation on payment of the debt to hand. over the security, and that if, having improperly made away with  the security  he is unable to return it to the debtor he  cannot have judgment for the debt. There  is no difference between the common law  of  England) and  the law with regard to pledge as codified  in  sections 172 to 176 of the Contract Act.  Under section 172 a  pledge is  a  bailment of’ the goods as security for payment  of  a debt  or performance of a, promise.  Section 173 entitles  a

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pawnee  to retain the goods pledged as security for  payment of  a debt and under section 175 he is entitled  to  receive from the pawner any extraordinary expenses he incurs. (1)  [1868] L.R. 3 Ex. 299. (2)  Halsbury’s Laws of England, 3rd ed.  Vol. 29 page 221. (3)  [1925] A.C. 489. 240 for the preservation of the goods pledged with him.  Section 176 ,deals with the rights of a pawnee and provides that  in case  of default by the pawner the pawnee has (1) the  right to  sue upon the debt and to retain the goods as  collateral security  and (2) to sell the goods after reasonable  notice of  the  intended sale to the pawner.  Once the  pawnee  by virtue  of his right under section 176 sells the  goods  the right   of   the  pawner  to  redeem  them  is   of   course extinguished.   But  .as aforesaid the pawnee  is  bound  to apply  the sale proceeds towards ,satisfaction of  the  debt and  pay  the  surplus, if any, to the  pawner.   ’So  long, however,  as  the  sale does not take place  the  pawner  is entitled  to  redeem the goods on payment of the  debt.   It follows  therefore  .that where a pawnee files  a  suit  for recovery of debt, though he is .entitled to retain the goods he  is  bound to return them on payment .of the  debt.   The right to sue on the debt assumes that he is in a position to redeliver 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.  If it  were otherwise,  the  result would be that he would  recover  the debt  and  also retain the goods pledged and the  pawner  in such a case would be placed in a position where he incurs  a greater liability than he bargained for under the  ,contract of  pledge.   The  pawnee  therefore can  sue  on  the  debt retaining the pledged goods as collateral security.  If  the debt is ordered to be paid he has to return the goods or  if the  :.goods are sold with or without the assistance of  the court  appropriate the sale proceeds towards the debt.   But if  he sues on the debt denying the pledge, and it is  found that he was ,,given possession of the goods pledged and  had retained  the same, the pawner has the right to  redeem  the goods  so pledged by payment of the debt.  If the pawnee  is not in a position to redeliver the goods he cannot have both the payment of the debt and also the goods.  Where the value of the pledged property is less than the debt and in a suit for recovery of debt by the pledgee, the pledgee denies  the pledge  or  is  otherwise not in a position  to  return  the pledged  goods  he has to give credit for the value  of  the goods  and  would  be  entitled then  to  recover  only  the balance.  That being the position the appellant would not be entitled  to a decree against the said promissory note  and also  retain the said goods found to have been delivered  to him  and  therefore  in  his  custody.   For,  if  it   were other wise  the  first  respondent as the  pawner  would  be compelled  not  only  to  pay  the  amount  due  under   the promissory  note but lose ;the pledged goods as well.   That certainly is not the effect of section 176.  The contentions urged by Mr. Rana therefore must be rejected. The appeal fails and is dismissed with costs. V.P.S.                          Appeal dismissed 241