A pledge is defined by the (sec.172) as “A bailment of goods as security for the payment of a debt or performance of a promise.” The bailer is called the “pawnor” or “pledgor” and the bailee is called “Pawnee” or the “pledge”. Thus if A being in need of money, raises money from a money-lender on the security of his watch and chain, the transaction is one of pledge. Notice that before a pledge can be valid, the bailor must be in “judicial possession” of the goods i.e. in possession of the goods under the legal light or title. Thus a servant cannot make a valid pledge of his master’s goods, though he may have “possession”, i.e. the physical custody of them.
Pledge distinguished from Bailment and Mortgage
A pledge is thus distinguishable for an ordinary bailment: (i) in a pledge, the bailment made as security for the due discharge of a legal obligation. In ordinary bailment, there is no such idea. (ii)On a bailment of goods, what passes to the bailee is right of possession of goods bailed; on a pledge, the pledge obtains “a special property” in the goods pledged (c). (iii) A bailee has a right of lien on the goods bailed, but no right of sale. A pledge has such a right under certain circumstances. The above points also distinguished a pledge for a lien.
A pledge must also be distinguished for a mortgage of movable. There is no specific statutory provision either in the Contract Act or in the transfer of Property Act, for a mortgage of movable (also some time known as hypothecation). Such transactions however are not on that account invalid (d). A mortgage of movables is distinguished from a pledge as follows:
(i) a mortgage of movables transfer to the mortgagee, the ownership of the property, with only a right of redemption left in the mortgagor. A pledge transfer to the pledge only a right of possession and a qualified right of sale.
(ii) A pledge requires delivery of possession in order to valid, a mortgage of movables does not require delivery of possession as an essential pre-requisite.
(iii) a mortgage of movables has the rights of foreclosure and sale, the pledge has only the limited right of sale. Notice that a mortgage of movables doesn’t require either writing or registration to be effective in law but can been made orally. In the last mentioned case Beamen J. pointed out the difficulties which this anomaly gives rise to. Though such a mortgage is valid without transfer of possession a subsequent dishonest pledge of the same property by the mortgagor would give the pledge a priority over the mortgage, if the pledge has acted in good faith and without notice of prior mortgage.
“Pledge” should been distinguished from what is known as “hypothecation”. In the first case, possession of goods is actually delivered to the creditor or Pawnee. In the second case, it remains with the debtor, with the right or power to the creditor, to cause the goods to be sold, in order to be paid his claim out of the proceeds. In both case however, the property cannot be transferred to a third party without the express consent or permission of the creditor.