The right of the lender, or pledgee, is to retain the chattle until a proper tender of the amount due is made. Under Section 173 of the Contract Act, a pawnee has the right to retain the goods pledged for payment of the debt including interest on the debt and all necessary expenses incurred by the pawnee in respect of the possession or for the preservation of the goods pledged.
The rights of the pawnee were summed up by Supreme Court in Lallan Prasad vs. Rahmat Ali and another (1967 (2) SCR 233 at 239) thus:
“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 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 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.”
In the Bank of Bihar vs. State of Bihar and others (1971 Suppl. SCR 299) the law is set down thus:
“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 mortgage which wholly passed the property in the things conveyed.
“The pawnee has 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.”
“Where judgment has been obtained against the pawnor of goods and execution has issued thereon, the sheriff cannot seize the goods pawned unless he satisfied the claim of the pawnee”. (based mainly on Rogers vs. Kennay (1846 (9) Q.B. 592).
“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”. (Halsbury’s Laws of England 3rd Edn. Vol.29 p.222)
Special Right of the Pawnee over the thing pledged
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 pawnee 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 pawnee 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 pawnee was entitled it was bound to reimburse the pawnee for such amount which the pawnee in ordinary course would have realized by sale of goods pledged with it on the pawnor making a default in payment of debt.
In Karnataka Pawnbroker’s Association and others vs. State of Karnataka and others (1998 (7) SCC 707) Supreme Court summed up the position as under:
“It cannot be and it is not disputed that the pawnbroker has special property rights in the goods pledged, a right higher than a mere right of detention of goods but a right lesser than general property right in the goods. To put it differently, the pawnor at the time of the pledge not only transfers to the pawnee, the special right in the pledge but also passes on his right to transfer the general property right in the pledge in the event of the pledge remaining unredeemed resulting in the sale of the pledge by public auction through an approved auctioneer.
The position being what is stated above, the natural consequence will be that it is the pawnee who holds not only the absolute special property right in the pledge but also the conditional general property interest in the pledge, the condition being that he can pass on that general property only in the event of the pledge being brought to sale by public auction in accordance with the Act and the Rules framed thereunder.”
The Act there referred was the Karnataka Sales Tax Act and the question that fell for decision was whether the pawnee, the pawnbroker, on sale could be considered to be a dealer, liable to pay sales tax under the Sales Tax Act.
In Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. and others (2000 (5) SCC 694) the position was reiterated in the following words:
“However, the Crown’s preferential right to recovery of debt over other creditors is confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor. It is only in cases where the Crown’s right and that of the subject meet at one and the same time that the Crown is in general preferred.
Where the right of the subject is complete and perfect before that of the King commences, the rule does not apply, for there is no point of time at which the two rights are at conflict, nor can there be a question which of the two ought to prevail in a case where one, that of the subject, has prevailed already.
In Giles vs. Grover (1832 (131) ER 563 : 9 Bing 128) it has been held that the Crown has no precedence over a pledgee of goods.
In Bank of Bihar vs. State of Bihar (supra) the principle has been recognised by this Court holding that the rights of the pawnee who has parted with money in favour of the pawnor on the security of the goods cannot be extinguished even by lawful seizure of goods by making money available to other creditors of the pawnor without the claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law of Mortgages (Tagore Law Lectures, 7th Edn. P. 386) “It seems a government debt in India is not entitled to precedence over a prior secured debt.”
It may be noted that even the Crown’s preferential right or a Crown debt was held to be subservient to the rights of a pawnee.
In O. Konavalov vs. Commander, Coast Guard Region and others (2006 (4) SCC 620) Supeme Court held that the lien of a pawnee traceable to Sections 172, 173 and 176 of the Contract Act is capable of satisfaction from property in the hands of the Government obtained even by lawful seizure.
Central Bank of India v. Siriguppa Sugars Chemicals Ltd. (2007)