Rights of Pawnee and Pawnor for CLAT - Practice Questions & MCQ

Rights of Pawnee (Pledgee):

• The concept of "Rights of Pawnee and Pawnor" is fundamental in pledge agreements within Indian Contract Law. It outlines the respective rights and obligations of the pledgee (pawnee) and the pledgor (pawnor) when goods are offered as collateral. 

Right of Retaining Possession:

• The pawnee (pledgee) has the right to retain possession of the pledged goods until the pawnor (pledgor) fulfills their obligation. This possession acts as a security interest until the obligation is met.
• This right is crucial for the pawnee to protect their interest in the collateral.

Right to Sue for Default:

• If the pawnor defaults on their obligation, such as failing to repay a loan or fulfill a promise, the pawnee has the right to initiate legal action.
• This legal action can lead to the sale of the pledged goods to recover the outstanding debt.

Right to Extraordinary Expenses:

• The pawnee is entitled to recover reasonable and necessary expenses incurred in preserving the pledged goods. This includes costs related to the storage, maintenance, and protection of the goods.
• These expenses ensure that the pledged goods are maintained properly during the pledge period.

Rights of Pawnor (Pledgor):

Right to Redeem:

• The pawnor has the right to redeem the pledged goods by fulfilling their obligation. Typically, this involves repaying the loan amount or performing the promised action.
• Upon redemption, the pawnee is obligated to return the pledged goods to the pawnor.

Right to Sue for Excessive Sale Proceeds:

• If the pawnee sells the pledged goods and realizes proceeds that exceed the amount of the outstanding debt, the pawnor has the right to initiate legal action.
• This legal action aims to recover the surplus funds from the sale, ensuring that the pawnor receives any excess amount.

Pawnor's Right to Redeem:

• If an individual pledges their electronic gadgets to a pawnshop in exchange for a loan, they have the right to redeem their gadgets by repaying the loan within the stipulated time frame.

Pawnee's Right to Sue for Default:

• If a business pledges its inventory to secure a business loan but fails to make timely repayments, the lender (pawnee) has the right to initiate legal proceedings to recover the pledged inventory.

Pawnor's Right to Sue for Excessive Sale Proceeds:

• If a pawnshop sells a pledged piece of jewelry for more than the amount of the outstanding loan, the pawnor can sue the pawnshop to claim the surplus funds.

Case Law Example:

• The company Bhopal Sugar Industries Ltd. pledged some of its assets to a bank as security for a loan.
• When the company defaulted on the loan, the bank took possession of the pledged assets and sold them.
• The Official Liquidator of the company challenged the sale, arguing that it had not been conducted in accordance with the law.
• The High Court ruled in favor of the Official Liquidator and held that the sale of pledged goods must be conducted in accordance with the provisions of the Indian Pledge Act.
• These provisions require that the sale be conducted in a public auction and that the pawnor (the person who pledged the goods) be given notice of the sale.
• The court also held that the Official Liquidator had a duty to ensure that the sale of the pledged goods was fair and transparent.
• The bank had not met this duty, as it had not conducted a public auction and had not given the pawnor notice of the sale.