Pledge by Pledgee

Pledge is a bailment of goods as security for the payment of a debt or performance of a promise. The goods are delivered to the creditor (called the pledgee) and the debtor (called the pledgor) retains the ownership of the goods. The pledgee has the right to sell the goods in case of default by the pledgor.

Pledge by pledgee is a situation where the pledgee pledges the goods that he has received as a pledge from the pledgor. This can happen in two ways:

  • The pledgee pledges the goods to a third party as security for a loan.
  • The pledgee pledges the goods to another creditor to whom the pledgor owes money.

In both cases, the pledgee is still the owner of the goods. However, he has a limited right to pledge the goods. He cannot pledge the goods to a third party for a longer period than the period for which he had pledged the goods from the pledgor.

Here are some examples of pledge by pledgee:

  • A person borrows money from a bank and pledges his car as security for the loan. The bank then pledges the car to a finance company as security for a loan that it has taken from the finance company.
  • A company borrows money from a financial institution and pledges its inventory as security for the loan. The financial institution then pledges the inventory to another financial institution as security for a loan that it has taken from the other financial institution.

Here are some MCQs on pledge by pledgee:

  1. Which of the following is not a characteristic of pledge by pledgee?
    • The pledgee is still the owner of the goods.
    • The pledgee can pledge the goods to a third party.
    • The pledgee cannot pledge the goods for a longer period than the period for which he had pledged the goods from the pledgor.
    • The pledgee can only pledge the goods to a creditor to whom the pledgor owes money.
    • The answer is (b). The pledgee can only pledge the goods to a creditor to whom the pledgor owes money.
  2. A person borrows money from a bank and pledges his car as security for the loan. The bank then pledges the car to a finance company as security for a loan that it has taken from the finance company. The period for which the bank had pledged the car from the person is 1 year. The finance company pledges the car to another finance company for a period of 2 years. Is this valid?
    • Yes, it is valid.
    • No, it is not valid.
    • The answer is (b). It is not valid because the finance company cannot pledge the car for a longer period than the period for which the bank had pledged the car from the person.
  3. A company borrows money from a financial institution and pledges its inventory as security for the loan. The financial institution then pledges the inventory to another financial institution as security for a loan that it has taken from the other financial institution. The period for which the financial institution had pledged the inventory from the company is 3 years. The other financial institution pledges the inventory to a third financial institution for a period of 5 years. Is this valid?
    • Yes, it is valid.
    • No, it is not valid.
    • The answer is (a). It is valid because the other financial institution can pledge the inventory for a longer period than the period for which the financial institution had pledged the inventory from the company.