Legal Reasoning Questions for CLAT | QB Set 72

A pledge is a special type of bailment where movable goods are delivered by one person to another as security for the repayment of a debt or the performance of a promise. Under Section 172 of the Indian Contract Act, 1872, the person who delivers the goods is called the pawnor (pledgor), while the person who receives the goods is called the pawnee (pledgee). Unlike an ordinary bailment, the main purpose of a pledge is to create security for an obligation. The ownership of the goods remains with the pawnor, but possession is transferred to the pawnee. If the pawnor fulfils the obligation, the pawnee must return the goods. However, if the pawnor defaults, the pawnee has the right to retain the goods and may either file a suit for recovery of the debt while retaining the goods as collateral or sell the pledged goods after giving reasonable notice to the pawnor. A valid pledge generally requires delivery of movable goods, a lawful purpose, and an intention to create security. The law also recognises certain situations where even a non-owner may make a valid pledge, such as a mercantile agent acting within authority under Section 178. Indian courts have clarified several principles relating to pledge. In Lallan Prasad v. Rahmat Ali (1967), the Supreme Court held that a pawnee cannot recover the debt after selling the pledged goods without following the legal requirements. In Bank of Bihar v. State of Bihar (1971), the Court recognised that the pawnee enjoys a special property interest in the pledged goods. Similarly, Morvi Mercantile Bank Ltd. v. Union of India (1965) explained the legal nature of a pledge and the rights arising from possession of pledged goods.

Questions

Question 1

Rohan borrowed ₹3 lakh from Priya and handed over his gold jewellery as security. After repaying the entire loan within the agreed period, Rohan demanded the jewellery back. Priya refused, stating that she wished to keep the jewellery because its market value had increased significantly.

What is the correct legal position?

A. Priya must return the jewellery because the purpose of the pledge has been fulfilled.

B. Priya becomes the owner of the jewellery once its value increases.

C. Priya may retain the jewellery for six more months after repayment.

D. Priya may auction the jewellery even after full repayment.

Question 2

Ananya left her laptop with Vikram as security for a loan. She failed to repay the loan on the due date. Without informing Ananya, Vikram immediately sold the laptop to recover his money.

Which statement is legally correct?

A. Vikram’s sale is valid because default automatically transfers ownership.

B. Vikram may sell the laptop whenever he wishes after default.

C. Vikram should have given reasonable notice before selling the pledged goods.

D. Vikram had no right to retain the laptop after default.

Question 3

Kabir pledged his expensive camera to Neha for a loan. Before the repayment date, Neha started using the camera for her personal photography business without Kabir’s permission.

Which statement best reflects the legal position?

A. Neha becomes the owner because she possesses the camera.

B. Neha is not entitled to use the pledged goods for personal purposes without the pawnor’s consent.

C. Every pawnee has an unrestricted right to use pledged goods.

D. Kabir loses all rights over the camera once it is pledged.

Question 4

A furniture dealer authorised his employee Sameer to keep furniture for sale. Sameer pledged one sofa to a bank while acting within the authority normally given to him as a mercantile agent. The bank accepted the pledge in good faith without knowing of any restriction.

What is the legal consequence?

A. The pledge is automatically void because Sameer was not the owner.

B. The bank acquires ownership of the sofa.

C. The pledge is valid only if the owner later approves it.

D. The pledge is valid because a mercantile agent may create a valid pledge under the law when acting within authority and in good faith.

Question 5

Ishita pledged a diamond necklace to Arjun for a loan. After default, Arjun sold the necklace without giving notice to Ishita and later demanded the remaining balance of the loan from her.

Which statement is most legally accurate?

A. Arjun acted correctly because notice is unnecessary after default.

B. Once goods are sold, the pawnor can never challenge the sale.

C. Selling pledged goods without giving reasonable notice violates the rights of the pawnor, and the pawnee cannot ignore the legal requirements while claiming recovery.

D. Arjun had no right to retain the necklace before selling it.

Answers with Explanations

1. Answer: A

A pledge only transfers possession, not ownership. Once the debt has been fully repaid, the pawnee must return the pledged goods to the pawnor. Priya cannot retain the jewellery merely because its value has increased.

2. Answer: C

A pawnee has the right to sell pledged goods only after giving the pawnor reasonable notice. Selling the goods without notice is contrary to the provisions governing pledge and affects the legality of the sale.

3. Answer: B

The pawnee receives possession only as security for the debt and cannot use the pledged goods for personal benefit without the pawnor’s consent. Neha’s use of the camera is inconsistent with the limited rights of a pawnee.

4. Answer: D

Section 178 of the Indian Contract Act recognises that a mercantile agent, acting in the ordinary course of business and with possession of the goods, may create a valid pledge if the pledgee acts in good faith and has no notice of any limitation on the agent’s authority.

5. Answer: C

A pawnee must give reasonable notice before selling pledged goods. The Supreme Court in Lallan Prasad v. Rahmat Ali (1967) emphasised that the statutory requirements governing the sale of pledged goods cannot be ignored. Failure to give notice may affect the pawnee’s rights and liabilities, making Option C the most legally accurate.