Bank of Bihar Vs. State of Bihar &
Ors  INSC 103 (1 April 1971)
CITATION: 1971 AIR 1210 1971 SCR 299
R 1985 SC 520 (33) D 1992 SC1740 (23)
Contract Act, 1872, ss. 172, 173, 176, 180
and 181-PledgeSpecial property of pawnor-Pawnee's rights whether can be
extinguished by lawful seizure of pawned goods by Government to satisfy its
claims against pawnor.
Certain sugar was pledged with the plaintiff
bank (appellant herein) by Defendant No. 2 under a cash credit agreement.
Part of the said sugar was seized under the
Public Demands Recovery Act in connection with a demand of sugar cess by the
Cane Commissioner. The sugar was sold and the sale proceeds were attached
towards the payment of cess. No payment was made to the plaintiff bank, which
thereupon filed the present suit to enforce its claim. The trial court granted
a decree against the State of Bihar for the price of the sugar. The High Court
however held that no decree could be granted against the State as the seizure
HELD:The pawnee had special property and a
lien which was not of ordinary nature on the goods and so long as his claim was
not satisfied no other creditor of the pawnor had 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 plaintiff and the balance could have been
made available to satisfy the claim of other creditor of the pawnor. But by a
mere act of lawful seizure the Government could not deprive the plaintiff 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 plaintiff was
entitled it was bound to reimburse the plaintiff for such amount which the
plaintiff in ordinary course would have realized by sale of the goods pledged
with it on the pawnor making a default in the payment of debt. [303E-G] The
trial court was right in holding that the plaintiff's right as a pawnee could not
be extinguished by the seizure of the goods in its possession inasmuch as the
pledge of the goods was not meant to replace the liability under the cash
credit agreement. It was intended to give the plaintiff a primary right to sell
the goods in satisfaction of the liability of the pawnor. The Cane Commissioner
who was an unsecured creditor could not have any higher rights than the pawnor
and was entitled only to the surplus money after satisfaction of the plaintiffs
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1942 of 1966.
Appeal from the Judgment and decree dated
April 23, 1963 of the Patna High Court in First Appeal No. 420 of 1955.
Sarjoo Prasad and R. C. Prasad, for the
U. P. Singh, for respondent No. 8.
300 The Judgment of the Court was delivered
by Grover, J.-This is an appeal by certificate from a decree of the Patna High
Court in a suit instituted by the appellant against the State of Bihar which
was impleaded as defendant No. 1, the other defendants being the Jagdishpur
Zamindari Co. Ltd. (defendant No. 2) and some of its directors defendants 3 to
According to the allegations in the plaint
one of the methods of making advances followed by the plaintiff Bank was that
the constituents pledged their merchandise on a cash credit system with the
Bank and took advances on the pledged goods. The Bank held the goods as
security for the advances made and ,'be constituents either provided the Bank
with godown or the Bank kept the pledged goods in godowns of its own and charged
rents from the constituents. The defendant No. 2 entered into a cash credit
system agreement with the plaintiff's Arrah Branch, the arrangement being that
the sugar would be pledged under the cash credit system. On December 16, 1946
the advance made to defendant No. 2 stood at Rs. 3,20,486-2-0 and the Bank held
6239 bags of different varieties of sugar as security. These bags were kept in
godowns provided by defendant No. 2. The key of the lock of each godown was in
the custody of the Bank. It was alleged that in December 1949 under cover of an
illegal seizure order issued by defendant No. 1 the Rationing Officer and the
District Magistrate, Patna, got the locks of the godown broken open and
forcibly and illegally removed 1818 bags of 27D quality of sugar. They total
quantity removed weighed about 5,000 maunds. No payment was made to the
plaintiff Bank which held the bags of sugar as pledgee under the cash credit
agreement. It is unnecessary to refer to other facts stated in the plaint
except to mention that according to the plaintiff it was entitled to recover
the sugar which had been seized illegally or to recover the price of that sugar
as per schedule 2 of the plaint which the plaintiff would have got if the
quantity of sugar which had been seized had been sold in the market on the
material day. The plaintiff prayed for a decree for the return of 1818 bags of
27D quality sugar and, alternatively for recovery of Rs. 1,81,700-9-3 with
interest by way of damages for illegal removal and detention of sugar or. price
thereof. Alternatively a decree for Rs. 93,910-10-9 was claimed against
defendant No. 2 and the other defendants.
The suit was resisted by defendant No. 1 on
the ground that the seizure had been effected pursuant to lawful orders which
had been made and that the sale proceeds of about 5000 mds. of sugar were
included in the sum of Rs. 1,50,039-10-9 which was deposited in the treasury
but which was later on attached under the orders of Certificate Officer, Patna,
under the Public Demands 301 Recovery Act on account of arrears of sugar cess
amounting to Rs. 2 lakhs due from the Bhita Sugar Factory with which defendant
No. 2 had entered into an arrangement pursuant to which the entire quantity of
sugar including 5000 maunds which had been seized had come into possession of
defendant No. 2. The other defendant also resisted the suit on various grounds.
A number of issues were framed on the pleadings of the parties. We may only
mention issue No. 6(a) which will be material for determination of the points which
we have been called upon to decide "Was the sugar seized by the government
in possession of the Bank as a pledgee at the time of the seizure and have the
rights of the Bank as such pledgee been determined by the seizure in
question?" The trial court held that the order of seizure in respect of
the stock of sugar was valid. It was further held that the plaintiff's right as
a pledgee could not be extinguished by seizure of the sugar in its possession
and though the attachment order of the Certificate Officer was legal and
binding on defendant No. 2 it was not binding on the Bank (plaintiff) and it
could be effective only in respect of that portion of the price which was not
necessary for the liquidation of the dues of the plaintiff from defendant No.
2. A decree was passed in favour of the
plaintiff against defendant No. 1 only for Rs. 93,910-10-9 with interest at 6%
per annum from the date of the suit till realisation.
Defendant No. 1 (State of Bihar) filed an
appeal to the High Court. The High Court was of the view that in the presence
of the finding that the plaintiff had not been wrongfully deprived of the sugar
on account of the lawful seizure or its price owing to the certificate
proceedings started by the Cane Commissioner the plaintiff was not entitled to
any decree against the State. But it was entitled to a decree against defendant
No. 2 and the other defendants.
Consequently a decree against defendant No. 1
was set aside and instead of decree was granted against the other defendants.
Now it is common ground that the plaintiff
(which is the appellant before us) held the sugar which was seized from its
custody as security for payment of the debts or advances made to defendant No.
2 in its cash credit account. There were arrears of certain cess due from
defendant No. 2. As stated before, the Cane Commissioner took proceedings under
the Public Demands Recovery Act and attached the price of the sugar which had
been deposited by the appropriate authorities in the Government Treasury
instead of being paid to the plaintiff. The Cane Commissioner indisputably did
not have any right of priority over the other creditors of defendant No. 2 and,
in particular, the secured creditors.
Section 172 of the Contract Act defines a
pledge to mean the bailment of goods as security for payment of debt or 302
performance of a promise. The bailor is called the "pawnor" and the
bailee is called the "pawnee". Section 173 of that Act provides that
the pawnee may retain the goods pledged not only for the payment of the debt or
performance of the promise but also for the interest of the debt etc. Section
176 is in the following terms :
"If the pawnor makes default in payment
of the debt, or performance, at the stipulated time of the promise, in respect
of which the goods were pledged, the pawnee may bring a suit against the pawner
upon the debt or promise, and retain the goods pledged as a collateral security
; or he may sell the thing pledged, on giving the pawnor reasonable notice of
the sale." If the proceeds of such sale are less than the amount due in
respect of the debt or promise, the pawnor is still liable to pay the balance.
If the proceeds of the sale are greater than
the amount so due, the pawnee shall pay over the surplus to the pawnor."
Section 180 is to the effect that if a third person wrongfully deprives the
bailee of the use of the possession of the goods bailed or does him any injury
the bailee is entitled to use such remedies as the owner might have used in the
like case if no bailment had been made and either the bailor or the bailee may
bring a suit against a third person for such deprivation or injury. According
to Section 181 whatever is obtained by way of relief or compensation in any
such suit shall, as between the bailor and bailee. be dealt with according to
their respective interests. Relying on the above two sections the High Court
came to the conclusion that a pawnee has merely the possession of the goods
coupled with a power to sell them on default by the pawnor but the latter
retains the ownership subject to a lien to the extent of the debt enforceable
by exercise of the power of sale.
In the present case the sugar had been seized
and then sold.
The sale proceeds would have been available
to defendants 2 to 5 subject to the claim of the plaintiff against them but it
ceased to have any lien on the pledged property or the sale proceeds against
any third party including the State as soon as it was legally deprived of the
possession of the pledged goods.
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 303 mortgage which whole passed
the property in the thing conveyed(1). "The Pawnee hag 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 (2) "where judgment
has been obtained against the pawnor-of goods and execution has issued thereon,
the sheriff cannotseize the goods pawned unless he satisfied the claim of the
pawnee". (based mainly on Rogers v. Kennay(3). "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. (4) It has not been shown how the law in India is
in any way different from the English law relating to the rights of the Pawnee
vis-a-vis other unsecured creditors of the pawnor.
In our judgment the High Court is in error in
considering that the rights of the Pawnee who had parted with money in favour
of the pawnor on the security of the goods can be defeated by the goods being
lawfully seized by the Government and the money being made available to other
creditors of the pawnor without the claim of the Pawnee being fully satisfied.
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 plaintiff 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 plaintiff 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
plaintiff was entitled it was bound to reimburse the plaintiff for such amount
which the plaintiff in ordinary course would have realized by sale of the goods
pledged with it on the pawnor making a default in payment of debt.
The approach of the trial court was
unexceptionable. The plaintiff's right as a Pawnee could not be extinguished by
the seizure of the goods in its possession inasmuch as the pledge of the (1)
3rd Edn. Vol. 29 page 211.
(2) Halsbury's Laws of England 3rd Ed. Vol.
29 p. 218-219.
(3)  9 Q. B. 592.
(4) Halsbury's Laws of England 3rd Ed. Vol.
29 p. 222.
304 goods was not meant to replace the
liability under the cash credit agreement. It was intended to give the
plaintiff a primary right to sell the goods in satisfaction of the liability of
the pawnor. The Cane Commissioner who was an unsecured creditor could not have
any higher rights than the pawnor and was entitled only to the surplus money
after satisfaction of the plaintiff's dues.
Defendants 3 to 5 did not file any appeal
against the judgment of the High Court. The decree passed by the High Court
against them would, therefore, stand. In the view that we have taken the appeal
is allowed, the judgment and decree of the High Court dismissing the suit
against the State, of Bihar is hereby set aside and a decree is granted against
the State of Bihar in the same terms as was granted by the trial court. The
appellant will be entitled to costs throughout.
G.C. Appeal allowed.