Del HC | Can ‘Pawnor’ under Ss. 172/176 of Contract Act be made liable for repayment of entire debt, in absence of any guarantee being furnished? Succinct Report 

Delhi High Court: The Division Bench of Rajiv Sahai Endlaw and Asha Menon, JJ., held that the pawnor, merely by his act of delivering his own goods to a creditor in consideration of a credit facility granted to the debtor/borrower, by legal fiction becomes liable for the entire debt, would be detrimental to trade and commerce, with borrowings becoming difficult to obtain owing to persons not agreeing to make a pledge of their goods for credit to another, for the fear of becoming liable for more than the value of goods.

Legal Question for Consideration

Whether by virtue of Section 176 of the Indian Contract Act, 1872, the pawnor, even if different from borrower or the principal debtor, becomes liable for payment of the entire debt, even if has not furnished any guarantee for repayment of the entire debt i.e. over and above the value of the pawned goods?

Facts pertinent to the matter

Respondent 1 had filed the original application before the Debt Recovery Tribunal, Delhi under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 along with pendente lite and future interest, jointly and severally from respondent 2 and petitioner.

Aggrieved from the order of DRAT, of dismissal of his appeal, the petitioner filed the instant petition.

Analysis, Law, Decision

It was noted that the counsel for respondent 1 Bank had fairly admitted that there was no document whereunder the petitioner had undertaken liability as a borrower, in his personal capacity or as a guarantor for repayment of the dues of respondent 2 Company to the respondent 1 Bank.

Bench on an interpretation of Clause 2.1 of the Share Pledge Agreement was unable to agree with the contention of respondent 1 Bank that the petitioner became liable for the entire debt.

Further, it was stated that,

In the Share Pledge Agreement,

  • while the respondent 1 Bank is described as the Bank, the respondent 2 Company is described as the Borrower and the petitioner is described as the Pledgor; the same is indicative of the role of the petitioner in the agreement being confined to that of a pledgor/pawnor, as distinct from a borrower; had the intent been, of the petitioner along with the respondent 2 Company borrowing the monies and being liable for repayment thereof, the petitioner, besides as a pledgor, would also have been described as a borrower;
  • Clause 2.1 merely notes the agreement to be for the benefit of the respondent 1 Bank; merely by stating so, the petitioner did not and could not in law have become liable for more than that for which he expressly became liable under the Share Pledge Agreement; the pledge made by the petitioner under the agreement was also for the benefit of the respondent 1 Bank and thus merely from the statement that the agreement was for the benefit of the respondent 1 Bank, it does not follow that the benefit to the respondent 1 Bank flowing from the petitioner was more than that undertaken by the petitioner or provided in the agreement;
  • the petitioner pledged his shares as security for due discharge and repayment of Obligations under the Finance Documents; it is not the case that under the Finance Documents the petitioner is personally liable; and,
  • the parties expressly agreed that in the event of any default by the borrower, the respondent 1 Bank would be entitled to transfer or register in its name the pledged shares and to receive all amounts payable with respect thereto and to sell the same; there is no clause, that on any default or breach by the respondent 2 Company as borrower, the petitioner would become personally liable for the borrowings of respondent 2 Company.

Supreme Court, in State of Maharashtra v. M.N. Kaul, AIR 1967 SC 1634, while answering the question of whether the guarantee subject matter thereof was enforceable, held, “That depends upon the terms under which the guarantor bound himself. Under the law he cannot be made liable for more than he has undertaken”

In Central Bank of India v. Virudhunagar Steel Rolling Mills Ltd., (2015) 16 SCC 207, held that,

“…had the intent been to make the directors personally liable for the outstanding liabilities of the company also, it could have been so provided in the letter of guarantee and the directors were thus not personally liable for the dues of prior to the date they signed the letter of guarantee. It was further held that since the deed of guarantee was drafted by the bank, in case of doubt, had to be read against the bank.”

In the instant matter, High Court dismissed the contention of the respondent 1 Bank that the petitioner admitted his liability before the Recovery Officer.

Court stated that banks are also known to, besides the borrower, make others also on whose surety/guarantee the said credit facilities are extended to the borrower, sign a plethora of documents, again in their standard form. From the conduct of the respondent 1 Bank not making the petitioner sign any such documents, the only inference is that the petitioner was not intended to be liable for dues of respondent 2 Company save to the extent of the value of the shares pledged by the respondent 2 Company.

Moving, further, with the analysis, Bench elaborated that Section 172 provides bailment of goods as security for payment of a debt is called a “pledge” and the bailor is called the “pawnor” and the bailee, the “pawnee”.

In Court’s opinion, none of the provisions preceding or following Section 176 provide for the pawnor, by virtue of the pledge, even if not otherwise liable for the payment of debt, by a legal fiction becoming so liable for payment for debt, even beyond the value of the pawned goods.

“…we hesitate to, merely on the basis of Section 176 hold that a pawnee can recover from the pawnor anything beyond the value of the goods which the pawnor has pledged, unless the pawnor has separately from the pledge also made himself liable for the debt.”

Therefore, Bench decided that under Section 176 of the Contract Act, the pawnor, if not otherwise liable for the debt as a borrower or as a guarantor or otherwise, does not merely from the act of making a pledge, become liable to the creditor/pawnee, for anything more than the value of the goods pledged.

Hence, DRAT erred in holding the petitioner as a pawnor become liable for the entire debt for which pledge was made even without being a borrower and even in the absence of having promised so.

In view of the above discussion, a petition was disposed of. [Ajoy Khanderia v. Barclays Bank, 2021 SCC OnLine Del 3740, decided on 20-07-2021]


Advocates before the Court:

For the Petitioner:

Mr Rajeeve Mehra, Sr. Adv. with Mr Kanishk Ahuja and Ms Neha Bhatia, Advs

For the Respondent:

Mr R.P. Aggarwal and Ms Manisha Agrawal, Advs.


Additional Read:

Section 176 – Pawnee’s right where pawnor makes default. – 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 pawnor 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.”

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