securedcredit.files.wordpress.com · Web viewRights and Obligations of Pledgor and Pledgee (A) Pledgor's Rights. The pledgor has the following rights: i. The pledgor has legal title

UNIVERSITY OF LAGOSSCHOOL OF POSTGRADUATE STUDIES

COURSE: SECURED CREDIT TRANSACTIONS 1 COURSE CODE: PPL 803

BEING A SEMINAR REPRESENTATION IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE LL.M

DEGREE PROGRAMME.

TOPIC:

PLEDGE OF CHATTELS

BY GROUP ELEVEN:

NAMES MATRIC NO.1. NWAKAUDU OKECHUKWU P. 0990610152. AKWALI TOBECHUKWU 3. OKWUMABUA CHARLES 1090610834. YAKUB KAYODE 5. IFEDAYO OKE LAWAL 0990610616. EJIWUNMI ABDULATEEF OLAWALE

LECTURER: DR. OLUDAYO AMOKAYE

February, 2011

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Table of Content

A. Introduction

i

B. Part I

i. Definition of Essential Terms and concepts

ii. Nature of Pledge

C. Part II

i. Classification of Pledge

D. Part III

i. Recommendation and Conclusion

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INTRODUCTION

The usual explanation of why security is taken by a

creditor is that it provides the creditor with an

alternative source or recoupment if the debtor either

cannot or will not pay voluntary1

We submit that the above postulation is a concise, irrefutable reason behind

secured creditor transaction globally.

Pledge of chattels as security may be taken by creditors to secure or guarantee

repayment of credit facilities granted to borrowers in the ordinary course of business.

In the context of pledge of chattels, such creditors are referred to as

Pawnbrokers. In practice, a Pawnbroker considers the value of any chattel that

is offered as a pledge for the loan. The amount of the loan is usually a percentage

of the chattels value and the pledge is kept by the Pawnbroker for the agreed

period of the loan. If the loan is repaid during the agreed period along with the

fee or commission, the customer receives the pawned item. If the time elapses

without repayment, the Pawnbroker is allowed to sell the pledged chattel to

recoup the amount of his loan2.

Security makes a lender feel safe or comfortable in lending. It relates to the

obligation to pay money, usually either to repay a loan or to pay a sum under a

contract, such as the price of goods supplied on short-term credit3.

1 David E. Allan, Security: Some mysteries, myths and monstrosities, Monash University Law Review (Vol. 15 Nos. 3 and 4. 89) pg 342. 2 See Wilkipedia, the free encyclopedia PLbttp.//en.wikipedia.org/wki/pawnbroker , assessed on 1/2/2011.3 See L.A. Sheridan Rights in Security page 1.

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Pledge of chattels can be classified as real security, which is the transfer of the

proprietary interest in a property or possession to a creditor as security for a

loan. Real security affords the creditor certain rights over property, which has

been appropriated to meet the debt or other obligation of the debtor. Real

security involves holding interest in some tangible property (such as land,

goods or chattels of different kinds) or in intangible property (such as choses in

action) as security for credit4.

Pledge of chattels is a form of real security by which the creditor does not obtain

proprietary or ownership right over the property but the right of possession.

The existence of this form of security is predicated on the creditor having

possession, actual or constructive, of the chattels pledged as security to meet the

debt5.

It is important at this stage to define the salient terms and concepts in the topic

under consideration.

This presentation is a veritable attempt to explain pledge of chattel and is

divided into three parts namely.

Parts 1, which boarders on definition of relevant terms and concepts and nature

of pledge. Part 2 Deals on classification of pledge and Part 3 centers on

conclusion and recommendation.

PART 1

4 See I. O, Smith: Nigerian Law of Secured Credit (1st ed. 2001) pages 6/7, Edu v National Bank of Nigeria Ltd, (1971) NCLR page 3405 Sec Chitty on contracts Vol. 2 (27tb ed) page 162 paragraph 32 - 091, Re Morrit (1886) 18QBD 222.

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SECURITY:

An examination of the concepts and methodology of security should begin with

an enquiry of what is expected of security, what is its purpose and function6.

Security is anything that makes money more assured in its payment or more

readily recoverable7. But as a more general concept, security is a transaction

whereby a person to whom an obligation is owed by another person called the

debtor is afforded, in addition to the personal promise of the debtor to

discharge the obligation, rights exercisable against some property of the debtor

in order to discharge the obligation8.

SECURITY INTEREST

A security interest is defined as a right to one party in the asset of another party

to secure payment or performance of an obligation by that other party or by a

Third Party, consequently a security interest arises from a transaction intended

as security9.

It is also important to state at this point that security may be real or personal, it

is real, when it is created over tangible or intangible property and it is personal,

when it is created by personal assurance in the form of guarantee or

indemnity10.

PLEDGE

6 David E. Allan; Supra note 1, page 3427 A. fleming. Globalization and the Economy 1999 (London). 1999 p. 79 see also I.O Smith, Nigerian Law of Secured Credit (2006) Ecowatch Publication (Nig Ltd P.2).8 Sykes & walker, The law of securities 5th ed. (1993) Law Book Company Ltd p. 11 9 R.M. Goode, Legal Problems of Credit and security. Pg. 1. See also Oditah F. Legal Aspects of Receivable financing, Sweet & Maxwell, (1991) p. 8 10 I.O. Smith supra pg 8-12

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Pledge is a form of consensual security11.

The fact that pledge is a form of security was reinstated by Cohen J. in Askrigg

pty. Ltd. V. Student Guild of the Curtin University of Tech12, wherein pledge was

defined inter alia as a contract which result in the bailment of the matter to the

creditor which he is entitled to retain until the debt is paid.

A pledge does not connote a transfer of title, but merely gives the creditor a

right to possession of the security. This concept involves two elements first the

actual or constructive delivery of the subject of the pledge to the creditor.

And secondly, it is also tenable that the creditor must have the right to sell the

security given upon the default of the borrower13.

It is an unassailable fact, that the concept of pledge is associated with

possessory right in the subject matter of security either on land or chattels, but

the position at common law is that chattels and not land may be pledged14.

But under customary law, a pledge of land is permissible, under customary law,

a pledge of land is an arrangement, whereby the owner- occupier of land known

as the pledgor, in order to secure an advance of money or money’s worth, gives

possession and the use of the land to the creditor known as the pledgee until the

debt is fully discharge15. From this illustration of customary pledge of land the

following features are evident;.

11 Roy Goode, Security: A Pragmatic conceptualistic response, Monash University Law Review (vol. 15, Nos. 3 & 4, 89) pg. 362. 12 (1989) 18 N. S.W.L.R. 73813 This was the view of Atkin L.J. in National provincial and Union Bank of England V. Charnley (1924) I.K.B 431 at 449.14 Sheridan: Right in Security: Pg. 145 15 Elias, Nigerian Land Law, 4th Ed. (Sweet & Maxwell) 1971 P. 153- 154

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a. The pledge provides the pledgee-creditor with security for the performance

of the pledgor’s obligation of repaying the loan and

b. The security takes the form of giving the pledgee possession of the pledgor’s

property.

In summary pledge connotes;

a. A bailment of goods by a debtor to his creditor, to be kept till the debt is

discharged.

b. A contract by which a debtor gives to his creditor a thing to detain as

security for his debt.

Conclusive pledge is ordinarily confined to personal property (goods and

chattels). But money, negotiable instruments, chooses in action and indeed any

other valuable thing of a personal nature such as patent- rights and

manuscripts, may by common law, be delivered in pledge16.

CHATTELS: In Afribank (Nig) Plc V A. I. Investment Ltd17 the Appeal court

defined chattel as follows:

“Chattel means a moving or transferable property; especially

personal property and chattel are either personal or real. Personal chattels

may be so called because they belong to the person of a man or for that

which is being injuriously withheld from a person and

forwhich he has no means of recovery except through personal

action. Chattel real on the other hand are such as either appertain

not immediately to the person but to some other things by way of

16 www.dictionary.net/pledge (assessed on 1/31/2011)17 (2002) 7NWLR (Ft 765) CA 40, the court adopted the definition of chattel as contained in Black's law Dicti-onary (7th ed) 229.

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dependency or such as issuing out of some immovable thing to a

person, for instance, a lease or rent far a term of years.”

Furthermore, the Osborn's Concise Law Dictionary18, states that

“Any property, other than freehold land, leasehold and other interest in

land less than freehold are termed chattels real, as they savour of

the reality. Chattels personal are movable, tangible articles of

property”.

Chattels is a term describing all property of whatever kind, excluding freehold

land and anything permanently affixed to freehold land, interest in land (for

example lease holds) are chattels real. Chattels personal are all movable and

tangible articles of property.

Chattels include timber growing on land (whether freehold or leasehold) and

articles of personal use19.

The word chattel is originally the same word with cattle, formed the late Latin

capital, meaning heads of cattle, from the Latin caput head.

Furthermore, a chattel is also the legal and popular denomination for personal

property as distinguished from thing real, or land, tenements or hereditaments.

Chattel, is a movable or transferable property, it also connote personal

property, especially physical object, capable of manual delivery and not the

subject matter of real property, chattel also include a tangible good or an

intangible right, such as a patent (either chattel personal) and equally connotes

18 (7th ed), by Roger Bird, at page 7119 www.probertenacy dispeadia.com/cgi-bin/re. assessed on 1/31/2011.In summary, it will suffice to say, that chattels are personal properties that are movable and capable of being possessed.

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a real property interest that is less than a freehold or fee, such as a leasehold

estate (either chattel real, the most important chattel real, is an estate for years

in land, which is considered a chattel because it lacks the indefiniteness of time

essential to real property20.

It is important to note that pledge of chattels is generally understood as

relating to personal property21.

Pledge of Chattels: This can be described as the transfer of

possession (but not ownership) of chattels as security for the payment

of a debt or performance of an obligation on default being made, the

chattels may be sold22.

Pledge of a chattel is also referred to as pawn. To pledge a chattel as security for

debt is to part with possession or to pawn it. A special property is conferred

on the pledgee or pawnee (creditor) who has the power of sale on default

of redemption. The surplus after satisfying the debt belongs to the pawner

(pledger). Chitty on Contracts23 defined pledge of chattels as follows:

“A pledge or Pawn is a bailment of goods by a debtor to creditor to be

kept by him till the debt be discharged”

Pawnbroker: A Pawnbroker is a person who offers loans or credit facilities

to individuals who use their personal property as collateral. These items are

called pledges or pawns. The word pawn is derived from the Latin word, Patinum, 20 Black’s Law Dictionary, 8th Ed. Edited by Bryan A. Garner (2004) West Publishing Co. Pg. 251.21 See Cbitty on Contracts Vol 2 (27tb ed) paragraph 32-097 at page 16522 See Osborn's Concise Law Dictionary (7tb ed) at page 25423 Vol. 2 (27tb ed) paragraph 32-090 at page 161, A pledge has also been defined as "a property right over chattel for the purpose of guaranteeing the performance of an obligation and its priority inpayment. See Mexico Business Opportunities and Legal framework - Securing Transactions bttp,//www.mexicotrade com./transaction.btmt. assessed 1/2/2011

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meaning cloth or clothing. Typically in the past, most people's primary assets were

their clothing. The place of business of a pawnbroker is called a pawnshop24.

NATURE OF PLEDGE

Distinction between Pledge of Chattels and other Related Security Interests.

It is apt to distinguish between pledge of chattels and the underlisted security

interest as this would ensure a better understanding of this topic.

Distinction between Pledge and Personal Security Interest: The major

distinction between a pledge of personal chattels and personal security is

that the former gives the creditor certain rights (rights in rem) over specific

property, which has been appropriated to meet the debt. On the other hand,

personal security gives the creditor a contractual action enforceable in the law

court against the debtor or a third party known as surety. It cannot afford

the creditor a primary proprietary right25. .

In reality the distinction between pledge of chattels and personal security is

not sacrosanct as personal security may materialize into real or

proprietary security by judgment and eventual writ of attachment26.

Distinction between Pledge of Chattels and Lien over Chattels.

Lien creates a right over the property of another person (the owner) as

security for any claim arising from the unfulfilled obligations of the obligor

24 See Wikipediat the free encyclopedia PI Supra, Section I of the Pawnbrokers law of Lagos State cap. P2 2003 states that Pawnbrokers includes every person who carries on the business of taking goods in pawn.

25 A good example of personal security is contract of guarantee. On the nature of a guarantee, see Nwankioo V Ecumerical Dev. Co. Society. (2002) NWLR (Pt 749) CA 513 at PP 534 to 535

26 See Okoli H.S. N - Classification of Securities Commercial Reality or Fiction". An article in NLREDP series No. 11995 (Edited by Wole Owaboye) page 253.

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owner. "When applied to creditor debtor relationship a lien enables the

creditor to exercise a right of retention over chattels in order to make the

other party discharge certain obligations owed him.

The main distinction between a pledge and a lien is that sale upon default in

payment is an incident of pledge whereas a lien gives merely a right to detain

the goods until the debt is paid27.

Furthermore, a pledge as distinct from a lien can be assigned. The pledgee

may assign or sub-pledge to a third party his special property or interest in

the thing pledged, however the holder of a lien is ordinarily not entitled to

assign or create a further lien28.

Be that as it may the distinction between pledge and lien seems to be

blurred from the functional perspective having regard to the fact that the

holder of a lien may in special circumstances be able to exercise the power

of sale. Thus where a factor has a lien over goods bought for his principal,

he cannot enforce the lien by sale as against his principal. However, if the

sale is effected in the ordinary course of business, a valid title will be

transferred to the purchaser under the Factors Act, 188929.

Distinction between Pledge and Mortgage of Chattels.

Mortgage of chattels is alternatively known as bill of sale. It defers from a

pledge in the following respects.

27 See Yungman V Briesemann (1892) LT 642.28 See Cbitty on Contracts Vol2(27th ed)page 161 and Donald V Suckling, at P 612

29 Factors Act 1889, section 2. This is a statute of General Application in Nigeria.

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A mortgage of chattel transfers the proprietary interest (ownership) in the

property by assignment, subject to a right of redemption30. In a pledge, no

property right is transferred to the pledgee. The pledgee only acquires a

special right, which can enable him sell the property in the event of default

by the pledgor.

Furthermore, delivery either actual or constructive of the articles pledged in

consideration of advance is required for a pledge. In a mortgage delivery

of the chattels is not essential. The security of a mortgagee, is the

ownership of the subject matter of the mortgage while the security of the

pledge is its possession31.

Finally a pledge is distinguishable from a mortgage based on the fact that

the pledgee does not have the right of foreclosure, since he has only a

special property in the chattel32.

The distinction between a pledge and mortgage of chattels is not absolute as

the mortgagee may take possession of the chattels to enforce or protect

his security. The classification of a mortgage as non possessory real security

seems illusory as it is possible to create a mortgage whilst the mortgagee

retains possession of the mortgage. Lord Macnaghtan, in Samuel V. Jerah,33

alluded to the misconception surrounding mortgage by stating that no one ever

under stood its nature.

30 Re Morrtt (1886) 18 QBD 22231 See Re Morrit, Supra.32 The Richardson (1885) 30 CbD 396 at 403

33 1904 AC 323

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In summary, Pledge creates an alternative way of creating security on personal

chattels. It affords the creditor dominion over these chattels by the exercise of

the right to possession and invariably diminishes debtor’s fraud on the creditor,

thus prevents the debtor from removing the chattels, in the event of his inability

to pay his debt, which was secured by the pledge of his chattels34.

PART 2

CLASSIFICATION OF PLEDGE

It is probable indeed that the conception of a right of pledge as an independent

real right originated in the law of chattels and was only later transferred to the

law of Land. The two institutes continued to be dominated by the same

fundamental ideas and consequently the same technical expressions are used in

reference to both35

Pledge of chattels is governed by the Common Law36, Equity, Nigerian

constitution37, local statutes38, and judicial precedents39. 34 I.O. Smith Supra, Note 3. Pg 176-17835 Rudolf Hubner (Online), A history of Germanic Private law,http://books.googte.com.ng/books?assessed11/2/2011

36 See Morrit, Supra37 See the constitution of the Federal Republic of Nigeria 1990, section 4, dealing with the legislative powers of the National Assembly and States Houses of Assembly.38 The applicable statute is the Pawnbrokers Act of 1917 which has been adopted by the various states in Nigeria. For example, see the pawnbrokers law cap.p2 laws of Lagos State which replaced the pawnbrokers law. (Cap 140) Laws of Lagos State 1994, Pawnbrokers law (Cap 85), Oyo State 1978, Pawnbrokers Law (Cap 113) of Bendet State, Pawnbrokers law (Cap 90) law of Eastern Nigeria and Pawnbrokers (law Cap 87) laws of Northern Nigeria.39 See the fol lowing cases c o-operat ive supply A ssociat ion Ltd V Interc ontra Ltd ( 1969) NCLR p61 and Ahmed El-Hag V G .K .J Amachree (1962) LLR p 10

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Classification of Pledge.

A Pledge may be classified into:

(1) Possessory pledge by which possession of the subject matter of the pledge is

actually given by the pledgor to the pledgee as security for repayment of

debt. Thus the essence of a pledge is the transfer of possession to the

pledgee40.

However, the pledgee may have constructive possession in certain

circumstances some of which are mentioned below:

(i) It is possible to have a non-possessory pledge, which arises when

the pledgee allows the pledgor to retain possession of chattels

pledged for a special purpose41.

(ii) By virtue of Section 3 of the Factors Act 1889 the delivery to the

creditors of documents to the goods is deemed to be a pledge of the

goods. Thus when goods are under the operation of a bill of lading,

delivery for the purpose of pledging the goods may be effected by

indorsement or transfer of the bill of lading42.

(iii) The debtor's delivery to the creditor of the keys to the warehouse

where the chattels are kept or instructing the warehouse men to

allow the creditor into the warehouse to remove the goods. In

practice, a tripartite Warehouse Agreement may be executed by

40 S ee Re Morri t , a nd Ahm ed E.L Ha g V G .k . J , Ama ch ree Supra41 Se e North Weste rn Bank Ltd V Poynter Sons a nd Maeldonalds ( 1895) AC 56

42 See Burdick V Sewell (18830) 10 QBD 363

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the pledgor, pledgee and the owner of the warehouse where the

chattels are kept creating a pledge in favour of the creditor.

(2) Another classification of a pledge is statutory pledge and those

outside the statute governed by common law

(i) Statutory Pledge: The Modern Pawnbroker Law in Nigeria is traced to the

Pawnbrokers Act of 191743 . The Act has been adopted by the various states in Nigeria.

This seminar will be based on the Pawnbrokers law of Lagos State44. The relevant

provisions of the said law are stated hereunder.

A Pawnbroker is defined as including every person who carries on

the business of taking goods in pawn45.

The Pawnbrokers Law is only applicable to every loan by a pawnbroker of

any sum of money not exceeding forty naira46. The pawnbroker's law is

inapplicable to a loan in excess of forty naira or to a pledge on which the

loan is made47. The general obligations of the pawnbrokers to keep books

and documents used in the business, as well as names over doors and

table of rates are contained in Sections 8 and 9 of the Pawnbroker's

Law. The law also makes provisions for Pawning, Redemption and Sale

43LvgSuXvLLPqIiIIsY&hl=cn&ei=pxhA^ZrK\fsO3hAeOwKIIt)DA&sa=X&oi=book rcsult&ct=resnlt&resnuni=9&v ed=aCEKO6AEwCA#\=oncpage&q=:pledge 0 /o2Qof%20chattels&f=faIse. Assessed 11/2/2011 .

2 Cap 140 Laws of Lagos State 1994, Cap 88 Ogun State 1978, Cap 85 Ondo State, 1978, Cap 113 Laws of Bendcl state (now applicable in Edo and Delta States); Cap 90 Laws of Eastern Nigeria (now applicable in Anambra, Enugu, Imo and Abia States); Cap 87 Laws of Northern Nigeria 1963 (applicable in all Northern States of Nigeria).

44 See the Pawnbrokers Law Cap. P2 law of Lagos State 2003 which has replaced the Pawnbrokers Law. Cap 140

laws of Lagos State 1994

45 Section 2

46 Section 7(1)

47 Section 7(2)

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of chattels. A pawnbroker shall, on taking a pledge in pawn, gives to the

pawner a pawn- ticket48.

Every pledge shall be redeemable within twelve months from the day of

pawning, exclusive of that day, and there shall be added to that year of

redemption seven days of grace, within which every pledge if not

redeemed within the year of redemption shall continue to be

redeemable49. By virtue of Section 13, pledges for one naira or under not

redeemed within the year of redemption and days of grace are forfeited

and become the pawnbrokers absolute property. However, pledges above

one naira are redeemable until sale50 The holder for the time being of the

pawn ticket is the person entitled to redeem the pledge upon payment of the

loan. It is him that the pawnbroker delivers the pledge upon producing

and delivery of the pawn ticket to the pawn broker51. Where such pawn

ticket is lost, destroyed or stolen the person entitled to redeem may apply to

the pawnbroker for a printed form of declaration52.

Where redemption is rendered impossible as a result of destruction or

damage by or in consequence of fire, the pawnbrokers shall be liable on

application within the redemption period to pay the value of the pledge

after deducting the amount of the loan and profit and twenty five percent of

48 Section 10

49 Section 12

50 Section 14

51 Section 20

52 Section 24(a)

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the amount of the loan53. A pawnbroker shall be entitled to insure to the extent

of the value so estimated54 Section 23 makes provision for compensation for

depreciation of pledge. Thus where the pledge depreciates in value through

the neglect or willful default of the pawnbroker, the person entitled and

offering to redeem the pledge may be compensated upon satisfactory proof

before a magistrate that the pledge has become or has been rendered of less

value than it was at the time of pawning.

Furthermore, the sum awarded as compensation by the magistrate shall be

deducted from the amount payable to the pawnbroker or paid by the

pawnbroker in such manner as the magistrate may direct55.

In Mexico, the creditor may petition the court to authorize the sale of the

pledged collateral upon maturity of the principal obligation if the value of

the collateral given in pledge drops below an amount that is not sufficient to

cover the original obligation plus 20% and if the debtor does not provide

sufficient funds to amortize the debt represented by the loan.56

Finally with respect to the sale of pledged property pawned the following salient

provisions should be noted. A sale by the pawnbroker of a pledge pawned

for a sum above one naira is required by law to be effected at a public auction

and not otherwise,57

By virtue of Section 18(1) the pawnbroker is required to account for any

surplus within three years of sale subject to set-off.

53 Section 22(1). The problem with this provision is who determines the value? It is suggested that the value should

be agreed upon at the commencement of the pledge to avoid dispute54 Se ct ion 22(2}55 S e ct ion 2 3

56 See Mexico Business Opportunities and Legal Framework, supra.

57 Section 15(1). By virtue of section 15(2) a pawnbroker may bid for and purchase at a sale by auction, made or purporting to be made under this law, a pledge pawned -with him and on such purchase he shall be deemed the absolute owner of the pledge purchased.

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(ii) The Common Law Pledge: A pledge at Common Law is a form of

possessing security. It arises where possession to chattels or a right to it is

given by the pledgor owner to the creditor or pledged as security for a loan

or other obligations. The essence of a pledge is the delivery of possession of

the chattels to the pledgee which must be actual or constructive58

In pledge, it is not necessary that disbursement of the credit and the

delivery should be contemporaneous. What is required is that possession should

be delivered within a reasonable time of the advance in pursuance of the

contract to pledge59.

Redelivery of the chattels to the pledgor for a limited purpose and on the

understanding that the pledge will be unaffected, does not destroy the

pledge60.

Rights and Obligations of Pledgor and Pledgee

(A) Pledgor's Rights. The pledgor has the following rights:

i. The pledgor has legal title in the subject matter of the pledge,

which can only be extinguished by a proper sale of the chattel by the

pledgee on default by the pledgor61.

58 Dublin City Distillery Ltd V Doberty (1914) AC 82359 See Chitty on Contracts Vol. 2 (27th ed) paragraph 32-091 page 162.60 North Western Bank Ltd VJohn Poynter, Son & Macdonalds, Supra

61 See EXP Hubbard (1886) 17 QBD 690

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ii. The pledgor may sell the chattels to a third party and pass the legal

right to redeem to him whilst the pledge subsists and before realizations

of the security by the pledgee62.

iii. The pledgor is entitled to redeem on the agreed date or within a

reasonable time if no date is specified in the pledge agreement. Upon

repayment, the contract of pledge is extinguished and the pledgee is

divested of his personal right in the chattel63.

(B) Pledgor's obligations:The pledgor is obliged to discharge his

indebtedness under the pledge agreement within the agreed period failing which

his interest in the chattel may be extinguished by the pledgor exercising his

power of sale.

Furthermore, by the pledge the pledgor impliedly warrants that he has a

title to the thing pledged. He is thus liable in damages to the pledgee for any

breach of such a warranty64.

(C) Pledgee's Rights. The pledgee possesses the following rights:

i. The pledgee is legally entitled to safeguard his possessory rights and may

institute legal proceedings against a third party to recover possession of the

chattels pledged without joining the pledgor as a party65.

62 See I. O. Smith Nigerian Law of Secured Credit Supra Page 185 and Franklin V Neate (1844) 13 M &

W8163 See Babock V Lawson (1889) 5 QBD 284

64 See Williams V Barton (1825)3Bing 139

65 See Martin V Reid (1862) 11 CB(N.S) 730

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ii. The pledgee may assign, or sub-pledge to a third party his special property or

interest in the subject matter of the pledge. However, such a transfer is only

valid if it purports to transfer no more than the pledgee's interest in the

chattel and the pledgee continues to be liable for reasonable care being taken

for its safe custody66.

iii. The pledgee is entitled to use the thing pledged, provided the article will

not be depreciated. However, if the article will depreciate in value or worse for

such use such as clothes the pledgee may not use it67.

iv. If the keeping of the subject matter of the pledge causes the pledgee to

incur some costs, the pledgee is entitled to claim the amount of such

expenses upon redemption or enforcement of the security. In the case of

livestock such as cow he may milk the cow in recompense for the keeping68.

v. If there is an increase in the value of the thing pledged, the pledgee is

entitled to reap the benefit of the increase as part of his security.

Finally a pledgee of chattels has a right to sell the chattels in the event of pledger's

default to repay the loan. The pledgee is entitled to exercise an implied power of sale

where the pledgor fails to pay on the agreed date or upon a reasonable notice of

the pledgee's intention to sell being given to the pledgor69 If the pledgee gives no

notice or gives inadequate notice to the pledgor before selling the Chattels, the sale is

void and he is liable in conversion. In Ahmed El-Hag VG.K.J.Amachree, (Supra), the

defendant pledgee sold horses pledged to him without giving any notice to the 66 See Donald V Suckling, Supra.67 See Cbitty on contracts Vol.2 (27tb ed) page 166

68Coggs V Bernard (1703) 2 Ld Rayym 909 69 Re Morrit, Supra

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plaintiff (pledgor). The court set aside the sale and held the defendant liable in

conversion.

The pledgee is obliged to sell in good faith and must avoid conflict of interest.70 He

must take reasonable care to sell at the best price obtainable in the market. However,

he is not expected to sell more than is reasonably sufficient to payoff the debt since

possession is held only for the purpose of securing the loan71

Finally the pledgee in the exercise of his power of sale must appropriate the proceed

of sale to the payment of the pledgor's debt and in paying off incidental expenses.

Any surplus is required to be paid over to the pledgor.

(D) Pledgee's Obligations

i. By virtue of having possession of the thing pledged, the pledgee is liable for

failure to take reasonable care of it. He is obliged to protect and preserve the

security from any form of loss or damage72. However, if the chattel pledged is

stolen from the pledgee he will be discharged from liability if he can show that

he took ordinary care of it. Also the pledgee is excused where the chattel was

perishable and did in fact perish.73

ii. In the case of livestock, the pledgee is required to maintain and feed them

since that is necessary to keep them alive.74

iii. The pledgee cannot validly transfer title in the chattels neither can he

consume them otherwise his interest in the security is extinguished and he

70 The Odesa (1916) IAC 14S71 The Odesa (Supra)

72 See Coggs v Bernard Supra73 Ratcliff V Dames (1610) yelv 17874 Ahmed El-Hag V GKJ Amachree, Supra

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becomes liable in the tort of conversion for dealing in the chattels in a

manner incompatible with the right of the owner75.

Merits and Demerits of Pledge of Chattels.

(a) The following merits are inherent in the use of pledge as security for

advances.

i A pledge is a form of real security, which affords a creditor additional rights

over chattels pledged. As earlier pointed out, the pledgee is entitled to sell

the subject matter of the pledge in the event of default by the pledgor.

ii A pledge of chattel does not require any special documentation. Thus the main

advantage lies in its simplicity. It is easy to perfect without carrying out any

investigation of the title nor is registration necessary If the pledge is

constituted in a document, perfection is effected by stampings at the stamp

duties office as an ordinary agreement which does not attract ad valorem

rate76. Pledge can therefore be created at reasonably low cost.

(b) Demerits of Pledge of Chattels

i. A pledge may give constructive possession to the pledgee. The

demerit lies in the fact that the pledgor may be able to deal with the

chattel in a manner inconsistent with the right of the pledgee. Also a

pledgee in possession of chattel or the documents to the chattels can

validly pass title to an innocent purchaser for value without notice of

the interest of the pledgor (owner). This is an exception to the basic

rule of nemo dat quod non habet, which implies that a person who buys

75 Cooke V Haddon (1862) 3 &F23976 See the schedule to the Stamp Duties Act (Cap 411) Laws of the Federation of Nigeria 1990

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goods from someone who is not the owner or authorized by the

owner will not obtain a good title.77

ii. A pledge of chattel is not a registrable instrument. Consequently it

is impossible to put other potential creditors on notice. This seems to

make the security created rather illusory particularly with respect to

situations where the pledgee has constructive possession.

iii. The law does not require the documentation of a pledge

transaction. The demerit lies in interpreting such transactions as the

intention of the parties cannot be easily ascertained.

iv. The nature of the interest transferred by a pledgee in a valid sale to

a third party looks somewhat confusing. This is predicated on the fact

that a pledge is mainly a possessory security.

The proprietary or ownership interest or title in the chattels is

retained by the pledgor and not transferable to the pledgee.

Perhaps a solution to this problem is to borrow a leaf from the

principle laid down in Ahmed El-Hag V. G.K.J. Amachree78 to the effect

that the pledgee sells by virtue and to the extent of the pledgor's

ownership and not with a valid legal title of his own Thus the

pledgee to all intents and purposes exercises the power of sale as

77 See the exceptions to the basic rule of Nemo Dat Quod Non Habet as contained in the Sale of Goods Act 1893t

which is a statute of General Application. The statute applies to the Northern State of Nigeria. The Sale of Goods Law 1958 Cap. 115 L/WN 1959 is applicable to Bendel and former Western States. The relevant exceptions in this regard are Estoppel contained in (Section 21(i)ofthe sale of Goods Act 1893, disposition by a Mercantile Agent contained in Section 1 of the factors Act 1889, which is also a statute of General Application. Sale in a market overt (Section 22) of the Sale of Goods Act 1893 is also an important exception.See the following cases Henderson V. Williams (1895) IQB $21,Mbanu V UAC of Nigeria Ltd (1961) All N.L.R. 775

78 Supra

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agent of the pledgor. A denial of such a power will render the pledge

instrument a completely useless security since the pledgee has no

right of foreclosure, he has only a special property in the chattel.79

v. As pointed out above the pledgee has no right of foreclosure, but can

exercise the power of sale. The implication is that if there is no ready

market for the pledged chattel, the security becomes unrealizable from the

practical perspective. This renders the pledge investment rather ineffective.

vi. A pledge under the Pawnbrokers Act has no place in modern times where

there has been significant increase in the volume of credit transactions. The

Pawnbrokers Act has a limited scope and it is only applicable where a loan not

exceeding forty naira is made by the pawnbroker.

This provision is certainly archaic and unrealistic in modern times where there

has been massive devaluation in the value of the Nigerian currency It is

unlikely that any credit transaction will fall within the ambit of the

Pawnbrokers Act in present day Nigeria.

vii. Finally, some of the provisions regulating the sale of a pledged chattel under

the Pawnbrokers Act and Laws look rather absurd and ridiculous. Thus a sale

by the pawnbroker of a pledge pawned for a sum in excess of one naira is

legally required to be made at public auction and not otherwise80.we submit

79 Carter V Wake (1877) 4 C.b.D 60S, Re Richard Son (1885) 30 CbD 396. See I.O. Smith Supra P186-187.80 See section 15(i) of the pawnbrokers Act and the pawnbrokers law of Lagos State 1994 Supra.

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that this provision is devoid of practical utility as the cost of conducting a

public auction is far in excess of the One Naira limit stated therein.

RECOMMENDATION

It is obvious from the foregoing that pledge of chattels, as a form of security is

fraught with a lot of problems. The problems besetting the security have made it

imperative to make the following recommendations for a review of the applicable

laws and statutes.

(a) The scope of the Pawnbrokers Act should be amended as it is only

applicable where a loan not exceeding forty naira is granted by the

pawnbroker. The forty naira stated therein is ridiculous and cannot be

reconciled with the high volume of credit transactions and inflationary

trends in modern times. The amount should be increased to an

appreciable level. In the United Kingdom, the Consumer Credit Act 1974 puts the

limit for pawn transaction at 15,000 British pounds as from May 1985.

(b) The requirement in the Pawnbrokers Act that a disposition by the

pawnbroker for a sum above one naira be made by public auction needs to be

reviewed. It is suggested that the requirement of public auction should not

be mandatory in view of the high cost of conducting a public auction sale.

Furthermore, a sale by a public auction does not necessarily guarantee a good

price. In this regard we may borrow a leaf from the Consumer Credit Act

1974 of the U.K which replaced previous legislation on pawnbrokers by

sections 114-122, under the heading of "pledge”. The 1974 Act does not

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require the sale of the pawn to take place by auction. We submit that the sale

of Chattels under a pledge could be done by private treaty and not only by a

public auction in line with the rules governing sale of mortgaged

properties in Nigeria.

(c) Perhaps it will be desirable to create an exception to the rule that the

pledgee is not entitled to a right of foreclosure81 It is submitted that fairness

demands that the pledgee should be able to use the subject matter of the

pledge to the exclusion of the pledgor if a buyer cannot be found after an

appreciable period of time. This approach is beneficial to the pledgor as

interest will continue to accrue as long as the pledge remains unredeemed.

Equity also demands that if the value of the chattel is significantly in excess

of the loan, the pledgee should be willing to pay some monetary

compensation to the pledgor. Such compensation could be determined

by an independent Arbitrator to be appointed by the pledgor and pledgee in

line with the provisions of the Arbitration and conciliation Act (Laws

of the Federation of Nigeria 2004).

Furthermore, the pledgee should be able to retain the collateral subject to the

implied or expressed consent of the pledgor82.

d) The main criticism of pledge of chattels is the fact that it is not a registrable

instrument. This makes it impossible to put other potential creditors on

81 However by virtue of Section 13 of the Pawnbroker's Law Cap. p2 of Lagos State, pledges for one naira or under not redeemed within the year fixed for redemption and days of grace are forfeited and become the pawnbrokers absolute property.

82 This approach is line with the position in the USA where the Uniform Commercial code is applicable. See section 9-505. David G. Epstein in his book Debtor Creditor (1990) page 87 alluded to this issue by stating that "Retention requires debtor acquiescence". This approach is also applicable in Mexico.

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notice. It is suggested that especially where the pledgee is only vested with

constructive possession there should be avenues of notifying other potential

creditors of the existence of the pledge. In this regard it is helpful to draw

from the practice in the United States of America where security interests

created over chattels are registrable. These security interests are covered

Article 9 of the Uniform Commercial Code, which sets out comprehensive

schemes for regulating security interest in personal property and fixtures.

"Donnel, Barnes and Metzger" identified some of the methods of perfecting

a security interest under the Code, such as by filing a public notice of the

security interest or by the creditor taking possession of the collacteral83.

According to the writers the most common way of perfecting a security interest

is by filing a financing statement in the appropriate public office.

The Financing statements serves as constructive notice to the world that the

creditor claims an interest in a collateral belonging to a certain named debtor. The

financing statement usually consists of a multicopy form, that is available from the

secretary of state's office. The security agreement may be filed as the financing

statement if it contains the required information and has been signed by the

debtor.

To be sufficient, the financing statement must:

(1) Contain the names of the debtor and of the secured party (the creditor)

(2) Be signed by the debtor

(3) Give an address of the secured party from which additional information about

83 See Law of Business by Donnel, Barnes andMetzger (1980 ed) page 579, See also Debtor Creditor Law, David G. Epstein (1990) pages 80 to 90.

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the security interest can be obtained

(4) Give a mailing address for the debtor and

(5) Contain a statement of the types or a description of the collateral.

Each state in the U.S. A specifies by statute where the financing statement must be filed

In all states, a financing statement that covers fixtures must be filed in the office

where a mortgage on real estate would be filed. When the debt secured by the

financing statement is completely satisfied, the debtor is entitled to a termination

statement signed by the secured party. If the secured party does not furnish one on

request, he is liable to a fine and any damages suffered by the debtor.

In Mexico,84 nearly every chattel may be given in pledge and must be evidenced in a

written agreement and is perfected by actual or constructive delivery. In the

latter case, the pledge must be recorded in the Public Registry of Property.

As far as Nigeria is concerned, a section could be created in the High Court’s

Registry for registration of a pledge. The registration particulars should disclose

the addresses and occupation and signatures of the pledgor and pledgee. The

value and particulars of the subject matter of the pledge should also be disclosed

as well as the location.

One may also wish to borrow a leaf from some jurisdictions85 where Government

Identity Card must be shown in order to pawn an item. In this regard, it has

84 See Mexico Business Opportunities and Legal Framework - Securing Transactions bttp.//www.mexico-trade.com/transaction.btml, Supra85 See Wikipedia, the free encylopedia PI Supra86 we admit adopting the recommendations and the conclusions as contained in the article of Emwanta O. Ehigiato: the efficacy of pledge of chattels as security for advances in Nigerian law, published in modern practice journal of finance & investment law 2006 mpjfil vol. 10. Nos. 1 – 2 pg 230 – 247, we also relied on other relevant portions of this article in this presentation.

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been noted that few stolen items end up in pawnshops especially in some

countries where pledgors are required to show Government approved

identification when taking a loan.

Finally, it is suggested that the documentation for a pledge transaction should be in

writing as this would minimize the problems of ascertaining the intention of the parties

if it were to be done without any form of written documentation.

!

In Conclusion

Pledge as a form of real security has many laudable features as well as

shortcomings.

The potency of the security will be enhanced if the laws and statutes applicable thereto

are reviewed in line with the foregoing suggestions. Credit law is supposed to be

dynamic and responsive to modern commercial realities. In Nigeria, the legal

framework for pledge of chattels is certainly ill equipped to cope with new trends.

Consequently a review is urgently required. The use of pledge as a securtization device

is a fact of life in many countries. Both in the past and present borrowers have been

obtaining funds in this manner.

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