Determining Liability in Pledged Goods Cases

In the case of M/s World Trans Logistics vs. Silk Bank Ltd. (2016 SCMR 800), the Supreme Court of Pakistan provided a significant ruling addressing the liability of financial institutions regarding pledged goods, particularly when such goods are alleged to have been misappropriated or lost while under the control of the bank.

Background:

M/s World Trans Logistics, the petitioner, obtained a finance facility from Silk Bank Ltd. in 2009, secured by both the mortgage of immovable properties and the pledge of goods. After defaulting on the repayment, the bank initiated a recovery suit in the Banking Court. The Banking Court decreed the suit for Rs. 42,242,625. On appeal, the petitioner argued that they should not be liable for repayment as the pledged goods had been misappropriated by the bank's officials. This argument was rejected by the High Court, leading to the appeal before the Supreme Court.

Key Issues:

Nature of Pledge and Possession: A critical issue was the distinction between actual and constructive possession of the pledged goods. The petitioner contended that Silk Bank, having control over the goods, should be liable for their alleged misappropriation. However, the Court clarified that under the "letter of pledge", the petitioner retained possession and was permitted to use the goods in the ordinary course of business. Thus, the responsibility for the care and risk of the goods remained with the petitioner.

Contractual Obligations Under Pledge: The Court examined the terms outlined in the letter of pledge, which obligated the petitioner to maintain a register of the pledged goods, update the bank on inventory changes, and bear any loss or damage to the goods. The Court highlighted that these contractual obligations were enforceable, and Silk Bank, having only constructive possession, could not be held accountable for the goods' loss.

Precedents on Pledge and Possession: The Court referenced several key precedents to reinforce its decision. In Apollo Textile Mills Ltd. vs. Soneri Bank Ltd. (2012 CLD 337) case, it is emphasized that in a constructive pledge, the risk and responsibility remain with the pledgor, who retains possession of the goods.

In Askari Bank Ltd. vs. Waleed Junaid Industries (2012 CLD 1681) case, the principle that the pledgor retaining possession must bear the risk of loss or damage to the pledged goods is reaffirmed. In Lallan Prasad vs. Rahmat Ali (AIR 1967 Supreme Court 1322) case, it was highlighted that even if the bank has constructive possession, the actual care and responsibility for the goods lie with the pledgor unless otherwise agreed upon.

Court’s Conclusion: The Supreme Court dismissed the petition, upholding the lower courts' decisions. It concluded that Silk Bank, given its constructive possession, was not liable for the loss or misappropriation of the goods. The petitioner's failure to adhere to the obligations set forth in the pledge agreement placed full responsibility on them, justifying the bank’s recovery of the decretal amount.

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