Hypothecation

Hypothecation

A small recap:

Bailment –delivery of goods for a specific purpose and getting it back after the purpose or period is over.

Pledge: This is also bailment of goods as security for obtaining a loan.

              Pledge is defined in sec 172 of Indian contract act 1872.

Now let us see what hypothecation is.

Shivraj got back his jewel and really wanted to expand his cattle farm. He visited the same old good wealthy man and offered him his jewels and land for a debt with which he planned to purchase some more cows and sheep.

“Shivrajji, thank you.... You have come to me. I know that you are growing rich. Now you are one of the respectable members of our village. So I don’t need any security. But please sign this document which says,

1. I have a right on your cattle (moveable asset) existing and to be purchased.
2. I can use this right in case you fail to pay. I can sell them and appropriate the proceeds to the adjustment of the loan.

This is enough. I have faith in you that you will pay in advance.”

Shivraj felt very happy. He also knew well that he would pay in advance and come for a bigger amount for purchase of a house.

pledge: Delivery of goods is essential and possession is with creditor.

Hypothecation: No delivery of goods; possession is with debtor. When debtor fails to pay the debt, the charge crystallizes from a floating charge into fixed charge.

When banks give vehicle loan, they don’t take any security.

When banks give loan on stock, they don’t take them into possession.

They get an agreement of hypothecation signed by borrower. That is the charge.

Hypothecation is defined by law very lately in SARFAESI Act 2002.

We will see how Shivraj got a loan under ‘Mortgage’. OK?