RANJAN

HYPOTHECATION- WHAT A BANKERRAJIV

SHOULD
SEM-IIII, SEC-B
Rolll-455
KNOW

HYPOTHECATION- WHAT A BANKER SHOULD KNOW

1.

STATEMENT OF PROBLEM/ HYPOTHESIS:

Mortgaged securities, pledges and guarantees, etc., are incidentally covered or governed by a single
piece of legislation, i.e., mortgages by the Transfer of Property Act, and pledge and guarantees by the
Indian Contract Act. But, in the case of hypothecation, there is no such specific piece of legislation
which deals with the subject, and hence different courts are known to interpret the rights under
hypothecation differently. Yet, hypothecation is, perhaps, the commonest form of security obtained by
the banks. Moreover, there is no identifiable central law that governs hypothecation, and so, it is very
difficult to give a precise definition of the same.
2.

AIMS AND OBJECTIVES:

The research paper aims to define hypothecation as well as point out the difference between
hypothecation, pledge as well as mortgage. Moreover, it also discusses the rights and liabilities of a
hypothecator and a hypothecatee as well as what can be hypothecated.
3.

LITERATURE REVIEW:

As for the definition of the word hypothecation, Watson Law Lexicon defines it as An act of pledging
the property or thing without parting with the possession of the pledged property or thing to the
pledgee. It means hypothecation is nothing but a pledge without possession. A still better
comprehension of the term hypothecation may be attempted through the logic of exclusion i.e., seeing
what it is not and thereby comprehending what it could be.
In hypothecation, the possession of the property is retained by the owner and certain rights in that
movable property are transferred to the person in whose favour the property is hypothecated. But, in a
pledge, the possession of goods also passes to the pledgee by way of security though the possession may
be constructive.1 The borrower in the case of hypothecated goods has actual physical possession of the

1 State of A.P. and another vs. Andhra Bank Ltd., AIR 1988, A.P. 18(1987).

goods as agent, as it were, of the bank and in that limited sense, hypothecated goods are also not only
constructively but actually in the possession of the bank.2
In mortgage, there is an intention to transfer interest in the property to the mortgagee; whereas in the
case of hypothecation no such attempt is made except to create a charge on the movables.
As for the rights concerned in the case of hypothecation or pledge of movable goods, there is no doubt
about the creditors right to take possession, to retain possession and to sell the goods directly without
the intervention of the court for the purpose of recovering his dues. So far as the movables actually
covered by the hypothecation deeds are concerned, there can be no doubt the Bank is entitled to retain
possession and also exercise the right of private sale.3
A mere passive inactivity or passive negligence on the part of the creditor in failing to realise the debt
from the security is not sufficient in itself to discharge a surety, as the surety can himself avoid the
consequences of such passivity by paying the debt and getting subrogated to the rights of the creditor. In
the absence of a contract to the contrary, a creditor is not under obligation to active diligence for the
protection of the surety so long as the surety himself remains inactive.4
However, an opposite view was taken in the case of State Bank of India vs. Quality Bread Factory and
Other5. In another case6 the court overruled the above judgement and held that a surety in case of
hypothecation is not entitled to invoke the provisions of Section 141 of the Indian Contract Act.

2 M/s. Gopal Singh Hira Singh vs. Punjab National Bank, AIR 1976 Delhi 115.
3 Bank of Maharashtra Ltd., Pune, vs. Official Liquidator, AIR 1969 Mysore 280 1970.
4 Karnataka Bank Ltd. vs. Gajanan Shankarrao Kulkarni and another, AIR 1977 Karnataka 14.
5 AIR 1983 Punjab & Haryana 244.
6 Bank of India vs. Yogeshwar Kant Wadhera and Others, AIR 1987 Punjab & Haryana 176.

4.

SUMMARY:

Hypothecation is one of the commonest modes of security creation in banks. There is, however, no
specific law by which the rights and liabilities of the hypothecator and hypothecatee are defined.
Hypothecation is governed by the general principles of the Contract Act. Therefore, the courts interpret
the obligations under hypothecation in different ways. Hypothecation has got very many disadvantages
for the simple reason that the very possession of goods always remains with the borrower.