Hypothecation is the pledging of goods, against the debt without delivering them to the lender. As per Section 2 (n) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 "hypothecation" means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property.
Sample Format of Hypothecation Agreement is given below.
THISDEED OF HYPOTHECATION executed at ________ on this the ___________ day of
Mr.________________, son of_____________, aged about ___________ years, residing at _____________________, hereinafter called the CREDITOR (which expression shall, unless it is repugnant to the context mean and include his legal representatives, executors, administrators, and assigns)
Mr.________________, son of_____________, aged about ___________ years, residing at _____________________, hereinafter called the BORROWER (which expression shall, unless it is repugnant to the context mean and include his legal representatives, executors, administrators and assigns);
WHEREAS The BORROWER has placed an order for the purchase of, a ___________, namely________________, [valued at Rs.____________ (Rupees ____________), (Details of the same are set out in the schedule 'A' hereunder) (hereinafter referred to as the asset), with the ________________, namely ________________, having its office at __________, and has remitted an amount of Rs.______________ (Rupees _____________only], with the said _________________ as advance towards the sale consideration.
That the BORROWER has approached the CREDITOR for a loan of Rs.______________,
(Rupees _____________only), for the payment of the balance price of the schedule
That the CREDITOR and BORROWER have agreed that the CREDITOR shallfinance the purchase of the schedule 'A' mentioned asset, on the condition that the BORROWER hypothecates the schedule mentioned asset with the CREDITOR as security for the due repayment of the said loan. The parties have agreed to reduce their agreement to writing.
NOW THEREFORE IN CONSIDERATION OF THE MUTUAL OBLIGATIONS AND UNDERTAKINGS CONTAINED HEREIN THIS AGREEMENT WITNESSETH AS FOLLOWS:
Payment by the CREDITOR
The CREDITOR shall pay to the said manufacturer, on behalf of the BORROWER, a sum of Rs. ____________/-, (Rupees _______), towards the balance price of the said asset and shall retain possession of the original invoice of the said asset till the debt is fully discharged by the BORROWER.
The BORROWER hereby hypothecates and creates a charge on the asset more fully described in the schedule 'A' hereunder to and in favour of the CREDITOR as security for the repayment of the loan with interest.
Obligations of the BORROWER
The BORROWER hereby undertakes to repay the loan amount within a period of
months commencing from________ along with interest. The BORROWER shall pay interest at the rate of ______________ on the principal per month, at Rs._____________/-, (Rupees ____________only). The Interest and principal are payable in monthly installments as per schedule-B hereto.
Rights of the CREDITOR
If the BORROWER defaults in payment of the amount as per schedule-B hereto then such defaulted installment will carry interest as if the defaulted installment is the principal, until it is paid.
If the BORROWER fails to pay any ______ installments then the CREDITOR shall be entitled to claim the principal and interest amount due, and the same shall become payable forthwith, on the CREDITOR calling upon the BORROWER to make payment of such defaulted principal amount.
The BORROWER shall not remove or take the said asset, outside the State without prior intimation to the CREDITOR.
The BORROWER agrees and undertakes to insure the asset against all hazards, and shall produce the relevant receipts, and other documents, whenever called upon by the CREDITOR so to do.
That disputes if any arising under this Deed or any matter incidental thereto, shall be submitted to arbitration as per the provisions of the Arbitration and Conciliation Act 1996 (updated from time to time) and the venue of the arbitration shall be at ___________
IN WITNESS WHEREOF the parties hereto affixed their signatures on the day month and year mentioned hereinabove
SCHEDULE 'A' (Description of Assets)
SCHEDULE-B (Description of payment schedule)
(n) "hypothecation" means a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property.
Hypothecation is the pledging of goods, against the debt without delivering
them to the lender. Hypothecation refers to a financial arrangement where the
borrower borrows money by against the security of goods. Here goods mean movable
property. In business parlance, hypothecation is defined as the charge created
over the asset (usually inventories, debtors, etc.) for the repayment of debt of
suppliers, creditors, and other parties.
In this arrangement, the asset is not delivered to the lender but kept by the borrower until he defaults in payment of debt. So the possession of asset belongs to the debtor only. There are two parties to hypothecation, where hypothecator is the borrower while hypothecatee is the lender. The right of the two parties depends on the agreement signed between them.
If the hypothecator fails to pay the amount, then firstly, the hypothecatee has to take the possession of the goods hypothecated. Thereafter, he can sell them off to adjust the amount of his loan.