Legal formats and statutory reference material for India

Loan Agreement with Surety and Hypothecation Format in India

A practical sample for a loan supported by a personal guarantee and a charge over specified movable assets, with repayment, default, surety and security clauses.

Important legal distinction: hypothecation is used for movable property without transfer of possession. If the intended security is land, a house or other immovable property, a mortgage instrument should be prepared and completed in accordance with the Transfer of Property Act, 1882, the Registration Act, 1908 and applicable stamp law. This sample should not be used to create an immovable-property mortgage merely by changing the asset description.

Legal position

A guarantee is governed principally by Sections 126 to 147 of the Indian Contract Act, 1872. Section 126 identifies the creditor, principal debtor and surety; Section 127 addresses consideration for the guarantee; and Section 128 provides that the surety's liability is generally co-extensive with that of the principal debtor unless the contract states otherwise.

For statutory purposes under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), hypothecation is defined as a charge over movable property, existing or future, created without delivery of possession as security for financial assistance. The existence of that definition does not mean that every private lender can use SARFAESI enforcement remedies; those remedies depend on the Act's applicability and the status of the creditor and transaction.

The agreement should clearly identify the loan amount, interest rate, payment dates, consequences of default, the extent of the surety's undertaking and each movable asset offered as security. Stamp duty and execution requirements can vary by State and by the legal character of the instrument, so applicable State stamp law should be checked before signing.

On this page

LOAN AGREEMENT WITH SURETY AND HYPOTHECATION

This Loan Agreement is executed on this   day of  , 20  at  .

BETWEEN

1. Borrower / Principal Debtor: Mr./Ms.  , son/daughter/spouse of  , aged about   years, residing at  , hereinafter referred to as the "Borrower" or "Principal Debtor".

2. Surety / Guarantor: Mr./Ms.  , son/daughter/spouse of  , residing at  , hereinafter referred to as the "Surety" or "Guarantor".

3. Creditor / Lender: Mr./Ms./Entity  , having address at  , hereinafter referred to as the "Lender" or "Creditor".

The Borrower requested a loan of ₹  ("Loan"), repayable in   instalments together with interest at  % per annum, calculated on   basis.

The Surety has agreed to guarantee the Borrower's obligations on the terms stated below, and the Borrower has agreed to create a charge by way of hypothecation over the movable assets described in Annexure I.

NOW IT IS AGREED AS FOLLOWS

1. Advance of loan. The Lender advances ₹  to the Borrower by  . The Borrower acknowledges receipt of the Loan.

2. Repayment. The Borrower shall repay the Loan and contractual interest in accordance with the schedule below. Any prepayment terms, charges or rebate shall be:  .

Instalment Due date Principal (₹) Interest (₹) Total (₹)
1
2
3
4
5

3. Default. If the Borrower fails to pay an amount on its due date and does not cure the default within   days after written notice, the Lender may, subject to applicable law, declare the outstanding principal, accrued interest and legally recoverable charges immediately due and payable.

4. Guarantee. In consideration of the Lender advancing the Loan, the Surety guarantees due payment and performance by the Borrower. Subject to this Agreement and applicable law, the Surety's liability shall be co-extensive with that of the Borrower. The maximum guaranteed amount, if contractually limited, shall be ₹  plus such interest and recoverable costs as expressly agreed.

5. Changes affecting the Surety. No material variation of the Loan terms intended to bind the Surety should be made without the Surety's written consent where such consent is required by law. Nothing in this clause overrides the statutory rights or discharge provisions applicable to a surety under the Indian Contract Act, 1872.

HYPOTHECATION OF MOVABLE ASSETS

6. Creation of security. As continuing security for payment of the secured obligations, the Borrower creates in favour of the Lender a charge by way of hypothecation over the movable assets specifically described in Annexure I, together with permitted replacements, additions and proceeds to the extent legally capable of being charged.

7. Possession and use. Unless otherwise agreed in writing, possession of the hypothecated assets shall remain with the Borrower. The Borrower shall keep the assets in reasonable condition, use them lawfully and not sell, transfer, further charge or materially dispose of them except with the Lender's prior written consent or as expressly permitted by this Agreement.

8. Title and encumbrances. The Borrower represents that the assets listed in Annexure I belong to the Borrower and are free from undisclosed liens, charges and encumbrances. Existing encumbrances, if any, shall be fully disclosed in Annexure I.

9. Inspection and records. On reasonable prior notice, the Borrower shall permit inspection of the hypothecated assets and relevant ownership or insurance records, subject to applicable law and reasonable privacy and business safeguards.

10. Enforcement. On an uncured event of default, the Lender may exercise only those remedies that are available under the contract and applicable law. Nothing in this Agreement authorises forcible repossession, private sale or exercise of statutory enforcement powers where the Lender is not legally entitled to use them.

11. Costs. The Borrower shall pay reasonable and legally recoverable costs directly incurred for preservation or lawful enforcement of the security, to the extent permitted by applicable law and expressly recoverable under this Agreement.

12. Notices. Notices shall be sent to the addresses stated above by hand delivery, registered/speed post, recognised courier or electronic means where legally valid. A party shall promptly notify the others of any change of address or contact details.

13. Governing law and jurisdiction. This Agreement shall be governed by the laws of India. Subject to any mandatory jurisdiction or agreed valid arbitration clause, courts at   shall have jurisdiction.

14. Entire agreement. This document and its annexures record the agreed terms relating to the Loan, guarantee and hypothecation. Any amendment shall be in writing and signed by the parties whose rights or obligations are affected, subject to applicable law.

15. Execution. The parties state that they have read and understood this Agreement and execute it voluntarily on the date and at the place stated above.

BORROWER
Name:
Address:
SURETY
Name:
Address:
LENDER
Name:
Address:

Witnesses

1. Name:   Address:   Signature:  

2. Name:   Address:   Signature:  

Annexure I - Hypothecated Movable Assets

Asset Detailed description / identification Location Approx. value (₹) Existing encumbrance, if any

Relevant provisions of Indian law

Indian Contract Act, 1872 - Sections 126, 127 and 128

Section 126 defines a contract of guarantee and the expressions "surety", "principal debtor" and "creditor". A guarantee may be oral or written, although a written agreement is strongly preferable for a documented loan transaction.

Section 127 provides, in substance, that an act done or promise made for the benefit of the principal debtor may constitute sufficient consideration for the surety's guarantee.

Section 128 provides that the surety's liability is co-extensive with that of the principal debtor unless the contract provides otherwise. Sections 133 to 141 should also be considered because variations, release/discharge, giving time, creditor conduct and securities can affect a surety's rights and liabilities.

SARFAESI Act, 2002 - Section 2(1)(n)

The statutory definition of hypothecation concerns a charge in or upon movable property, existing or future, created without delivery of possession as security for financial assistance, and includes a floating charge and its crystallisation into a fixed charge.

Immovable property: mortgage is different

A mortgage of specific immovable property is governed by the Transfer of Property Act, 1882. A simple mortgage is not the same as hypothecation of movable assets. Depending on the type and value of the transaction, a mortgage instrument may require registration and attestation, and stamp duty must be determined under the law applicable in the relevant State or Union Territory.

Use note: This is a general drafting format, not a substitute for transaction-specific legal advice. Before execution, verify the parties' capacity, applicable lending/regulatory requirements, State stamp duty, registration requirements, interest restrictions and the correct method of creating and enforcing the intended security.