The lender’s right to the term “Hypothecation of assets” is not defined anywhere in the statute. Some courts have even compared hypothecation to the mortgage of movables. Hypothecation of assets is defined in SARFAESI ordinance 2002 as under;
“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 crystallization such charge into fixed charge on movable property”.
The letter of hypothecation or deed hypothecation is used for creating charge against the security of movable assets. Though the charge created by way of hypothecation in favour of the lender, the asset hypothecated remains under the possession of the borrower and he is free to deal with it. The securities commonly covered under hypothecation deed are goods, book debts machinery, vehicles, furniture, and crops. Though crops are immovable (fixed to earth) security, they are hypothecated to lenders because they can be easily removed and sold. [Click ‘Hypothecation’ to know more on hypothecation of property].
Mortgage: The transfer of an interest in a specific immovable property to secure the money advanced or to be advanced or performing a promise which may give rise to the financial liability is called mortgage of immovable property. For example, if the mortgagor states that “all of my property” in the mortgage deeds then it is not a mortgage as it is not specific. The securities commonly covered under mortgage are immovable properties like Commercial/Industrial Property, non-agricultural land and residential house/flat in the name of borrowers/guarantors. Click ‘Mortgages’ to know different kinds of mortgages
The key difference between hypothecation and mortgage:
Creation of Charge:
Hypothecation form of charge is used to create a charge in or upon any movable property, existing or future.
Mortgage form of charge is on the specific immovable property identifiable and ascertained when charge is created.
Right to deal with the property:
In hypothecation, the debtors (borrower) have the right to sell or dispose-off the hypothecated current assets in the ordinary course of business without prior permission of the lender. Also there is no obligation to pay off the dues first to dispose-off such goods until the floating charge is crystalized into fixed charge. However, the above rule is not applicable to hypothecation of specific assets like motor vehicle or small machinery etc. The borrower cannot sell or disposed-off such items without discharging the liability or prior approval of the lender.
In case of mortgaged assets, borrower has no right to deal with the property. If the borrower wants to sell, transfer or dispose-off the assets, he has to either discharge all the dues or obtain prior approval of the lender for the same.