Hypothecation is a financial process where a borrower offers an asset as collateral to secure a loan while retaining ownership rights to that asset. In simpler terms, hypothecation meaning, types of hypothecation it allows individuals or entities to obtain a loan by pledging an asset without giving up their ownership of that asset.
In this article, you will find comprehensive information about hypothecation, including its legal definition, an example of how it works, key points related to hypothecation, the rights available to borrowers, and the responsibilities they must adhere to. We have also covered the concept of pledging for a more in-depth understanding. Scroll down to explore the complete details of “hypothecation meaning – Definition and Example in 2023.”
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Hypothecation
Hypothecatio. is a method of creating a charge against movable assets as security, somewhat akin to pledging. In this scenario, when an individual borrows a specific sum of money from a lender and wishes to offer a property as collateral security, while retaining possession of the property, it falls under the category of hypothecation.
Legal definition
The Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002 defines types of hypothecation. as follows:
“hypothecation meaning means a charge in or upon any movable property, existing in the future, created by a borrower in favor of a secured creditor, without the delivery of possession of the movable property to such creditor, as security for financial assistance. This includes a floating charge and the crystallization of such a charge into a fixed charge on movable property.”
In the event of the borrower defaulting on the loan, the lender holds a lien right that allows them to access the asset. If a default occurs, the lender must first take possession of the asset before proceeding further.
Example
When you buy a car using financing from certain banking companies or NBFCs, if you are unable to repay the loan on time, the lender has the right to take physical possession of the vehicle. They can then proceed to recover their dues by selling the hypothecated property.
Key Points to Remember
When a company hypothecates assets to secure a loan, it is essential to register this action under Section 125 of the Indian Companies Act with the Registrar of Companies. Without the lender’s consent, no individual can use the hypothecated assets for their personal gain, and the sale of such property cannot occur without the prior permission of the lender.
Borrower’s Entitlements
- Trade with the goods by obtaining prior consent of lender.
- Possession of the goods.
Borrower’s Responsibilities
- Safeguarding the goods against all potential risks.
- Providing periodic updates on the stocks held and their respective values.
- Maintaining the stock at agreed-upon levels.
Benefits of hypothecation
- It allows businesses and individuals to obtain loans without having to sell their assets.
- It provides lenders with security in case the borrower defaults on the loan.
- It is a flexible financing option that can be used for a variety of purposes.
Types of hypothecation
- Hypothecatio. of movable property: This includes assets such as goods, stock, and vehicles.
- Hypothecation of immovable property: This includes assets such as land and buildings.
- Hypothecation of receivables: This includes assets such as accounts receivable and invoices.
FAQ
Hypothecation is a legal process in which a borrower pledges movable assets as collateral to secure a loan, while retaining ownership of the assets. The borrower offers these assets as security to the lender.
In a Hypothecation arrangement, the borrower provides assets (e.g., vehicles, machinery, or inventory) as collateral to the lender without transferring possession. This allows the borrower to continue using the assets for business operations while using them as security for a loan.
The borrower retains possession and ownership of the hypothecated assets.
The lender has a charge or lien on the assets to secure the loan.
In case of default, the lender can take possession of the assets to recover the loan amount.
Yes, if a company is hypothecating assets to secure a loan, it should be registered under Section 125 of the Indian Companies Act with the Registrar of Companies.
