Article

Registration of hypothecation of motor vehicles

under Companies Act, 2013

Vijaya Agarwala & Ankita Banerjee

vijaya@vinodkothari.com

May 06, 2014

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 Registration of hypothecation of motor vehicle under Companies Act,
2013

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Introduction
Hypothecation is a method of creation of security of movable property. However,
the goods so hypothecated continue to be in the possession of the owner, that is the
borrower. Hence, it is a way of creating security without delivery of title or
possession and as in the literal sense of term, the lender is ‘hypothetically’ in control
of the property.

The only point of distinction between pledge and hypothecation is that in case of
pledge, the beneficial possession of goods is transferred to the lender whereas in
hypothecation, possession remains with the owner. Hypothecation is merely an
extended form of pledge which allows the lender to retain possession in trust for
himself. Though there is no doubt that the creditor’s right to take possession or sell
the goods directly for the purpose of recovering his dues continues to remain in
either case.

The law then and now

The erstwhile definition of charge under Act, 1956 defined charge as “for the purpose of
this Section charge includes mortgage1”

With the dawn of Act, 2013, the definition of charge now stands amended as “charge
means an interest or lien created on the property or assets of a company or any of its
undertakings or both as security and includes a mortgage”

Section 125 of the Act, 1956 dealing with registration of charges, clearly and
explicitly listed out charges that are required to be filed with the Registrar of
Companies (‘RoC’) for the purpose of safeguarding the interest of the lender and to
prevent the Company from creating several charges against a property. Section
125(4) of Companies Act, 1956 rendered -

“This section applies to the following charges:

(a) a charge for the purpose of securing any issue of debentures ;
(b) a charge on uncalled share capital of the company ;
(c) a charge on any immovable property, wherever situate, or any interest therein ;
(d) a charge on any book debts of the company ;
(e) a charge, not being a pledge, on any movable property of the company ;
(f) a floating charge on the undertaking or any property of the company including stock-
in-trade ;
1
Charge can be created for both movable and immovable property whereas mortgage can only be created
on immovable property.
 Registration of hypothecation of motor vehicle under Companies Act,
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Article
(g) a charge on calls made but not paid ;
(h) a charge on a ship or any share in a ship ;
(i) a charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on
a copyright or a licence under a copyright.

Corresponding Section 77 of chapter VI of Companies Act 2013, reads as -

“ It shall be the duty of every company creating a charge within or outside India, on its
property or assets or any of its undertakings, whether tangible or otherwise, and situated
in or outside India, to register the particulars of the charge signed by the company and
the charge-holder together with the instruments, if any, creating such charge in such
form, on payment of such fees and in such manner as may be prescribed(in Form CHG
12), with the Registrar within thirty days of its creation.”

With the notification of Section 77 Companies Act, 2013, section 125 of the 1956,
Act, however, now stands repealed. Section 77(1) of the Act has simply done away
with the list provided in the principal Act, and requires registration of each and
every charge created on the assets of the Company whether tangible or intangible.

Also, e-Form CHG. 13 contains an option of registering hypothecation of motor

vehicle in Field 11(a). The principal Act, was though silent on registration of
hypothecation, however, in the matter of Sree Meenakshi Mills Ltd. And Anr. vs
Registrar Of Companies, Madras4 it was held by the RoC that the non registration of
charge did not render it void against the liquidator as the hypothecation of the hire
purchase agreements created a charge on the book debts of the company, and that
it was immaterial that the hypothecation bond was intended to secure to the
defendants other rights besides the book debts.

Several rulings in the past seem to have consensus on hypothecation being an

extended form of pledge and creates a charge on the property/ assets of the
borrower. Below we, discuss the inference drawn from such rulings:

2
Rule No. 3, registration of creation or modification of charges
3
Application for registration of creation/modification of charge
4
Read the entire text of the ruling at: http://www.indiankanoon.org/doc/1034491/
 Registration of hypothecation of motor vehicle under Companies Act,
2013

Article
Case 1:
Madras High Court
Rehaboth Traders By Partner R. vs Canara Bank And Ors. on 22 August, 1997
The appellant Rehaboth Traders, a partnership firm, having failed to discharge its
liability, was adjudged as insolvent. The respondent Canara Bank had advanced loan
to the appellant against hypothecation of goods.
The Hon’ble High Court stated that t is true that the word 'hypothecation' has not
been expressly defined in the law of contracts. But, the scope of the word
'hypothecation' has been explained in catena of judgments of the Hon’ble Apex Court,
as well as various High Courts in the country. It is also true that there is no transfer of
interest of property in the goods by the hypothecator to the hypothecatee.

It was held by the apex court that, in case of hypothecation of goods, the Bank shall
be treated as a secured creditor and shall have preferential right of recovery in
relation to other creditors and that hypothecation is an extended form of pledge.

Case 2:
Delhi High Court
Ideal Bank Ltd. (In Liquidation) vs Pride Of India Pictures Ltd. on 25 January,
19835

The company borrowed large sums of money from one Adarsh Films Ltd.,
respondent No. 2, for short "the creditor", against the mortgage of its assets,
including apparently some of the assets which had already been pledged with the
bank. The arrangement visualised that the creditor would run two cinemas of the
company and would get possession of the cinemas, and other assets for a period of
four years from the date of the mortgage or for such longer period as may be
necessary to recover the outstandings.

It was held by the Hon’ble Court that mortgage of movable property is a recognized
form of hypothecation and confers a good title upon the persons in whose favour it
is made. It is recognized that such transaction is not only valid but is customary
throughout the country and even resorted to by banks with a view to enable the
pledges to carry on business with the pledged property. Hence, the property of the
company was charged/ pledged or hypothecated.

5
http://www.indiankanoon.org/doc/1088376/
 Registration of hypothecation of motor vehicle under Companies Act,
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What can be derived looking at precedents in this regard is that although it is a
settled understanding that hypothecation and pledge are not synonyms and mean
two different concepts, yet the general practice is to treat hypothecation as a subset
of pledge and thereby companies have feigned the importance of also registering
hypothecation. The Act, 2013 however seem to indicate otherwise.

Conclusion:

Hence, this development in the area of corporate governance is sure to vex the
corporate world, burdening them with too many filing requirements, failing which
needless to say, the Act has dreadful penal6 provisions inlaid for the officers in
default. The law as it stands now actually requires registration of every charge. So
companies will have to register the hypothecation of any movable property be it any
motor vehicle or car for the business use of its officers.

Read our related article on: Charges – Reframed- pledges require filing

http://india-
financing.com/index.php/component/content/article.html?layout=edit&id=3
13

For other Company Law articles, visit:

https://india-financing.com/component/content/article/281.html

6
Company to be punishable with fine of Rs. 1 lac to 10 lacs. Officer in default- fine of Rs. 25,000 to 1 lac
or imprisonment of 6 months or both.