It is another method of creating a charge over the movable assets. Hypothecation implies that the possession and ownership (property) in the goods remain with the borrower (hypothecator) and only an equitable charge is created in favour of the lender (hypothecatee). Thus, under hypothecation neither ownership nor possession of goods is transferred to the lender (a stock-list is, however, supplied periodically by the borrower) but the borrower binds himself, under an agreement, to give the possession of the goods to the lender on demand. On such a demand being made by the lender, the charge of hypothecation is converted into a pledge and the hypothecatee enjoys the powers and rights of a pledgee.
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It will be noticed that hypothecation is a convenient device to create a charge over movable goods like raw materials, or goods in progress which are to be processed into finished products and transfer of possession of which will impede the company’s business. As possession and ownership of the hypothecated goods are always with the hypothecator, a wide door is open to the owner to deal with the goods without reference to the hypothecatee. Obviously, the lender runs great risk under this method and, therefore, advances are made against hypothecation only to companies of high reputation and sound financial standing. Such a charge has to be registered with the Registrar of Companies within a period of 30 days from its creation, and this fact servers a notice to the public of the lender’s interest in the goods.