Agreements | By VakilNo1

Hire-Purchase Agreements
(I). Preliminary.- Hire-purchase agreements have acquired special importance in the
developing economy of the country. What does hire-purchase agreement connote ? By
a contract of hire-purchase is meant a contract which in addition to terms of hire,
provides that on payment of the rent for a certain period, or for a certain number of
times, or on the payment of a certain sum after such payment of rent, or at some time
during the hiring, the property in the goods hired shall (or may) pass from the owner to
the hirer. [Periars Law of Hire and Hire-Purchase 2nd Ed., p.2]. In effect hire-purchase
agreement is a contract of bailment and is governed by the provisions of Chapter IX of
the India Contract Act, 1872. This agreement is with an option to purchase though it is
sometimes used in a wider sense to include agreements where there is an irrevocable
agreement to buy in instalments are paid. A hire-purchase agreement thus creates a
bailment, but is a bailment plus an option to purchase. The transaction is composed of
the element of both the law of hire and sale, it would be clearly wrong to assimilate it to
a hypothecation of moveable property .[V. Dakshinamurthi Mudaliar v. General & Credit
Corporation (India) Ltd., AIR 1960 Mad. 328, 330].
The transaction partakes of a contract or bailment with an element of sale added to it. In
such an agreement, the owner of the goods lest them on hire for periodic payments by
the hirer upon an agreement that when a certain number of payments by the hirer upon
an agreement that when a certain number of payments have been completed, the
absolute property in the goods will pass to the hirer, but so that the hirer may return the
goods at any time without any obligation to pay any balance of rent accruing after
return; until the conditions have been fulfilled, the property remains with the owner. In
this agreement the hirer is not bound to purchase the thing hired, he has an option, he
may or may not purchase. But in either case, if there an obligation to buy, or an option
to buy, the goods delivered to the hirer by the owners on the terms that the hirer on
payment of a premium as also of a number of instalments shall enjoy the use of the
goods, which ultimately may become his property, the transaction amounts to one of
hire-purchaser, even though the title to the goods has remained with the owner and
shall not pass to the hirer until certain event has happened, namely that all the
stipulated instalments have been paid, or that the hirer has exercised his option to
finalise the purchase on payment of a sum nominal or otherwise. [Instalment Supply (P)
Ltd. v. Union of India, AIR 1962 SC 53, 58: Sundaram Finance Ltd. v. State of Kerala,
AIR 1966 SC 1178].
(ii) Hire-Purchase agreement not sale.-It has to be remembered that a hire-purchase
agreement is not a sale even if it contains a stipulation in the form of option of the hirer
to purchase the article hired. Even where the price for sale is to be pain in instalments
later, the property in the goods passes as soon as the sale is made. This follows from
the definition of sale in section 4 of the Sale of Goods Act, 1930 (as distinguished from
an agreement to sell) which requires that the seller transfers the property in the goods
to the buyer for price. The essence of sale is that the property is transferred from the
seller to the buyers for a price whether paid at once or paid later in instalments.

On the other hand , a hire-purchase agreement as its very name implies, has two
aspects. There is first an aspect of bailment of the goods subjected to the hire-purchase
agreement, and there is next an element of sale which fructifies when the option to
purchase, which is usually a term of hire-purchase agreements, is exercised by the
intending purchaser. Thus the intending purchaser is known as the hirer so long as the
option to purchase is not exercised, and the essence of the hire-purchase agreement
properly so called is that the property in the goods does not pass at the time of the
agreement but remains in the intending seller, and only passes later when the option is
exercised by the intending purchaser. The distinguished feature of a typical hirepurchase agreement is made but only passes when the option is finally exercised after
complying with all the terms of the agreement. [K.L. Johar & Co. vi Dy CTO, AIR 1955
SC 1082,1088].
The position of the owner of goods under a hire-purchase agreement is that of a person
who has made on irrevocable offer to sell but no obligation to buy. [Helby v. Mathews,
(1895) AC 471 ; Lee v. Butler, (1893) 2 Q.B. 318]. T essence of the hire-purchase
agreement is that the hirer is not bound to purchase . [Dalpat Rai v. Manohar Lal &
Sons, AIR 1974 Raj. 61]. A hire-purchase agreement has two elements ; (I) element of
bailment, and (ii) element of sale, in the sense that it contemplates an eventual sale.
The element of sale fructifies when the option is exercised by the intending purchaser
after fulfilling the terms of the agreement. When all the terms of the agreement are
satisfied and the option to purchase is exercised, a sale takes place of the goods which
till then had been hired. [K.L.Johar & Co. v. Dy. CTO, AIR 1965 SC 1082, 1090].
(iii) Duty of hirer.-According to section 151 of the Contract Act, 1872, the hirer is bound
to take as much care of the goods hired to him as a man of ordinary prudence would
under similar circumstances take of his own goods of the same bulk, quality and value
as the goods hired. Under Section 152 of the Contract Act, the hirer in the absence of
any special contract is not responsible for the loss, destruction or deterioration of the
thing hired, if he has taken such care. Accordingly, the parties may provide by
stipulation in that behalf that the hirer will be liable for any loss or damage to the goods
arising from any cause whatever.
(iv) Parties .-Normally , there are two parties to the hire-purchase agreement, viz., the
owner and the hirer. However, sometimes a financier, for example in case of motor
vehicles, is also brought in as a necessary party who purchase the vehicle from the
owner and lets the same on hire to the hirer on instalments and in such case, a
guarantor is also required to be supplied by the hirer to secure fulfilment of the
obligations imposed on the hirer under the agreement.
(v).- Clauses.-In drafting a hire-purchase agreement, care should be taken to draft the
following important clause in the agreement properly ;
(a) No obligation to buy.-The agreement of hire-purchase should not amount to an
agreement to buy but it should only give the hirer an option to purchase because where
a person under an agreement to buy obtains the possession of the goods and the hirer
under the hire-purchase agreement so obtains the possession, he would be able to give
little to any one who takes the goods on sale or pledge from him without notice of the
hire purchase agreement [See section 30 (2) of the Sales of Goods Act, 1930 and

thereby the hirer would be able to defeat the intention of the owner. Where, however,
the agreement is not an agreement to buy but it merely give an option to the hirer to buy
on the fulfillment of certain conditions, the hirer cannot gives a valid title to any one.
[Roopchand Jankidas v. National Bank, 46 Cal. 342].
(b) Property in goods not to pass.-A hire-purchase agreement must contain an express
stipulation that the property in the goods shall not pass of the hirer untill all instalments
have been paid.
Minimum payment clause.-A hire-purchase agreement may be terminated either by
the owner or hirer and the hirer may return the article to the owner after terminating the
agreement. But since the articles are subject to usual wear and tear on account of user,
it is usual to insert a minimum payment clause in the agreement in order to provide for
depreciation of the article taken under the hire-purchase agreement. Such a clause
provides that in the event of the agreement being determined by the owner or the hirer,
the hirer shall be liable to pay 50% of the total price after deduction of the instalments
already paid by the hirer.
(d) Seizure clause.-It is also usual to incorporate a clause in the hire-purchase
agreement empowering the owner to seize the article hired in the event of the hirer
committing a breach of any terms thereof, particularly the non-payment of monthly hire.
(vi) Claim of financier to prevail over the state.-Where under a hire-purchase
agreement, the financier, i.e., the owner lets on hire a motor vehicle to the hirer, clause
4 of the agreement states that, on default by the hirer, the owner can seize, remove and
retake possession of the vehicle and sue for all the instalments due and for damage for
breach of the agreement and for all the costs of retaking of possession of the said
vehicle and all costs occasioned by the hirers default. Clause 6 would show that, only
upon the hirer paying the entire amounts due under the agreement, the said vehicle
shall become the sole and absolute property of the hirer. In regard to the registration of
the vehicle shall become the sole and absolute property of the hirer. In regard to the
registration of the vehicle, thought it is in hirers name, clause 8 of the agreement states
that the owners-meaning the financing company agree to permit the hirer to have the
registration of the vehicle in his name provided that the hirer shall transfer the
registration in the name of the owners whenever required to do so by them and
especially when the hirer commits breach of any of the conditions of the agreement. In
the light of these clauses in the agreement and in the event of the financier seizing the
vehicle on default on the hirer in payment of the instalments, the claims of the financier
would prevail over that of the State. Where a person has got a prior secured right over
the property, the States claim will not prevail. In the Income-tax Act, there is no
substantive provision for superseding or overriding the claims or rights of a secured
creditor. Schedule II mentioned in section 222 of the I.T. Act, 1961, which contains
statutory rules in accordance with which the modes of recovery mentioned in that
section have to be exercised, relates to procedure only and does not deal with
substantive rights. [Sundaram Finance Ltd. v. RTO, (1979) 117 ITR 334 (Ker)].
(vii) Allowability of depreciation of hired article.-The Board has issued the following
circular containing instructions regarding depreciation allowance on plant and
machinery acquired under hire-purchase agreement.

The following instructions are issued for dealing with case in which as asset is being
acquired under or on what is known as hire-purchase agreement:(i) In every case of payment purporting to be for hire-purchase, production of the
agreement under which the payment is made should be insisted on.
(ii) Where the effect of an agreement is that the ownership of the subject is at once
transferred to the lessee( e.g. where the lessor obtains a right to sue for arrear of
instalments but no right to recovery of the asset) the transaction should be regarded as
one of purchase by instalments and no deduction in respect of hire should be made.
Depreciation should be allowed to the lessee on the entire purchase price as per the
agreement.
(iii) Where the terms of the agreement provide that the equipment shall eventually
become the property of the hirer or confer on the hirer an option to purchase the
equipment, the transaction should be regarded as one of hire-purchase. In such case
the periodical payments made by the hirer should not tax purposes be regarded as
made up of(a) consideration for hire, to be allowed as a deduction in the assessment ; and
(b) payment on account of purchase, to be treated as capital outlay, depreciation being
allowed to the lessee on the initial value (i.e., the amount for which the hired subject
would have been sold for cash at the date of the agreement).
The allowance to be made in respect of hire should be the difference between the
aggregate amount of the periodical payments under the agreement and the initial
value(as described above), the amount of this allowance being spread evenly over the
term of agreement. If, however, the agreement was terminated either by outright
purchase of the equipment or its return to the owner, the deduction should cease as
from the date of the termination.
An assessee claiming this deduction should be asked to furnish a certificate from the
vendor or other satisfactory evidence of the initial value (as described above). Where no
certificate or satisfactory evidence is forthcoming, the initial value should be arrived at
by computing the present value of the amount payable under the agreement at an
appropriate rate per centum. In doubtful case the fact should be reported to the Board.
[Circular No.9 of 1943, R. Dis. No. 27(4) IT/43, dated 23rd March, 1943].
(viii) Registration.-Registration of a hire-purchase agreement is not compulsory.
(ix) Stamp duty.-The hire-purchase agreement requires a stamp of only Re. 1 like an
ordinary agreement.

(x) Model Forms

ABSTRACT

In recent times the Non-Banking Finance company (NBFC s) have emerged as

substantial contributors to the Indian economic growth. In Indian economy today,
the financial intermediation is being conducted by a wide range of financial
institutions. They are showing spectacular performance both in terms of sourcing of
funds and deployment of funds in various area. This paper seeks to analyze the
various sources of funds opted for vehicle finance by financial institution.
The Banking and Non-Banking Financial institution plays an expanded role as to
accelerate the growth of financial market and to provide a wider choice to the
investors. The hire purchase finance adopts the automobile sector as a high way to
the road transport. One estimate put about 25 to 35 percent of all civilian
commercial vehicle sales was have been financed by hire purchase companies.
The companies are providing the corporate sector with alternative sources of funds
and to some extent have helped to reduce the pressure on the development of
financial institution which are also facing a resource crunch. Every successful
company should have adequate resources at its disposal and the RBI has also
issued various directions for the regulation of the deposit being raised by such
companies.

VEHICLE FINANCE THROUGH HIRE PURCHASE

To begin with there are basically three ways of funding an asset
1) Hypothecation
2) Leasing
3) Hire purchase
The similarity is that all have equated monthly installments.
In Hypothecation the title (ownership) according to the sale of goods act goes to the
purchaser, the asset is hypothecated to the finance company. The lien is cancelled at
the end of the contract.
In Leasing the finance company is the lessor and the user is lessee. The title or the
product cannot be sold or transferred to the lessee at the end of the contract.
In Hire purchase the vehicle is sold to the finance company who in turn hires it to the
user. After the end of the contract the product is sold to the user after collecting an
option money.
What is Hire purchase?
The term hire purchase refers to hiring of an asset for a period to time and at the end of
the period purchasing the same, the person taking the asset on hire purchase acquires
possession of the asset and the rights to use it.
What is Hypothecation?

In Hypothecation the contract has to be fulfilled in other words amount borrowed with
interest till date of closure/foreclosure will have to be paid whereas in hire purchase if
the hirer is not willing to possess the vehicle it can be surrendered by paying the hire
monies and charges till the date of surrender and walk away from the contract.
How does the hire purchase agreement work?
Any product from pin to a plane can be financed. The purchaser or the user first
identifies the product. He contacts the hire purchase company and after finalizing the
quantum of finance, period and the financial charges, he enters into an agreement with
finance company which is known to be the hire purchase agreement. The finance
company is called the owner or the hiree and the user is called the hirer, the guarantor
can be accepted as per the requirements. The user or the hirer then pays an initial
payment, which is called as the initial hire. Document charges as required in the
particular state where the transaction is put through and incidental charges if applicable.
One rupee is collected as option money in a hire purchase.
Why should this option money be collected though the financial institution would have
already collected the full value of the product? the reason is a sale without consideration
is null or void.
In hire purchase transactions can be done only on products where the invoice have
already suffered local sales tax in the particular state where the transaction is put
through. We cannot do hire purchase on CST billing. The reason is according to the
sale of goods act the product is purchased and the same is sold at the end of the
contract. If the product is purchased in a different state and sold in a different state it
becomes first sale in the state where it is being sold. First sale attracts local sales tax.
Local sales tax is not applicable for the second sale in that particular state.
Currently hire purchase has been taxed as such the customer are forced to shift from
hire purchase to loan transactions which other wise mean hypothecation.
Now the competition is driving us by the way of rate war as most of the other finance
companies, banks do only loan transactions as such there was a shift towards loan
transaction.
Rules of the owner in Hire purchase
* The owner has to deliver possession of goods to the hirer because the hiring does not
commenced until the goods has been delivered.
* The owner must have the title of goods let on hire at the time of delivering goods.
* The owner has to ensure that the goods are of mercantile quality and that they are
reasonably fit for the purpose for which they are used
Rules of Hirer

* The hirer is required to take a reasonable care of goods.

* The hirer must pay the sum stated in the contract within the specified period as
prescribed by the contract.
* The hirer should not pledge or sell the goods or use them for a purpose different from
that are stated in the contract.
* Finally the hirer is required to pay the owner against any loss or damage that results
from his negligence or misuse
Process involved in Hire purchase
* Pre finance stage:
The credit worthiness of the hirer is found based on which whether or not to strike a
deal is decided
* Release of finance stage:
* Documentation followed by
* Initial payment by hirer
* Insurance cover for vehicle
* Finance is released to dealer
* Whether the vehicle is free from encumbrance-checked by financial company
* Pre finance formalities:
Once the dealer deliver the vehicle the company must deliver it to customer and must
receive the invoice and delivery report, the absence of these documents will create
problems.
* Assessment of Hire purchase contract:
The Hire purchase agreement usually permits to assign his interest to a third party. An
assigner is technically liable only for the liabilities arising from date of assignment. In
case of transfer of vehicle from hirer to assignee the hire purchase company is required
to issue a non objection letter addressed to RTO.
* Documentation
Terms and condition to be followed by both the parties
* Delivery memo-given by hirer after taking the vehicle
Insurance declaration promise to pay insurance premium
Form 29 notice to transfer of ownership of a motor vehicle
Form 30 report of transfer of ownership of vehicle
Form 35 notice to termination of an agreement of hire purchase
Form61 income declaration