DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

Project Title: LAW RELATED TO HYPOTHECATION

Subject: - LAW OF BANKING

Name of the Faculty: - M.R BAYOLA KIRAN

Submitted by: -

B. Uday Reddy

2017128

Section-B

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 TABLE OF CONTENTS

CHAPTER I

1. ABSTRACT

2. WHAT IS HYPOTHECATION

3. DEFINITIONS

CHAPTER II

1. HYPOTHECATION AN EXTENDED PLEDGE

2. STATUS OF LENDER UNDER HYPOTHECATION

3. BANKS RIGHT TO SEIZE HYPOTHECATED ASSET

CHAPTER III

1. PRIORITY OF HYPOTHECATION CHARGE

2. HYPOTHECATEE RIGHT OF PRIVATE SALE

3. ILLEGAL USE OF HYPOTHECATED ASSET-BANKS STATUS

CHAPTER 1V

1. HYPOTHECATION AND WRIT REMEDY

2. HYPOTHECATION AND CRIMINAL BREACH OF TRUST

3. HYPOTHECATION AND NATURAL JUSTICE

CHAPTER V

1. CONCLUSSION

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 ABSTRACT

Hypothecation in legal sense providing something as collateral or security to any form of debt.
However, even though a collateral security is made on condition that the debtor usually does not
have to turn over physical custody of the collateral even though the lender is “hypothetically” in
control of the security.

The Indian Contract Act does not define the word hypothecation however, section 2 (n) of
Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest
(sarfaesi) ACT 2002 defines Hypothecation as:

“Hypothecation means a charge in or upon any movable property, existing in 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 of such charge into fixed charge on movable property”.

Hypothecation is to be registered under Section 125 of the Indian Companies Act, 1956 before
the Registrar of Companies by applying Form No. 8, when the hypothecator is a company.

Hypothecation is a process of generate a hold accountable for against the security of movable
assets, which is quite equivalent to pledge.

a) The assets/properties remain in the control of the borrower.

b) The assets/properties are not kept under the lock and key of the banker.

c) The borrower has to submit a stock statement at validate or prescribed intervals/period as per
terms of agreement to the bank.

d) Without Bank’s permission/sanction, no one can make use of the hypothecated assets for his
own benefit or sale by the borrower or any person connected thereto.

This word is used as principle in the civil law, “It is defined to be a right which a creditor has
over a thing belonging to another, and which consists in the power to cause it to be sold, in order
to be paid his claim out of the proceeds”.
There are two types of hypothecation, first one is pledge and pignus the another one is
denominated hypothecation. The pledge is the kind, of hypothecation which is contracted by the

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distribution of the debtor to the creditor of the thing hypothecated. Hypothecation, finally we will
called that which is contracted without delivery of the thing hypothecated1

Hypothecation is further split into general and special when the debtor hypothecates to his
creditor all his estate, assets and property, which he has, or may have, that this hypothecation is
to be said as general hypothecation; when the hypothecation is confined to a particular estate or
asset or property it is to be said as special hypothecation.

Hypothecations are also distinguished into conventional, legal, and tacit. Conventional
hypothecations are those which come about by way of the agreement of the parties 2. legal
hypothecation is that which has not been agreed upon by any agreement or contract, express or
implied; such as arises from the result of judgments and executions.

A tacit, which is also a legal hypothecation, is that which the law gives in some of the cases,
without the acceptance of the parties, to secure the creditor; such as The lien which the public
treasury has over the assets of public debtors3. The landlord has a lien on the goods in the house
leased, for an amount payable as his rent4. The builder has a lien, for his bill, on the house he has
built. The people have a lien on the property of the guardian for the balance of his account. he
has given the hypothecation of the tester's goods for the security of the inheritance.

In the common law, cases of hypothecation, in the harsh sense of the civil law, that is, of a
pledge of a chattel, without ownership by the pledgee, are only just to be found in cases of
security against a loan bonds and claims for seamen's wages, against ships are the nearest
approach to it; but these are liens and advantages 5 It seems that chattels not in alive, even so
they cannot be pledged, can be hypothecated, so that the lien will secure, as soon as the chattel
has been produced.

1
Bell's Com. 25, 5th ed.
2
Dig. 20, 1, 5.
3
Code, 8, 15, 1. 2d.
4
Dig. 20, 2, 2; Code, 8, 15, 7, 3d.
5
https://indiankanoon.org/search/?formInput=hypothecation

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 HYPOTHECATION

Hypothecation is a right which a creditor has over a thing belonging to another, and in order to
pay his claim in income, he has the power to sell it. There are two species of hypothecation, one
called pledge, pignus, and the other properly denominated hypothecation. Pledge is that type of
hypothecation which is contracted by the delivery by the debtor to the creditor of the thing
hypothecated. Hypothecation, properly so called, is that which is contracted without confinement
of the thing hypothecated6.

Hypothecation is a sort of collateral where the ownership or possession passes to the lender. In
banking, it processes an agreement to give a demand over goods, or over the documents of title
to goods, in circumstances which make it beyond the bounds of possibility 7to give the banker
possession. If this were within the bounds/realms of possibility the banker would take a pledge.
In acceptance of this fact the agreement generally undertakes to give a pledge when the goods or
documents become accessible8.

Hypothecation is the pledging of to some extent; somewhat as security without transfer of title or
possession. Hypothecation is the progress of pledging a thing as security for a debt or demand
without dividing with the possession. In modern times make an effort have been made to bring
"hypothecation" from the Civil Law as a normal term much the same as to "charge" the proper
English term. In this use of the word, to hypothecate property is to charge it with the payment of
a sum of money or the act of an obligation, giving the person in associated with favour it exists
neither the right to the possession of the property, nor the right to sell it, but was just; only the
right of realisation by judicial proceedings in case of fail to pay910

H.L. Hart gives the definitions of the hypothecation:

6
Bouvier’s Law Dictionary, 8th Edn, 1914, Vol 2, p.1480
7

8
Dictionary ofBanking by F.E.Perry & G.Klein, 3rd Edn, 1988, p.140 - 141
9

10
owitt’s Dictionary of English Law, 2nd Edn, 1977, Vol 1, p.93

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"Where property is charged with the amount of a debt, but neither ownership nor possession is
passed to the creditor, it is said to be hypothecated”11.

It is submitted that Hart’s definition is more precise, in that it gives them a meaning of its own,
not dependent on pledge or other type of security.

Salmond introduced the temperament of hypothecation when he begins that this security, which
he calls a "hen", is of its own nature a security for a debt and nothing more; it cannot remain
alive the debt. "It is just; only the shadow, so to spoke the, cast by the debt upon the property of
the debtor12.

If a customer is in possession/ownership (whether actual or constructive) of goods, he will

generally be free to pass that possession to his banker. appropriately, he will be able to create a
valid pledge of goods. In some situations, it is not possible for a banker to be given the actual or
constructive possession of goods, and in these cases that the chance of hypothecating them must
be considered. For example, “the goods may be in a part of the customer’s own warehouse which
cannot be sealed off in such a way as to enable the banker to become a pledgee”.

There is a risk in lending against hypothecation of goods is that since the lender does not gain the
actual or constructive possession of the goods, his estimate of control of them is very slight with
the decision of the borrower will in all probability have sufficient chance of dealing with them
fraudulently. The fact that the borrower may subsequently find himself in jail is but comfort to a
lender who has lost money. An innocent/ honest purchaser and a pledgee who obtain possession
of the hypothecated goods in good faith are unaffected by hypothecation.

Hypothecation implies that the possession and property in the goods continue to exist with the
borrower and only a rightful charge is created in favour of the banker. This is not a very
acceptable spot for the banker as he cannot have a favorable claim in the case of insolvency of
the borrower or in case of an attachment of goods by another creditor or if the goods are pledged
by the borrower to a 3rd party who has no knowledge of hypothecation to the banker.

The idea of hypothecation is not explained or narrated under the Indian Contract Act, 1872.
Hypothecation is not governed by any statute and by any law governing it directly or indirectly.

11
H.L. Hart, The Law of Banking, 4th Ed, 1931, Vol. 2, p 906
12
Salmond, Jurisprudence, 11th Edn, p.469

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It has been in mercantile usage since time antediluvian. Therefore, courts have to consider the
cases involving hypothecation purely on normal conditions of contract as per the terms of
hypothecation agreement.

The term "Hypothecation" is narrated and explain under the Section 3 of the Transfer of Property
Act, 1882 under "actionable claim". The explanation clause of Section 3 does not describe the
term "hypothecation".

The Hypothecation is an Extended Pledge

In Bank of Maharashtra v Official Liquidator13, the Mysore (now Karnataka) High Court
observed as follows:

“In the case of hypothecation or pledges of movable goods there is no doubt about the creditor’s
right to take possession, to retain possession and to sell the goods directly without the
intervention of court for the purpose of recovering his dues. The position in the regular pledge
completed by possession is undoubted and set out in the relevant sections of the Contract Act.
Hypothecation is only extended idea of pledge, the creditor permitting the debtor to retain
possession either on behalf of or in trust for himself”

In Sewakram v State Bank of India14, the Madhya pradesh High Court held that “the
hypothecation is an extended idea of pledge. Therefore, if the creditor has permitted the debtor to
retain possession the debtor retains that possession either on behalf of or in the trust for the
creditor. The hypothecatee is supposed to be in legal possession and custody of the property
though its physical possession is with the debtor”.

The Madhya Pradesh High Court in M/s. Tara Rerolling Mills & Five others v Punjab
National Bank15 held that As far as hypothecation is concerned, the possession remains with the
hypothecatee, but the hypothecation has the right to seize the property and sell it in order to
realize the debt obtained through hypothecation. Goods hypothetical to the bank fall under
section 176 of the Indian Contract Act, 1872. There is no difference between "hypothecation"
and "pledge" to apply section 176 of the Contract Act.

13
AIR 1969 Mysore 280
14
1990 (2) All India Banking Law Judgments 173
15
1998 (4) All India Banking Law Judgments 275

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What is the position of the Lender under the Hypothecation

In Union of India and another v Ct. Shenthilnathan and another 16, the Madras High Court
held that hypothecation of goods is an abstract idea of was not explicitly provided for in the law
of contracts, but is accepted in the law merchant by long usage and practice. Hypothecation is
not a pledge and there is no transfer of interest or property in the goods by the hypothecator to
the hypothecatee. It only creates a notional and equitable charge in favour of the hypothecatee
and the right of the hypothecatee is only to sue on the debt and proceed in execution against the
hypothecated goods, if they are available. The only right which the hypothecatee got under
hypothecation was a right to seek for the sale of the hypothecated goods after a money decree on
the debt. This Madras High Court decision classifies the hypothecatee as unsecured creditor.

In Bank of India v State of Madhya Pradesh 17, “the R.T.O. attached the bus (hypothecated to
the Bank) for passenger tax and motor vehicle tax under the Motor Vehicle Taxation Act. The
Madhya Pradesh High Court held that though the action taken by the RTO was legal, is because
of special lien and hypothecation the Bank being a secured creditor it has first charge and was
entitled to sell the bus and appropriate the sale proceeds towards its dues first”.

In what extent the Bank has the Right to Seize/confess the Hypothecated Asset/property

In Lambersingh Mavasingh v Punjab National Bank 18, the appellant filed the appeal before
the Gujarat High Court praying for time for payment of the amount of the loan availed for
purchase of the truck from the bank. The High Court rejected the prayer. The borrower submitted
that the bank had no right to recover the possession without recourse to the court. The question
before the Court was whether the clause in the hypothecation deed which enables the bank to
recover possession of the truck can be enforced or not. The High Court held that the loan is
secured by the hypothecation of truck and if such a clause for recapture of possession is provided
in the agreement, it is lawful. The High Court observed that the real course the borrower should
have adopted was to approach the bank to accept a reasonable amount in the light of the adverse
circumstances which he had to suffer. Instead of doing that, the borrower rushed to the court to
preempt the bank from resorting to a remedy which has been reserved to it under the agreement
and dismissed the appeal.
16
(1977) 2 MU 499
17
1989 (2) BCLR 78
18
Unreported Judgment - Appeal from order No. 165 of 1987 - Gujarat High Court

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What is the most important consideration of Hypothecation Charge

In Union of India and another v Ct. Shenthilnathan and another 19, the facts were that the
plaintiff was lending moneys to the third defendant from time to time on the basis of a deed
executed by the latter in August 1960 hypothecating his camera and certain other articles.

“In February 1963, the camera was attached and taken possession of by the District Revenue
Authorities in the course of proceedings against the third defendant for recovery of arrears of
Income Tax for the assessment year 1958 - 59. The plaintiff filed a claim petition for release of
the camera to him to enable him to preserve it for the realisation of the dues under the
hypothecation bond. Upon rejection of the petition by the Sub - ordinate Judge, Salem, the
plaintiff filed a suit against the Government of India (first defendant) and the Salem District
Collector (Second defendant) seeking a declaration that the camera was not liable to be attached
by the defendants in the tax recovery proceedings, in view of the plaintiffs prior charge over it.
The trial court gave judgment for the plaintiff and the Government appealed. The appeal was
allowed by the Madras High Court. The Court held that the right of the hypothecatee is that of a
bare money creditor with the ancillary right to proceed against the hypothecated goods after
obtaining a decree in a court of law. Thus, a hypothecation is a right in a creditor over a thing
belonging to another and which consists in the power in him to cause the goods to be sold in
order that his debt might be paid to him from the sale proceeds”.

The best that can be claimed by the plaintiff is an equitable charge. He could work out the
equitable charge only after obtaining a decree on the private debt. After obtaining the decree, he
should seek execution as against the goods under the hypothecation deed if available with the
hypothecator at or about the time when he seeks execution. The tax dues are public debt and
were not a debt which arose in the course of commercial dealings between the citizen and the
State. As between public debt payable to the State and a private debt payable to a citizen, the
former has priority. Under the circumstances, the State Authorities are capable of attaching the
camera for recovery of Income - Tax arrears and they have a priority in the sense that they are
entitled to recover the tax dues from out of the sale proceeds of the camera.

19
(1977) 2 MLJ 499

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In State of Andhra Pradesh and another v Andhra Bank Ltd and others 20, a bank granted
cash credit advance against hypothecation of stock in the godown of the Sugar Mill under the
open credit system. The Tahsildar attached the sugar in the godown hypothecated to the bank for
recovery of dues towards sugar cane purchase tax to the State under the provisions of the Andhra
Pradesh Sugarcane (Regulation and Purchase) Act, 1961. The stocks were sold and the amount
realised was deposited. The Bank filed a suit claiming that the Bank is entitled to preferential
first charge and lien based on the hypothecation of the stocks to recover the suit amount. The
State, being simple money creditors (on account of tax recovery) is entitled to any surplus that
may be left. The Andhra Pradesh High Court held that the concept of hypothecation is
recognised in the civil courts and it has become "law in force" in the country within the meaning
of Article 372 (1) of the Constitution of India as laid down by the Supreme Court in Builders
Supply Corporation v Union of India 21, The rules of common law relating to substantive rights
have been recognised, adopted and enforced by judicial decisions. That being so, to say that
secured creditor does not get any lien over the property hypothecated will amount to negativing
his right as a secured creditor. In view ofthese principles, the doctrine of"Priority ofCrown debts"
is not applicable as against the secured debt and therefore the bank’s (hypothecatee) claim has to
be satisfied first.

In Canara Bank v Asst. Commissioner (Commercial Taxes), Madras 22, the Commercial
Taxes Dept of Tamilnadu attached the movables of the borrower on account of the Sales Tax
dues. The movables were already hypothecated to the Bank for certain credit facilities availed by
the borrower. The Bank filed a writ of mandamus before the Madras High Court seeking a
direction to the Taxation Authorities not to sell the property as the bank has the first charge over
the property by virtue of the hypothecation in its favour. The High Court held that the
hypothecation in favour of the Bank is not a secured debt. Therefore the Bank’s charge as
hypothecatee could not be treated in preference to the government dues that can be recovered as
a prior charge ifthe goods hypothecated are available for being proceeded against and attached
for tax arrears.

In which circumstances the Hypothecatee had a Right of Private Sale

20
AIR 1988 AP 18
21
AIR 1965 SC 1061
22
1989 (1) All India Banking Law Judgments 258

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The Nagpur Judicial Commissioner’s Court in Nanhuji v Chimna23 held that “a non -
possessory hypothecation of movables is a valid contract and should be recognised and enforced
by the courts. The rights of the hypothecatee are entirely regulated by the terms of the contract
between the parties. On default in payment of the debt, he can compel delivery of property or
obtain a decree for sale of the property, if so stipulated in the contract. Ifthe property is simply
hypothecated without any stipulation as to the manner in which it is to be dealt with, the only
remedy open to the creditor is to obtain a money decree declaring his lien on the property and his
right to sell”.

In Re S.Y.C. W & S. Mills24, the Mysore High Court (now Karnataka High Court) held that in
hypothecation or pledge of movables, there is no doubt about the creditor’s right to take
possession, to retain possession and to sell the goods directly without the intervention of court
for the purpose of recovering his dues. Hypothecation is only extended idea of pledge, the
creditor permitting the debtor to retain possession either on behalf of or in trust for himself (the
creditor). Hence so far as movables actually covered by the hypothecation deeds are concerned,
there can be no doubt that the bank is entitled to retain possession and also to exercise the right
of private sale.

In Syndicate Bank v Official Liquidator25, the Delhi High Court held “that hypothecation
creates a special property in the goods in favour of the hypothecatee. In the case of
hypothecation, possession remains with the hypothecator but the hypothecatee has the right to
take possession of the hypothecated property and to sell it for the realisation of the debt secured
by hypothecation. It is open to the bank to take possession of the hypothecated property on its
own or through the court. It is also open to the bank to enforce the security by the suit”.

In Union of India v Ct. Shenthilnathan 26, the Madras High Court held that hypotehcation
creates only a notional and an equitable charge in favour of the hypothecatee. The right ofthe
hypothecates is only to sue on the debt and proceed in execution against the hypothecated goods,
if they are available.

23
(1911) 10 Indian Cases 869
24
AIR 1969 Mysore 280
25
AIR 1985 Delhi 256
26
(1977) 2 MLJ 499

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The Andhra Pradesh High Court in State Bank of India v S.B. Shah Ali (Died) and others 27
held that where there is a mere charge in hypothecation agreement, the hypothecatee has to
approach the court and seek intervention of the court for obtaining money decree and for
bringing the hypothecated goods for sale through the court. When there is any specific clause in
the hypothecation agreement empowering the hypothecatee to take possession of the goods and
to sell the same, in the event of default in payment, as per the said terms the hypothecatee can
proceed ahead without intervention of the court. It cannot be said that the hypothecatee has to
approach the court even though the deed provides for taking possession in case of default of the
hypothecator. If there is any violation of the terms of the deed it will not bar the hypothecator to
approach the court and seek proper relief.

In Canara Bank v Official Assignee, Madras28 before the Supreme Court the facts were that
the appellant bank in an appeal before the Madras High Court prayed that it should be permitted,
as a secured creditor in insolvency proceedings, to sell the hypothecated goods in the possession
of the insolvent for recovery of its dues, by virtue of the proviso to Section 17 of the Presidency
Towns Insolvency Act, 1909, read with Section 52 (2) (a) of the Act. The High Court disallowed
the claim. The bank appealed to the Supreme Court contending that the insolvents ofthe goods
hypothecated to the appellant bank were in possession of such goods at the commencement of
the bankruptcy as its true owners, and had not been in possession of the goods belonging to a
third party by the consent of such party, that the hypothecated goods were identifiable and
therefore covered by clause (a) of sub - section (2) of Section 52 of the Act and not by clause (c)
and that omission by the bank to give notice to the debtor did not disentitle the bank to proceed
against the hypothecated goods.

The Supreme Court held that in as much as the hypothecated goods are clearly identifiable, the
justice of the case required that the appellant bank ought to be allowed to recover its dues by sale
of the hypothecated goods.

It is submitted that the judicial decisions about hypothecatee’s right to sell the goods on default
are variegated due to absence of a separate legislation on hypothecation in India.

Unlawful Use of Hypothecated Asset and what is the status of Bank

27
1994 (3) ALT 332 (D.B)
28
1997 I AD (SC)

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Bank of Baroda v Sitaram and others29

A loan was given by the bank for purchase of a truck by way of said truck was hypothecated to
the bank. On any fail in making repayment of a loan, the bank brought a suit against the
borrowers for recovery of the loan. During the trial of the case, the above said truck was seized
by the Range Forest Officer for violation of forest laws. An application was filled by the bank for
attachment of the truck. the court accept plea and orders to attachment before judgment was
granted. The Forest Department passed orders for seizure of the vehicle. Apprehending sale of
the.vehicle by the Forest Department, the Bank again applied for an order against sale or disposal
of the truck. This application was dismissed.

Against that order, the Bank filed an appeal before the Madhya Pradesh High Court. The High
Court in the case held that hypothecation of the truck does not mean that the owner of the truck
or the person responsible for its running is discharge of the liabilities under any other law. If the
truck is utilized for transporting the contraband and is rendered liable for confiscation, it is no
defense that it was hypothecated to a nationalized bank. The Forest Department officials had
nothing to do with the transaction the Bank had with the borrowers. If the truck is found to be
liable to be confiscated under law, the officers of the Forest Department are within their rights to
confiscate the same. In such a case, the bank would lose its security but this cannot be helped.

The Hypothecation and Remedy of writ

The Madras High Court decided a case titled Sukra Shoe Fabric v United Commercial
Bank30in respect of the hypothecator’s (borrower) right to file a writ before the High Court
questioning the hypotheeatee - bank’s act in locking and sealing the factory premises containing
the hypothecated machinery.

The petitioner - firm was granted certain credit facilities by the respondent bank against
hypothecation of machinery. On default by the borrower in making repayment within the
stipulated time, the officers of the bank along with an Inspector of Police entered the factory
premises, locked and sealed the premises after taking an inventory of the machinery. A writ
petition was filed by the petitioner - borrower for the issue of writ of mandamus to direct the
bank to remove the lock and seal applied to the factory premises and deliver the possession of
29
(1995) 82 Comp. Cas. 435
30
(1992) 73 Comp. Cas. 179

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the same back to the petitioner. The petitioner contended that the bank had no right either in law
or under the hypothecation agreement to enter the premises and lock and seal the same.

The bank contended that it exercised the powers reserved under clause 4 (j) of the Hypothecation
Deed and seized the goods by means of locking and sealing the premises. The Police Inspector,
though present, did not enter the premises. The bank raised a preliminary objection that writ
petition under Article 226 of the Constitution of India is not maintainable since the rights of the
parties are governed by a non - statutory contract and the remedy of the borrower is Only to file a
civil suit.

The High Court held that the hypothesis was a nationalized bank and an authority under Article
12 of the Constitution of India. It is a public duty for its customers as well as its borrowers.

It has been held by the Supreme Court in Shri Anadi Mukta Satguru Shree Muktajee
Vandasjiswami Suvama Jayanti Mahotsav Smarak Trust v V.R. Rudani 31 that mandamus
can issue against any person provided that the court is satisfied that such a person owes a duty to
the public at large. The bank falls within this category. The following passage of the said
Supreme Court Judgment is relevant here:

Here again we may point out that mandamus cannot be denied on the ground that the duty to be
enforced is not imposed by the statute. Commenting on the development of this law, Professor de
Smith states: To be enforceable by mandamus a public duty does not necessarily have to be one
imposed by statute. It may be sufficient to have been imposed by Charter, Common Law,
Custom or even Contract32.

We share this view. Legal control over the rapidly expanding maze of bodies that affect people’s
rights should not be put in the water - tight compartments. It should be simple enough to meet
the needs of variable situations. Mandamus is a very comprehensive remedy that should be
readily available "where injustice is found". According to Article 226 technology should not
come in such a way as to provide that relief. We, therefore, dismiss the dispute sought by the
appellants over the management capacity of the writ petition.

31
AIR 1989 SC 1607
32
de Smith, Judicial Review of Administrative Action, 4th Edn, p.540

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The High Court rejected the first argument that the writ petition could not be pursued. Another
question is, does the respondent - the bank have the legal authority to enter, lock and seal the
premises. The hypothetical agreement does not allow the lender to enter the premises, lock and
seal without resorting to law.

The High Court further observed as follows on the bank’s act in locking and sealing the factory
premises:

When the factory was actually operating, the defendant - along with the bank and the police had
a gate - was supposed to knock down the factory and seal the premises. If the nationalized bank
can take the law into its own hands, how will the courts criticize others and find fault? The rights
granted to the creditor under the hypothetical agreement can only be exercised by consulting the
court, and not by taking the law into his own hands. If we find such power in a nationalized
bank, every other state financial institution and government agency would dare to follow the
same policy. It’s the equivalent of bidding good - saying goodbye to the rule of law. Adequate
solutions are available to the lender - the bank. Despite the risks of leaking borrower assets or
undermining securities, it is not uncommon for civil courts to issue temporary attachment orders
as well as appoint commissioners to protect the interests of eligible creditors.

By what law are the police in cahoots with the bank officials when they intend to enforce a term
of hypothesis deed? People often complain that the police do not support them in emergencies
that threaten the life, liberty and property of a citizen. However, it is strange that the police are
with the respondent - the bank officials - when they are accused of enforcing a term of
hypothesis deed. The action stated by the respondent bank was completely unofficial and
arbitrary

The Madras High Court allowed the writ petition and directed the respondent bank to remove the
lock and seal applied to the petitioner's factory and to deliver the factory premises along with the
goods and articles.

Law related to Hypothecation in cases of Criminal Breach of Trust

The Supreme Court in Central Bureau of Investigation v Duncan Agro Industries Ltd 33 held
that when the debtor hypothecates his goods to the bank by way of security, there is no
33
(1996) 87 Comp. Cas. 849

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entrustment of the goods by the debtor to the banker. If there is any contravention of the terms of
the contract it will be a mere breach of contract making the debtor liable for damages under the
civil law. There will be no occasion for committing any offence of criminal breach of trust by the
borrower in the case of hypothecation.

The observations of the Supreme Court are as follows:

The expression "property" or any sovereignty over property was used in a broad sense in section
405 of the Indian Penal Code in 1860. Assigned for a specific purpose and honestly disposed of
in violation of the law. .It has wide and varied implications in different cases.However, the
ownership or beneficial interest in the ownership of the property for which any crime is alleged
to be committed must be in a person other than the accused and in the account of the next person,
or in some way for his benefit.Indian Panel Code, 1860 The expression "trust" in section 405 is
used to refer to a variety of relationships, such as comprehensive expression and trustee, a
beneficiary, a bailiff and a bailiff, a master and a servant, a pledge and a pledge.When some
goods are hypothesized by one person to another, the ownership of the goods is still
hypothesized Will remain with the person who did it. The property of the fiduciary offender must
be the property of a person other than the accused or its beneficial interest or ownership must be
in another person and the offender must have confidence in such other property for the benefit of
the person or himself. In the case of a pledge, the article pledged belongs to another person, but
the same pledge keeps the trust. In the immediate case, the floating charge on the goods is
charged by the security to cover the credit facility. In such a case the offense of breach of trust
for the disposal of items covering security against the credit facility will not occur.

In Punjab National Bank v Anand Kumar34, , the facts were that the respondents have opened
an account with the petitioner - bank. Cash credit facility was given to them. The respondents
have hypothecated goods with petitioner - bank. On 26.9.1983 manager of the petitioner - bank
inspected the factory premises of the respondents and the bank godown situated therein and
found that goods hypothecated with the bank had been removed by the respondents to the extent
of 3760 quintals and the goods placed there were found short to a large extent. The petitioner’s
Manager, therefore, made a complaint to the S.H.O. Hissar for registration of a case. The case
was registered against the respondents. After investigation, the police concluded that there was

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2000 ISJ (Banking) 385

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no evidence that the respondents have committed any offence with regard to the pledged goods.
However, the police found the respondents to be guilty of the offences punishable under sections
420 (cheating and dishonestly inducing delivery of property) and 406 (punishment for criminal
breach of trust) of the Indian Panel Code and the police put up a challan against them. Learned
Chief Judicial Magistrate found that offence under sections 420 / 406 of the Indian Penal Code
was not made out.

Learned Chief Judicial Magistrate, for the misuse of hypothetical goods, the transfer of goods
from one person to another is an important matter and the ownership of the goods remains with
the original owner and the possession only changes hands and in the present case there is no
assignment.

Evidence as to whether the Punjab and Haryana High Court has handed over. Defendants
pledged these items with petitioner-bank, although possession was kept in their godown. So that
is not to say that Prima Face is not handing over. In addition, the Chief Judicial Magistrate was
able to examine whether the case falls under Section 379 (Punishment for theft) of the Indian
Penal Code. The petitioner alleges that the goods were hypothesized and seized and kept in the
godown with the defendants. With this position, the opinion taken by the learned Chief Judicial
Magistrate cannot be accepted.

The High Court allowed the Criminal Revision setting aside the order of discharge of the
respondents. The case was remanded to the learned Chief Judicial Magistrate for proceeding with
the case in accordance with law.

It has been submitted that this case represents a change in judicial thinking until the hypothetical
items are illegally removed. A criminal breach of trust has so far been thought of. The turn of the
crime of theft in the case of illegal removal of hypothetical goods is welcomed in banking circles
as it represents a warning note to criminals.

Law of Hypothecation and the Natural Justice

In Sri Rama Machinery Corpn. Ltd v Standard Chartered Bank, Madras 35 before the
Madras High Court, The facts are that there is an agreement between the bank and the customer
for the loan progress for the purchase of the vehicle. The borrower defaulted. The bank seized
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AIR 1999 Madras 137

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the vehicle as per the terms of the agreement between the parties. The issue before the High
Court is whether prior notice of possession needs to be given to the borrower by the bank in
accordance with the principles of natural justice. The High Court held that if prior notice is given
before the vehicle is seized, the vehicle will naturally be removed from the jurisdiction of the
state and the intent to use the force of restraint will also be removed. The observations of the
Madras High Court in the case are as follows:

"In Penumbra of Natural Justice by Tapash Gan Choudhaiy, the circumstances under which
principles of natural justice could be excluded are also stated, which read thus, it is well
established both in England and in India that where a right to a prior notice and an opportunity to
be heard before an order is passed would obstruct the taking of prompt action, such a right can be
excluded. Thus, the rule may be discarded in an emergent situation where immediate action
brooks no delay to prevent some imminent danger or injury or hazard to paramount public
interests".

In the case between Union of India v Tulsiram Patel36, it is held thus, "Not only, therefore, can
the principles of natural justice be modified but in exceptional cases, they can even be excluded.
There are well - defined exceptions to the "nemo judex in causa sua" rule as also to the "audi
alterum partem" rule. The "nemo judex in cause sua" rule is subject to the doctrine of necessity.
So far as the "audi alterum partem" rule is concerned both in England and in India, it is well
established that where a right to a prior notice and an opportunity to be heard before an order is
passed would obstruct the taking of prompt action, such a right can be excluded. This right can
also be excluded where the nature of the action to be taken, its object and purpose and the
scheme of the relevant statutory provisions warrant its exclusion; nor can the "audi alterum
partem" rule be invoked if importing it would have the effect of paralysing the administrative
process or where the need for promptitude or the urgency of taking action so demands, as
pointed out in Menaka Gandhi Case37 “The Madras High court further observed that it is clear
that there is no necessity to issue notice even in the case ofcertain administrative action. Ifthis is
the position even in the case of administrative orders, in the case of contracts it can be said that
there is no need for prior notice. If prior notice is issued before seizure of the vehicle, naturally

36
1985 (3) SCG 398 in para 101; AIR 1985 SC 1416
37
Menaka Gandhi v Union of India AIR 1978 SC 597 at p.681

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the vehicle will be taken away from the jurisdiction of the State and the very purpose of
exercising the power ofseizure will be taken away”.

Conclusion

The right to leave bankers however is subject to a number of restrictions. First, the right to set to
work automatically without any contractual obligation between the parties applies mostly to
current accounts. However, if this right of departure is to be applied to accounts other than
existing ones, in such a case, the customer who holds the relevant account must be notified.
Second, it has already been stated that the right of departure is more applicable to existing
accounts, therefore, if the bank wishes to merge the same customer's loan account or other
deposit accounts, in such a situation, the right to depart operation depends on the terms of the
contract between the bank and the customer and the terms and conditions of the bankers' right of
departure Maintained by. A similar agreement was reached between the bank and its customer in
the case of Re Euro Travel, Dempsey v Bank of Ireland. The standard form of the contract
containing the terms of exercise of the right of departure is as follows.

Furthermore, without prior notice you have the right to satisfy such obligations at your own
discretion or to offset and apply for any offense or any portion thereof from time to time and we
agree that such offset is a good and valid solution. Such funds may be applied for without the
need for additional approval or authorization from us.

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