A mortgage is a charge on immovable property created under Section 58 of the Transfer of Property Act 1882. Hypothecation is a charge on movable property — stock, machinery, vehicles, book debts — created by agreement, with the borrower keeping possession. Both secure a loan, but they differ in what is charged, how the charge is recorded, and what the lender may do on default. Banks choose between them according to the nature of the security, not the size of the loan.
When this matters
The distinction decides how a default is enforced and what the borrower can still do. A home or business loan against land or a building is a mortgage. A cash credit or working capital facility against stock and receivables is a hypothecation. Many borrowers discover which applies only when a recovery notice arrives, so it is worth knowing from the outset.
Mortgage of immovable property
Section 58 of the Transfer of Property Act 1882 lists the forms of mortgage:
- Simple mortgage — the mortgagor binds himself to repay, and the lender may sell the property through the court on default, without possession passing.
- Mortgage by conditional sale — the sale becomes absolute on default, and the transaction is treated as a mortgage until then.
- Usufructuary mortgage — the lender takes possession and takes the rents and profits towards the debt.
- English mortgage — the mortgagor transfers the property absolutely, with a covenant to repay and the right to be reconveyed on payment.
- Mortgage by deposit of title deeds — also called an equitable mortgage, created by depositing the title deeds with the lender with intent to create a security, common in bank lending.
A mortgage other than an equitable mortgage must be in writing and registered where the value reaches the threshold the Act sets, under Section 59 of the Transfer of Property Act 1882. The borrower's core right is the right of redemption under Section 60, which is the right to get the property back on repayment. A suit on a mortgage is governed by Order XXXIV of the Code of Civil Procedure 1908.
Hypothecation of movable property
Hypothecation is defined in Section 2(1)(n) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 — the SARFAESI Act. The borrower remains in possession and uses the goods, while the lender holds a charge over them. The practical consequences:
- The charge lives in the hypothecation agreement and in the loan documents, not in a registered deed.
- Where the borrower is a company, the charge must be registered with the Registrar of Companies under Section 77 of the Companies Act 2013 within the time the section allows, or it is not binding on the liquidator and creditors of the company.
- Security interests are also recorded with the Central Registry, so a lender's charge over movables can be searched.
- Because possession stays with the borrower, the lender's real power on default is to take possession of the charged movables and sell them.
What each gives the lender on default
On a mortgage, the lender can sue on the mortgage under Order XXXIV of the Code of Civil Procedure and have the property sold, or, as a secured creditor, use the SARFAESI route. On a hypothecation, the lender takes possession of the stock or equipment and sells it. Where the loan is a term loan to a company and the security is mixed, the lender usually holds both — a mortgage on the land and a hypothecation on the plant and stock.
SARFAESI in outline
A secured creditor, without going to court, may enforce security under Section 13 of the SARFAESI Act 2002. The lender serves a demand notice, the borrower gets time to clear the dues, and the borrower may make a representation which the lender must consider under Section 13(3A). If the dues are not cleared, the lender may take the measures set out in Section 13(4), including taking possession and selling the asset. The borrower's right to redeem continues until the sale is completed. Where the borrower resists, the lender may seek the District Magistrate's assistance under Section 14, and the borrower may appeal to the Debts Recovery Tribunal under Section 17. For unsecured or ordinary money claims, the lender files a summary suit under Order XXXVII of the Code of Civil Procedure, and the framework is discussed under our banking and finance practice and our insolvency and recovery work, with standard drafts under banking and recovery formats.
The borrower's rights
- The right of redemption under Section 60 of the Transfer of Property Act 1882, before the sale is complete.
- To be told the amount due and the basis of the demand before any enforcement step.
- To make a representation that the lender must consider under Section 13(3A) of the SARFAESI Act.
- To appeal to the Debts Recovery Tribunal under Section 17 of the SARFAESI Act.
- To insist that the sale be conducted fairly and that the sale proceeds be applied to the debt with the surplus returned.
Documents to keep
- The loan agreement, the mortgage deed or hypothecation agreement, and the schedule of security.
- Repayment records and the latest statement of account.
- Any demand notice and the reply, with proof of delivery.
- Registration records for a company charge, and the title deeds where the security is land.
Common mistakes
- Assuming a hypothecation needs no registration; a company charge that is not filed with the Registrar of Companies loses its priority.
- Ignoring the 60-day period after a SARFAESI demand notice and losing the chance to respond.
- Believing the lender can sell without notice or valuation; the process is regulated.
- Treating a mortgage by deposit of title deeds as informal; it still needs the intent to create security and a clear paper trail.
Common questions
Can a bank take possession of my house without a court order?
A secured creditor may use the SARFAESI route after serving the demand notice and following the procedure, including taking the District Magistrate's help where needed. The borrower can challenge the action before the Debts Recovery Tribunal under Section 17.
Does hypothecation need to be registered?
Not as a deed. But where the borrower is a company, the charge must be filed with the Registrar of Companies under the Companies Act 2013, and security interests are recorded with the Central Registry.
Can I sell the hypothecated goods?
Stock held under a cash credit facility is meant to be turned over in the ordinary course of business, but you cannot sell the charged machinery or dispose of the security to defeat the lender's charge.
What happens after the lender sells the secured asset?
The sale proceeds are applied to the outstanding dues. Any surplus is returned to the borrower, and any shortfall remains recoverable by the lender through the recovery process.
FileX Advocates & Legal Consultants, Kolkata, drafts and files these matters before the Calcutta High Court, City Civil and Sessions courts, magistrate, family, consumer and tribunal forums. Call +91 7439811422 or WhatsApp us for a free first consultation.