Deed of Hypothecation

SARFAESI Act, 2002; Indian Contract Act, 1872

A security document in which a borrower creates a charge over movable assets (stock, plant, machinery, book debts) in favour of the lending bank, without transferring possession to the bank. The borrower retains possession and use of the hypothecated assets. Upon default, the bank can invoke SARFAESI Section 13 to take possession.

In practice, the deed of hypothecation is the document that lets a bank lend against a borrower's stock, machinery, book debts and other movables while the borrower keeps using them. Because possession stays with the borrower, the deed is the creditor's primary evidence that a charge over those movables exists at all — its description of the hypothecated assets, the events of default, and the bank's right to take possession is what the creditor will rely on when it later invokes SARFAESI Section 13 to seize and sell. On default and NPA classification, the strength of the enforcement depends heavily on how tightly the deed is drafted: vague asset descriptions, fluctuating stock that is poorly captured, or missing default triggers can all stall possession. There is also a registration dimension for company borrowers, where an unregistered charge weakens priority. The recurring error is a thin, boilerplate deed that does not match the actual assets. Well-advised lenders align the deed precisely with the assets and perfect the charge before disbursal.