The Kerala High Court (Ernakulam Bench) has held that an agreement of hypothecation executed after sanction of a credit facility, which merely evidences the creation of security and under which possession of the movable asset remains with the borrower, is neither chargeable as a “pledge” under Article 6 nor as a “mortgage deed” under Article 37 of the Kerala Stamp Act, 1959. Such an instrument is properly chargeable under Article 5(g) as an agreement not otherwise provided for.
Applying the same, the Court held that since the hypothecation deed bore an adhesive stamp of Rs. 100/-, it was properly stamped under Article 5(g) as it stood at the relevant time. Accordingly, the order impounding the document was set aside, and the Munsiff’s Court was directed to receive the agreement of hypothecation in evidence and proceed with trial in accordance with law.
A Single Judge Bench of Justice Easwaran S. observed that deed of hypothecation was not the instrument on the basis of which the loan was granted; rather, it merely evidenced that a credit facility had already been sanctioned and that security was created in respect of the vehicle for repayment of the loan. The Bench noted that the borrower had agreed under the deed of hypothecation that the vehicle stood hypothecated as security, but the deed itself was only evidentiary of sanction and security creation.
The Bench further observed that the trial court failed to appreciate the basic difference between “pledge” and “hypothecation.” Though hypothecation is a species of pledge, the essential distinction is that in hypothecation possession remains with the loanee, whereas in the case of pledge possession is retained by the pledgee. Since the agreement in question clearly showed that possession of the vehicle remained with the borrower, the Bench held that it could not qualify as an instrument of pledge for the purposes of Article 6 of the Kerala Stamp Act, 1959.
The Bench also rejected the respondent’s contention under Article 37. It held that stamp duty under Article 37, being the charging provision for a mortgage deed, is attracted only where the loan is advanced and the terms and conditions of such advancement are found in the mortgage deed itself, meaning that the sanction of the loan should be by the mortgage deed. Where a credit facility is already sanctioned and an agreement of hypothecation is later executed merely to evidence creation of security, such instrument does not fall within Article 37.
Briefly, the petitioner, Kerala Gramin Bank, challenged the order passed by the Munsiff’s Court, Manjeri, by which the trial court impounded a deed of hypothecation on the ground that it was not properly stamped. The suit had been filed by the Bank for recovery of Rs. 4.85 lakhs with interest at 13% per annum, arising out of a vehicle loan sanctioned to the predecessor-in-interest of the defendants. Along with the hypothecation agreement, a guarantee agreement had also been executed. The defendants objected to the admissibility of the hypothecation deed in evidence on the ground of insufficient stamping, and that objection was accepted by the trial court.
The principal question before the High Court was the stamp duty payable on an “Agreement of Hypothecation” executed by a borrower in respect of a credit facility availed from a bank. The Bank contended that the trial court erred in treating the document as chargeable under Article 6 of the Kerala Stamp Act, 1959, since hypothecation is distinct from pledge inasmuch as possession remains with the borrower. The respondent alternatively argued that, even if Article 6 did not apply, the instrument would fall under Article 37(b) read with Section 2(n) as a species of mortgage.
Appearances:
Advocates Jawahar Jose and Safeer Bawa A.S., for the Petitioner
