As stated earlier, the concept of hypothecation has its origin in the Roman idea of the pignus and the hypotheca, both of which apparently were hardly different from each other in the Roman legal theory. A proper understanding of Hypothecation is to view it as a specie of charge. A Charge generally arises from an agreement between a creditor and a debtor whereby assets or class of assets belonging to the debtor are appropriated to the satisfaction of the debt, so that the creditor is entitled to have recourse to the assets or the proceeds thereof to discharge the indebtedness. The creditor secured by a charge claims priority over claims of unsecured creditors and junior encumbrancers. Since the charge does not transfer ownership to the creditor, it could be described merely as an encumbrance, a weight hanging on the asset. This weight travels with the assets into the hands of third parties, other than a bonafide purchaser without notice. The nature of rights transferred by the concept of hypothecation has constantly raged among scholars. There has not been a consensus whether the security transfers proprietary nor possessory rights already in existence at the time of creation. Skyes position is that although a charge “does not comprise any of the rights which make up the bundle of ownership, it is proprietary because in the event of bankruptcy of the guarantor, the creditor has not merely a claim to proof of debt, but a right to exercise remedies against the thing itself and to withdraw it to that extent from the net cast by the trustee in bankruptcy” As a result, Skyes believes that a charge for which Hypothecation is a specie, is proprietary. In disagreeing with Skyes, Smith posits that the real nature of proprietary security created by act of parties involves originally parting with ownership of the property
As stated earlier, the concept of hypothecation has its origin in the Roman idea of the pignus and the hypotheca, both of which apparently were hardly different from each other in the Roman legal theory. A proper understanding of Hypothecation is to view it as a specie of charge. A Charge generally arises from an agreement between a creditor and a debtor whereby assets or class of assets belonging to the debtor are appropriated to the satisfaction of the debt, so that the creditor is entitled to have recourse to the assets or the proceeds thereof to discharge the indebtedness. The creditor secured by a charge claims priority over claims of unsecured creditors and junior encumbrancers. Since the charge does not transfer ownership to the creditor, it could be described merely as an encumbrance, a weight hanging on the asset. This weight travels with the assets into the hands of third parties, other than a bonafide purchaser without notice. The nature of rights transferred by the concept of hypothecation has constantly raged among scholars. There has not been a consensus whether the security transfers proprietary nor possessory rights already in existence at the time of creation. Skyes position is that although a charge “does not comprise any of the rights which make up the bundle of ownership, it is proprietary because in the event of bankruptcy of the guarantor, the creditor has not merely a claim to proof of debt, but a right to exercise remedies against the thing itself and to withdraw it to that extent from the net cast by the trustee in bankruptcy” As a result, Skyes believes that a charge for which Hypothecation is a specie, is proprietary. In disagreeing with Skyes, Smith posits that the real nature of proprietary security created by act of parties involves originally parting with ownership of the property
13-hypothecation1.docx