High Court Upholds Bank’s First Charge Over Hypothecated Goods Despite Dealership Dispute and Ownership Claims by Supplier

The Delhi High Court upheld the bank’s first charge over hypothecated goods, rejecting the supplier’s ownership claims and dealership-related objections, and ruled that the goods, once sold and paid for, could be validly mortgaged by the borrower.

The Delhi High Court Division Bench comprising Justice Subramonium Prasad and Justice Harish Vaidyanathan Shankar, while adjudicating a writ petition, recently held that once goods are sold and full payment is received, the title passes to the buyer and the seller retains no lien over the goods. Consequently, the borrower-firm, being the lawful owner of the petroleum products, was entitled to hypothecate them in favour of the bank, which thereby held a valid first charge as a secured creditor. The Court further clarified that neither the dealership agreement nor any internal changes in the constitution of the partnership could override the bank’s rights over the hypothecated goods.

The Delhi High Court dismissed a writ petition challenging the judgment dated 26.08.2015 passed by the Debts Recovery Appellate Tribunal (DRAT), which had upheld the earlier decision of the Debts Recovery Tribunal-III (DRT) dated 10.01.2014. The core issue pertained to the entitlement over certain petroleum products hypothecated by Respondent No. 2-firm with Respondent No. 1-Bank. The DRAT had affirmed that the hypothecated stock was owned by the borrower and lawfully pledged to the bank, thereby giving the bank the first charge over the said goods. The petitioner, Bharat Petroleum Corporation Ltd. (BPCL), contended that it retained rights over the goods based on its dealership agreement with Respondent No.2.

The petitioner argued that the reconstitution of the partnership in Respondent No. 2 without its prior written consent violated the dealership agreement, rendering the hypothecation invalid. It further contended that Respondent No. 4, who executed the hypothecation, was not a registered partner and hence lacked authority. The petitioner also invoked various clauses from the Dispensing Pump and Selling License (DPSL) Agreement and the Marketing Discipline Guidelines (MDG), asserting that the hypothecation and alleged adulteration of the products barred any right of pledge or mortgage by the borrower.

However, the Court rejected these contentions. It held that once the petroleum products had been sold by the petitioner and full payment was received, the title in the goods passed to Respondent No. 2. Consequently, the petitioner ceased to have any lien or ownership over them. The Court also clarified that neither the DPSL nor the MDG imposed any legal bar on the borrower’s ability to hypothecate the goods to a bank. The term “exchange” in the MDG could not be equated to a legal hypothecation arrangement between the borrower and its creditor.

The Court noted that the petitioner failed to produce any document substantiating ownership over the hypothecated goods. It also observed that the agreement clause restricting the use of licensed premises did not confer proprietary rights over the goods stored therein. Therefore, once Respondent No. 2 became the lawful owner of the petroleum products, it had the legal capacity to hypothecate them, and the bank, being a secured creditor with first charge, was entitled to possession and enforcement rights over the goods.

Relying on settled principles from the Supreme Court decisions in Dena Bank v. Bhikhabhai Prabhudas Parekh and Company, REEDLAW 2000 SC 04201, Union of India v. SICOM Ltd., and Central Bank of India v. Siriguppa Sugars & Chemicals Ltd., the High Court upheld the preferential rights of secured creditors over hypothecated assets. It found no illegality or infirmity in the DRAT’s ruling and accordingly dismissed the writ petition with no order as to costs.

Mr. A. P. Verma and Mr. Sanjay Verma, Advocates and Mr. Shekhar Gupta, Law Officer, BPCL, represented the Appellant.

Mr. S. V. Tyagi, Advocate, appeared for the Respondents.

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REEDLAW 2025 Del 06202