Question

Given below are two statements:
Statement I: In the case of mortgage, the legal ownership of borrowed asset remains with the lending institution but the physical possession is with the borrower.
Statement II: Hypothecation refers to a legal transfer of ownership of property from a debtor to creditor. The transfer of ownership becomes void as soon as debtor clears off the loan.
In the light of the above statements, choose the most appropriate answer from the options below:

• A. Both statements I and II are true
• B. Both statements I and II are false
• C. Statement I is correct but statement II is false
• D. Statement I is incorrect but statement II is true

Hint:

In both mortgages (immovable assets) and hypothecations (movable assets), the borrower retains ownership and possession of the asset. The lender only holds a legal claim or charge as security.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
Secured loans require collateral to protect the lender against default.
Different legal mechanisms, such as mortgages and hypothecations, define how ownership and possession of these assets are handled.

Step 2: Detailed Explanation:
Let us analyze the legal definitions of both terms:
- Mortgage: A mortgage is the transfer of an interest in specific immovable property (such as land or buildings) to secure a loan. The legal ownership and physical possession remain with the borrower (debtor), while the lender holds a claim on the property. Thus, Statement I is incorrect.
- Hypothecation: This is a legal charge created over movable assets (such as vehicles, machinery, or crops) where both ownership and physical possession remain with the debtor (borrower). There is no legal transfer of ownership to the creditor unless a default occurs. Thus, Statement II is incorrect.
Consequently, both statements are legally inaccurate and false.

Step 3: Final Answer:
Both statements I and II are false, corresponding to Option (B).