hire purchase agreement presentation - unitedworld school of business

7/28/2019 Hire Purchase Agreement Presentation - Unitedworld School of Business

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Hire purchase is a mode of financing the price of the goods to

be sold on a future date. In a hire purchase transaction, the

goods are let on hire, the purchase price is to be paid in

instalments and hirer is allowed an option to purchase the

goods by paying all the instalments. Hire purchase is a method

of selling goods. In a hire purchase transaction the goods are let-outon hire by a finance company (creditor) to the hire purchase customer

(hirer). The buyer is required to pay an agreed amount in periodical

instalments during a given period. The ownership of the property

remains with creditor and passes on to hirer on the payment of the

last instalment.

Concept of Hire purchase


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Hire Purchase AgreementA hire purchase agreement is defined in the Hire Purchase Act,

1972 as peculiar kind of transaction in which the goods are let

on hire with an option to the hirer to purchase them, with the

following stipulations:

a. Payments to be made in installments over a specified

period.

b. The possession is delivered to the hirer at the time ofentering into the contract.

c. The property in goods passes to the hirer on payment of

the last installment.

d. Each installment is treated as hire charges so that if default

is made in payment of any installment, the seller becomes

entitled to take away the goods, and

e. The hirer/ purchase is free to return the goods without

being required to pay any further installments falling due

after the return.


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Supreme court has laid down that the sum and substance of hire

purchase is two fold. One, the owner under the agreemententers into a transaction of hiring out the goods on the terms

and conditions mentioned in the agreement. second, the

option to purchase exercisable by the hirer on payment of all

the installments of hire, arises when the installments are paid

and not until then. There is no agreement to buy goods, the

hirer being under no obligation to buy but has an option to

return the goods or to become its owner by payment in full of

the hire agreed installments and the price for exercising the

option.


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Illustration:

A sells a refrigerator to B with a stipulation that B shall pay A fixed sum every

month by way of installments till the full price of the refrigerator is paid.

Now till B pays the full amount to A by way of installments, he does not

become the owner of the refrigerator . He can discontinue payment of

further installments. In such case, A takes back the refrigerator has no

right to recover installments already paid by him to A because the amountpaid by him is adjusted towards the hire charges of refrigerator. This is

called a hire purchase agreement.


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Difference Between Sale and Hire PurchaseAlthough hire purchase system could ultimately result in sale of goods, the sale in normal sense

and sale under hire purchase system are not the same. The following are the differences between

sale and hire purchase.

Sale

A sale is governed by the sale of Goods Act,1930.

In case of sale, the ownership of the goods istransferred to the buyer immediately.

In case of sale, the buyer makes payment inlump sum.

The buyer pays only for the price of goods.

On non-payment of the consideration theseller cannot take back the goods, but canonly take legal action on buyer.

Once a sale has taken place, neither the seller,nor the buyer can terminate the contract(unless it is for genuine reason like damage ofgoods etc.)

When the buyer becomes insolvent, the sellerhas to undertake the risk of loss.

A sale is subject to levy of sales tax at thetime of contract of sale.

Hire Purchase

Hire purchase is governed by the HirePurchase Act, 1972.

In case of Hire purchase, the ownership ofgoods is transferred to buyer on payment ofall installments.

In case of hire purchase, the payment is madein installments.

The hire purchaser pays for the price of goodsand also some amount of interest.

On non-payment of any installment, the sellercan re-possess the goods.

Either the buyer or the seller can terminate

the contract at any point of time, until thepayments of last installment.

When the hire purchaser becomes insolvent,the seller can reposes the goods, and henceneed not undertake the risk of loss.

In this case, the sales tax will be leviable atthe time of ownership (i.e. on payment of lastinstallment).


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Illustration:

A purchases a machine for down payment of Rs. 20000 and

3 annual instalments of 20000each. Cash price is 74500. showtheaccounting ? Rate of interest 5%

74500 20000 = 54500interest = 2725amount due : 57225

2nd instalement 20000amount due : 37225interest = 1861 due =39086

3rd instalment : 20000, balance : 19086 interest (balancing amt) :

914last instalment 20000 balance = nil


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Legal Framework

There is no exclusive legislation dealing with hire purchase transaction in

India. The Hire purchase Act was passed in 1972. An Amendment bill was

introduced in 1989 to amend some of the provisions of the act. However,

the act has been enforced so far. The provisions of are not inconsistent

with the general law and can be followed as a guideline particularly where

no provisions exist in the general laws which, in the absence of any

specific law, govern the hire purchase transactions. The act contains

provisions for regulating:

1. the format / contents of the hire-purchase agreement

2. warrants and the conditions underlying the hire-purchase

agreement,

3. ceiling on hire-purchase charges,4. rights and obligations of the hirer and the owner.

In absence of any specific law, the hire purchase transactions are

governed by the provisions of the Indian Contract Act and the

Sale of Goods Act


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Terms used in Hire Purchase Agreements

Hire purchaser: A hire purchaser is a person who possesses the

goods under hire purchase agreement for use within an option toeither purchase it or return after use.

Hire vendor: a hire vendor is a person who sells the goods underhire purchase agreement.

Cash price:it is the price of goods which is sold under contract of

sale Hire purchase price: it is the price at which the goods are sold

under hire purchase system it includes cash price of the goods andinterest.

Installment money: it is the part of the hire purchase price paid byhire purchaser, in periodic intervals.

Down payment: it is the initial payment made by the hire puchaserto the hire vendor at the time of entering into hire purchaseagreement.


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Hire charges: it is an amount refers to the difference between

hire purchase price and cash price (H P- C P= H C) it also

referred to as interest.

Statutory hire charges: it is a hire charges according to the

hire purchase act of, 1972.

Hire purchase agreement: it is an agreement between hire

purchaser and hire vendor according to section 2(c) of the

hire purchase act 1972, for purchasing of goods according to

agreement.

Termination of hire purchase agreement: The hirer can

terminate the agreement at any time by giving the 14 daysnotice to the owner. However what ever the amount is

already paid by the hirer is considered as a hire charges.


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Procedure of Hire Purchase

The Dealer, contracts with finance co. for financing his hire purchase deals.

The customer selects the goods for HP, and dealer arranges for the complete set

of documents.

Dealer sends documents to finance co. with request to purchase the goods, and

accept the HP transaction.

The finance co. signs the agreement and sends copy along with EMI details to

dealer.

Down payment by customer on completion of proposal form.

Dealer delivers the goods to the customer, property passes on to the finance co..

Hirer pays EMIs, and on last payment , the ownership passes on to him, with loan

completion certificate by the finance co


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CASE

In Auto supply company vs Raghunatha chetty

a company had agreed to offer a bus on a hire purchase agreementon condition that rs 1140/ were to be paid by the hirer on deliveryand 11 monthly installments were to be paid thereafter, each of rs.226 and the owners were to be entitled to terminate the contracton default occurring if hirer for any month was in arrears. A suitwas brought by the owners for possession of the bus on the

happening of the said condition. Lord coutts-trotter,c.j. held thatthough there was no such explicit condition, yet it was thenecessary implication that when the agreement terminated eitherby choice or default of the hirer ,all sums paid by him are to beretained by the owners, the amount Rs.1140/- being construedeither as the installment of the hire money or as the premium

taken by the owner for granting lease and in either case moneyreceived was not to be refunded. The money was not to beregarded as advance of rent.


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Hire purchase vs leasing

Hire purchase

The hirer has the option

to purchase the goods

Is a method of financing business

assets & consumer articles

Depreciation & investment

allowance can be claimed

Only the interest is tax component

deductible Hirer enjoys the salvage value

of the asset

Leasing

In leasing the lessee has no option

to buy the goods

Is a method of financing business

assets only

Depreciation & investment

allowance cannot be claimed

Entire lease rental is tax deductible

Lessee does not enjoy the salvagevalue of the asset


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Concept Of Lease Financing

Lease financing denotes procurement of assets through lease. The subject of

leasing falls in the category of finance. Leasing has grown as a big industry in the

USA and UK and spread to other countries during the present century. In India,

the concept was pioneered in 1973 when the First Leasing Company was set up in

Madras and the eighties have seen a rapid growth of this business. Lease as a

concept involves a contract whereby the ownership, financing and risk taking of

any equipment or asset are separated and shared by two or more parties. Thus, the

lessor may finance and lessee may accept the risk through the use of it while a

third party may own it. Alternatively the lessor may finance and own it while the

lessee enjoys the use of it and bears the risk. There are various combinations inwhich the above characteristics are shared by the lessor and lessee.


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Meaning Of leasing

A lease transaction is a commercial arrangement whereby an equipment owner or

Manufacturer conveys to the equipment user the right to use the equipment in return

for a rental. In other words, lease is a contract between the owner of an asset (the

Lessor) and its user (the lessee) for the right to use the asset during a specified period

in return for a mutually agreed periodic payment (the lease rentals). The important

feature of a lease contract is separation of the ownership of the asset from its usage.

Lease financing is based on the observation made by Donald B. Grant:

Why own a cow when the milk is so cheap? All you really need is milk and not the

cow.


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Leasing In India

Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly

1% of the industrial investment in India is covered by the lease finance, as against

40% in USA and 30% in UK and 10% in Japan. The prospects of leasing in India are

good due to growing investment needs and scarcity of funds with public financial

institutions. This type of lease finances is particularly suitable in India where a large

number of small companies have emerged more recently. Leasing in the sphere ofland and building has been in existence in India for a long time, while equipment

leasing has become very common in the recent times.


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Types of lease agreement

Lease agreements are basically of two types. They are(a) Financial lease and (b) Operating lease.

The other variations in lease agreements are (c) Sale

and lease back (d) Leveraged leasing and (e) Directleasing.


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Financial lease

Long-term, non-cancellable lease contracts are known as financial leases. The

essential point of financial lease agreement is that it contains a condition whereby

the lessor agrees to transfer the title for the asset at the end of the lease period at

a nominal cost. At lease it must give an option to the lessee to purchase the asset

he has used at the expiry of the lease.

Operating lease

An operating lease stands in contrast to the financial lease in almost all aspects. This

lease agreement gives to the lessee only a limited right to use the asset. The lessor

is responsible for the upkeep and maintenance of the asset. The lessee is not given

any uplift to purchase the asset at the end of the lease period. Normally the lease

is for a short period and even otherwise is revocable at a short notice. Mines,

Computers hardware, trucks and automobiles are found suitable for operating

lease because the rate of obsolescence is very high in this kind of assets.


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Sale and lease back

It is a sub-part of finance lease. Under this, the owner of an asset sells theasset to a party (the buyer), who in turn leases back the same asset to the

owner in consideration of lease rentals. However, under this arrangement,

the assets are not physically exchanged but it all happens in records only.

Leveraged leasing

Under leveraged leasing arrangement, a third party is involved besidelessor and lessee. The lessor borrows a part of the purchase cost (say 80%)

of the asset from the third party i.e., lender and the asset so purchased is

held as security against the loan.


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Direct leasing

Under direct leasing, a firm acquires the right to use an asset from

the manufacturer directly. The ownership of the asset leased out

remains with the manufacturer itself. The major types of direct lessor

include manufacturers, finance companies, independent lease

companies, special purpose leasing companies etc


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Campus Overview

907/A Uvarshad,

Gandhinagar

Highway, Ahmedabad

382422.

Ahmedabad Kolkata

Infinity Benchmark, 10th

Floor, Plot G1,

Block EP & GP,

Sector V, Salt-Lake,

Kolkata 700091.

Mumbai

Goldline Business Centre

Linkway Estate,

Next to Chincholi Fire

Brigade, Malad (West),

Mumbai 400 064.


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hire purchase agreement presentation - unitedworld school of business

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