Law regarding hypothecation

owner is liable because his name is on RC Book.
If at the time of sale he made a good written agreement with provisions regarding liability to complying Name change procedure that may save him from liability. In your case owner and party driving car both will be party in compensation case.
if you sold car with broker service and you paid brokerage charges then you can file cansumer case against such intermediatory broker for deficiency in service.

If the lender sells the hypothecated vehicle, the policy should also be taken in the name of the lender as the first charge.  The insurance policy is mandatory for all such vehicle loans.  Once the policy is in the name of the lender or new vehicle transferor, the liability of the owner ceases to exist if the lender has given proper documents/notice to the borrower as to confiscation of the vehicle.   It is the responsibility of the lender from the moment the vehicle is confiscated and the borrower is absolved from all liabilities.  Only a competent advocate can provide precise guidance on studying facts and the circumstances with supporting documents.

You are asking the question referring to a third person's scenario.  Hope it is not a hypothetical or theoretical question.

 

You say the Lender sold the surrendered vehicle. Did the borrower write a letter to the Lender mentioning that he was surrendering the vehicle and obtain a receipt from the Lender with the date and time of such surrender duly mentioning the Vehicle  Number?

If so there would not be any problem.  Even if the borrower merely handed over the vehicle to the Lender, it is the responsibility of the Lender to given borrower  proper receipt giving full details of the vehicle, date, and time of such surrender

Whether the Lender followed the above procedure?

Then you borrower has no problem whatsoever as nobody can claim damages from him if the accident happened subsequent to the date and time of surrender.

In case the Borrower does not have any ack from the Lender, it is better the Lender is approached to give full details of the surrender of the vehicle, subsequent sale with dates and times duly mentioning for each event ie. accepting the surrendered vehicle and later selling the vehicle.

In case the Lender is not cooperative when Court Summons are received and/or Police call the Borrower, the Borrower has no alternative but to file his version before the Police/Court with full details of the vehicle being seized by the Lender and subsequent sale duly requesting the Police/Court to make the Lender as one of the parties in the case.   

 

When there is a case for compensation in a vehicle accident, surely there shall be Police Case.  In such a Police Case, the name of the Driver at the time of the accident shall be recorded, which also shall be in favor of the Borrower, provided his version of surrendering the vehicle to Lender prior to such accident is correct.

The proper course is issuing a notice to the lender under CP Act, preferably through an advocate, as to steps initiated by them as per laid down procedure, and after hearing their story in writing, keep it a record to submit it to the competent authority as defense and documentary proof of lender confiscating the vehicle.  Also seeking such information on the basis of the insurance policy copy as a record.

Recorded owner (as mentioned in RC) of the vehicle is liable.

You have not posted the complete facts.

Person A purchased a vehicle. Under the hypothecation from finance company B. Later A didn't pay the EMI and surrender the vehicle to the finance company B with all relevant documents. This all happened in 2007. Later the vehicle was purchased by another person C but the name on the RC book was A. In 2017 C caused an accident and an old person was injured. The vehicle had no insurance also. In this circumstance who is liable to pay the compensation for the injured person?

 

My reply stands good to the full details provided by you.