Meaning of charge's and Registration of Charges

Meaning of Charge [Sec 2 (16)]

 

According to section 2(16) of the Companies Act, 2013 “charge” has been defined as an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.

 

Thus, charge is:

•                    an interest or lien

•                    created on the property or assets of a company or any of its undertakings or both as security and

•                    includes a mortgage.

 

Whenever a company obtains term loans or working capital loans from financial institutions or banks by offering its property or assets, etc. as security it is required to create a charge on such property or assets in favour of the lender. In other words, creation of charge is necessary in case of secured borrowings availed by a company. Even where secured debentures are issued, a charge on any specific movable or immovable property needs to be created in favour of debenture trustee.

 

Once the charge is registered with the Registrar of Companies, it becomes an information available in the public domain which can be used by a lender to his advantage. After the registration, apparently the company is precluded from offering the same assets again to borrow funds fraudulently from a different lender.

 

The law with respect to the registration of charges has been dealt in sections 77 to 87 of the Companies Act, 2013.

Types of Charge :-

A charge may be either fixed or floating.

Fixed Charge:

A ‘fixed charge’ is a charge which attaches specific assets of the borrowing company. These assets are of permanent nature like land and building, office premises, machinery installed by the company, etc. and are identified at the time of creation of charge. When a charge is created on such assets, the charge remains ‘fixed’ and the borrowing company is not permitted to sell such assets though it may use them.

A fixed charge is created by way of mortgage or deposit  of title deeds. Assets under fixed charge can be sold only with the permission of the charge-holder. A fixed charge is vacated when the money borrowed against the assets subject to fixed charge is repaid in full.

 

Floating Charge:

A ‘floating charge’ is created on assets which are of fluctuating nature like raw material, stock-in-trade, debtors, etc. A floating charge is created by way of hypothecation or lien. The assets under floating charge keep on changing because the borrowing company is permitted to use them for producing final goods for sale

Thus, the company is free to deal with the assets which are under floating charge according to its own choice. In a way, it can be said that a floating charge is a present security which covers in its fold all such assets which are mentioned in the hypothecation deed for inclusion in the floating charge.

A floating charge remains dormant until it becomes fixed or crystallises. On crystallisation, the security (i.e. raw material, stock-in-trade, etc.) becomes fixed and is available for realization so that borrowed money is repaid. Crystallisation of floating charge may occur when the terms and conditions of floating charge are violated or the company ceases to continue its business or the company goes into liquidation or the creditors enforce the security covered by the floating charge, etc.

 

1.     Registration of Charges

 

Registration by the company creating a charge:

 

It shall be duty of the company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise and situated in or outside India, to register the particulars of the charge.

 

Thus, charge may be created within India or outside India. The subject-matter of the charge i.e. the property or assets or any of company’s undertakings, whether tangible or non-tangible, may be situated within India or outside India. But in each case when charge is created it must be registered by the company.

 

In case a charge is created by deposit of title deeds (normally banks agree for this mode of charge instead of proper mortgage), it should also be registered by the borrowing company.

 

Registration by the charge-holder:

 

Section 78 (explained later) provides that in case the company creating a charge fails to register the charge within the prescribed period of 30 days, the person in whose favour the charge is created can get the charge registered.

 

Registration by the purchaser:

 

Section 79 (explained later) covers another case of registration of charge where a company purchased some property in whose case a charge was already registered. In this case also, the company purchasing the property shall get the charge registered in its name in place of seller in the records of Registrar.

 

2.     How to Register Charge

 

For the purpose of registration of charge by the company, the particulars of charge in the prescribed form together with a copy of the instrument, if any, creating the charge duly signed by the company and the charge holder, shall be filed with the Registrar within 30 days of creation of charge along with the prescribed fee.

 

3.     Verification of Instrument of Charge

 

A copy of every instrument creating (or modifying) any charge and required to be filed with the Registrar, shall be verified as follows:

 

(a)       in case of property situated outside India: where the instrument or deed relates solely to the property situated outside India, the copy shall be verified by a certificate issued either-

•          under the seal, if any, of the company, or

•          under the hand of any director or company secretary of the company, or an authorised officer of the charge holder, or

•          under the hand of some person other than the company who is interested in the mortgage or charge;

 

(b)       in case of property situated in India (whether wholly or partly): where the instrument or deed relates to the property situated in India (whether wholly or partly), the copy shall be verified by a certificate issued under the hand of any director or company secretary of the company or an authorised officer of the charge holder.

 

Thus, in case the instrument or deed relates solely to a property situated outside India, the copy may also be additionally verified by a certificate issued under the hand of some person other than the company who is interested in  the mortgage  or charge. This type of verification is not possible when the instrument or deed relates to the property situated in India, whether wholly or partly.

 

 

4.     Extension of Time Limit

 

The original period within which a charge needs to be registered is 30 days from the date of creation of charge. The Companies (Amendment) Second Ordinance, 2019 (w.r.e.f. 02-11-2018) has amended the provisions relating to extension of time limit as under:

 

(i)        Charges created before 02-11-2018 (i.e. before the commencement of the Companies (Amendment) Second Ordinance, 2019)5: In such cases, where charge was created before 02-11-2018 but was not registered within the original period of

30 days, the Registrar may, on an application by the company, allow such registration to be made within a period of 300 days of such creation.

 

Further, if the registration is not made within the extended period of 300 days, it shall be made within six months from 02-11-2018 on payment of prescribed additional fees. It is provided that different fees may be prescribed for different classes of companies.

 

(ii)       Charges created on or after 02-11-2018 (i.e. on or after the commencement of the Companies (Amendment) Second Ordinance, 2019)6: In such cases (i.e. charge was created on or after 02-11-2018 but the registration of charge not effected within the original period of 30 days), the Registrar may, on an application by the company, allow such registration to be made within a period of 60 days of such creation (i.e. another 30 days are granted after the expiry of original 30 days), on payment of additional fees as prescribed.

 

According to another relaxation, if the registration is not made within the extended period as above, the company shall make an application and the Registrar is empowered to allow such registration to be made within a further period of sixty days after payment of prescribed advalorem fees7.

 

Procedure for Extension of Time Limit :

 

 For seeking extension of time, the company is required to make an application to the Registrar in the prescribed form. It should be supported by a declaration from the company signed by its company secretary or a director that such belated filing shall not adversely affect the rights of any other intervening creditors of the company.

 

The application so made must satisfy the Registrar that the company had sufficient cause for not filing the particulars and the instrument of charge, if any, within the original period of thirty days. Only then he will allow registration of charge within the extended period. Further, requisite additional fee or advalorem fee, as applicable, must also be paid.

 

5.     Issue of Certificate of Registration

 

If a charge is registered with the Registrar, a certificate of registration of such charge shall be issued in Form CHG-2 to the company and, as the case may be, to the person in whose favour the charge is created.

 

The certificate so issued by the Registrar shall be conclusive evidence that the requirements of Chapter VI of the Act and the rules made thereunder as to registration of creation of charge have been complied with.

 

6.     Subsequent Registration not to prejudice Rights of Charge-holder

 

It is provided that any subsequent registration of a charge (i.e. registered within  the extended period instead of original thirty days) shall not prejudice any right acquired in respect of any property before the charge is actually registered by the company.

In other words, rights of the lender or charge-holder shall not get affected and shall remain as they were before the actual registration (i.e. rights acquired from the date of creation of charge) even if the charge is actually registered within the extended period.

 

7.     Section 77 not to apply to Certain Charges

The application of Section 77 shall not be made to certain charges which are prescribed in consultation with the Reserve Bank of India.

 

 

8.     Unregistered Charge not to be taken into account by the Liquidator/Creditor

 

If a registrable charge though created but was not registered by a company and no certificate of registration of such charge was issued by the Registrar, it shall not be taken into account by the liquidator appointed under the Companies Act, 2013 or the Insolvency and Bankruptcy Code, 2016 or any other creditor

 

However, not registering the charge shall not impact/negate any contract or obligation for the repayment of the money secured by the charge. Further, it may be noted that failure to register charge shall not absolve a company from its liability in respect of any offence under this Chapter