Creation of Charges under Companies Act, 2013

ACS Divesh Goyal

Definition of Charge: ― As per Section-2 (16) Charge means- 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;

Principle rule of Creation of Charge is that “Charge will be creating on the Assets of the Company”, Assets as defined in Schedule III of the CA-2013

PROVISIONS OF CHARGE GIVEN UNDER CHAPTER VI OF COMPANIES ACT 2013 COVERS  SECTION- 77 to  87.

NEED FOR CREATING A CHARGE ON COMPANY’S ASSETS:

Almost all the large and small companies depend upon share capital and borrowed capital for financing their projects. Borrowed capital may consist of funds raised by issuing debentures, which may be secured or unsecured, or by obtaining financial assistance from Financial institution or banks.

The financial institutions/banks do not lend their monies unless they are sure that their funds are safe and they would be repaid as per agreed repayment schedule along with payment of interest. In order to secure their loans they resort to creating right in the assets and properties of the borrowing companies, which is known as a charge on assets. This is done by executing loan agreements, hypothecation agreements, mortgage deeds and other similar documents, which the borrowing company is required to execute in favour of the lending institutions/ banks etc

Type of Charges to be registered:

Companies Act, 1956 : Section 125 specifies only 9 types of charges to be registered.

Companies Act, 2013 : Section 77 states that Companies are required to register ALL TYPES OF CHARGES, with ROC within 30 days of its creation.

• within or outside India,
• on its property or assets or any of its undertakings,
• whether tangible or otherwise, and
• situated in or outside India

For Creation of Charge Form CHG-1 will be filed with fees prescribed under Act. Form should be signed by the Company and the Charge-holder and should be filed together with instrument creating charge.

Additional period to register the Charge:

Section 77- ROC may on application by the company, allow the registration of charge within 300 days (30 days + additional period of 270 days). If form will file after 30 days then form will file with additional fees.

Application to be supported by a declaration in Form CHG-10 from the CS or Director that such belated filing will not adversely affect the rights of any creditors of the company.

Rule 4(2) chapter VI –The Companies (Registration of Charges) Rules, 2014 

DUTY OF REGISTRATION OF CHARGE:

• As per Section 77 it is duty of Company to Create charge.
• As per Section 78 if Company fails to file form for registration of charge then, the person in whose favour charge is created will file form for creation of charge. The person is entitled to recover from the company the amount of fees.

But before filling of form person will give 14 days’ notice to Company. If company doesn’t register the charge or show sufficient cause then person himself will file the form with ROC.

This is not responsibility of Person (in whose favour charge is created) to file form. Therefore if company fail to file form for registration of charge and person also not filed form then person will not liable to pay any penalty.

CERTIFICATE OF REGISTRATION OF CHARGE:

After filling of Creation of charge ROC will issue a certificate of registration of charge in form CHG-2. The certificate issued by the Registrar under CHG-2 shall be conclusive evidence that the requirements of Chapter VI of the Act and the rules made there under as to registration of creation of charge, as the case may be, have been complied with.

Time Limit for filling for Creation of Charge

With in 30 days -Application should be made within 30 days of creation of charge in form CHG-1 without any late fees.

After expiry of 30 days but not beyond 300 days – Application should be made before 300 days of creation of charge in CHG-10 attached in CHG-1.

After Expiry of 300 days -Application for Condonation of Delay to Regional Director in form CHG-8.

Condonation of delay for Registration of charge:

• Where the instrument creating or modifying a charge is not filed within a period of Three Hundred Days from the date of its creation or modification the Registrar shall not register the same unless the delay is condoned by the Central Government.
• Where the instrument satisfaction of the charge is not filed within Thirty Days from the date on which such payment of satisfaction, the Registrar shall not register the same unless the delay is condoned by the Central Government.
• The application for condonation of delay shall be filed with the Central Government in Form No.CHG-8 along with the fee. [ By Notification F. No. 1/6/2014-CL.V Dated: 21-5-2014 THIS POWER HAS BEEN DELEGATED TO REGIONAL DIRECTOR)
• The order passed by the Central Government under sub-section (1) of section 87 of the Act shall be required to be filed with the Registrar in Form No.INC.28.

MODIFICATION OF CHARGE:

Provisions of Modification of charge are completely same as provisions of Creation of Charge. After filling form for Modification of Charge registrar will issue certificate for modification of charge in form CHG-3.

Any modification in the terms or conditions or the extent or operation of any charge registered under that section also required registration.

**WHETHER FUNDED INTEREST IS MODIFICATION OF CHARGE?

Solu: In Andhra Pradesh State Financial Corpn v. Guruvayurappan Swamy Oils, appellant financial institution had created charge over properties of company-in-liquidation in respect of principal amount plus interest. Some of the interest was kept in a separate account called “Funded Interest Account”. Hence, there is no modification of charge required to secure such funded interest.

SATISFACTION OF CHARGE:

Charge is created as security for loan or debentures or as security for some other purpose. If the amount of loan is repaid or debentures are fully paid or other purpose is fulfilled, there remains no necessity of the charge. This is called satisfaction of charge.

As per Section 82 – Form for Satisfaction of charge will be file in form CHG-4 within 30 days of satisfaction of charge. If company fail to file form CHG-4 within 30 days of creation of charge then company have to go for condonation of delay for satisfaction of charge.

CHARGES FILING OF WHICH WITH ROC IS NOT NECESSARY:

• Guarantee doesn’t require Registration.
• Charge created by operation of law need not be filed
• Negotiable Instrument (Hundi) is not a ‘Charge’ and registration not required.

Pledge is not required to be filed for Registration:

Earlier there was list of transaction on which charge was required to create. With the enactment of the Companies Act, 2013, tire list of charges requiring registration done away with. Thus, in the absence of a specific list of charges to be registered, and the wide definition of the word “charge”, ‘pledges’ and ‘liens’ were also required to be registered.

The companies creating pledge over shares are compulsorily required to register the charge, which was not the case with its predecessor. This is unfair, for example, there is absolutely no sanctity in registration of a pledge as a pledge is a possessory security interest and the asset is already with the lender. A pledge on movables neither creates an interest or a lien but rather is a special property.

Effect of registration of charge:

a. Maintain Register of Charge by ROC: As per Section- 81 ROC will maintain Register of Charges in respect of each company, containing particulars of all charges registered

b. Inspection of Register of Charge: The Register of charges maintained by ROC is open for inspection by any person on payment of prescribed inspection fees.

c. Deemed Notice:** Any person intending to lend moneys or who has lent money to a company can know which of company’s assets are already charged and extent to which type are charged.

d. Charge binding even on subsequent purchaser: Provisions relating to charge apply even to a subsequent purchaser, even if he had not purchased property directly from company. The purchaser is required to make reasonable enquiries as to title of vendor.

Penalty for not filing charges:

If any company contravenes any provision of this Chapter, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

Effect of non registration of charge:

As per Section 77(3) If charge is not registered with ROC, the charge shall not be taken into account by the liquidator or any other Creditor. [The words are Registered’ and not ‘filed’. Thus, mere filing of charge with Registrar would not be sufficient. It has to be actually registered by ROC and certificate of registration should be issued.

However, this is so only if company is under winding up. Otherwise, contract or obligation for repayment of the money secured by charge is there even if charge was not registered. 77(4)

REGISTER OF CHARGE BY COMPANY:

a) Every company shall maintain, at registered office a register of charge in form No. CHG-7.

b) Copy of the instrument creating the charge shall also be kept at the registered office of the company along with register of charge- (Proviso of Section 85(1)

c) The entry in the registered authenticated by a director or secretary of the company or the other person authorized.

d) **Company will maintain this register for life time of Company.

e) ** Instrument creating charge or modification of charge shall be preserved for a period of 8 year from the date of satisfaction of charge by the Company.

Inspection of register of charge: Section-85

a) Register of Charge and Copy of all the instrument creating charge will be open for inspection to Members and Creditor at the registered office of company , without any fee.

b) The registered will also be opened for inspection of any other person on payment of prescribed fee.

c) The register and copies of instrument shall be opened during business hours.

PROCESS OF CREATION/ MODIFICATION OF CHARGE IS AS UNDER:-

If a company has passed special resolutions under Section 180(3)(c) of the Companies Act, 2013, authorising its Board of directors to borrow funds for the requirements of the company and under Section 180(1)(a) of the Companies Act, 2013, authorising its Board of directors to create charge on the assets and properties of the company to provide security for repayment of the borrowings in favour of the financial institutions/banks or lenders and in exercise of that authority has signed the loan documents and now proposes to have the charge, created by it registration with the ROC, should follow the procedure detailed below

Where the special resolution is passed as required under section 180 of the Companies Act, 2013, form MGT14 of the Companies (Management and Administration) Rules, 2014 is to be files with the registrar.

• Conduct a Board meeting to arrive at a positive decision to avail the facility including security of Charges. In the said business of availing facility, authority to execute necessary documents is also required to be given.
• File extracts of the said resolution with the Registrar of Companies in form [1]MGT 14 within 30 days of its passing.
• Execute necessary documents for availing the facility including the security being given.
• Make entries in the register of Charges maintained in form CHG-7 forthwith after the creation/ modification/ satisfaction and get it authenticated by Director or Secretary of the company or any person authorized by the board.
• Submit form CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) with the prerequisite fees within a period of 30 days from the date of creation/ modification of charge.
• Attach the following documents with e-form No. CHG- 9/ CHG -1: 9/ CHG -1 A certified true copy of every instrument evidencing any creation or modification of charge. In case of joint charge and consortium finance, particulars of other charge holders. Instrument(s) evidencing creation or modification of charge in case of acquisition of property which is already subject to charge together with the instrument evidencing such acquisitions
• After due compliance, Registrar shall issue certificate of registration in form CHG-2, where charge is registered under section 77(1) or 78 or in form CHG-3, where charge is registered under section 79.
• If CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) is not being submitted within the period of 30 days, however within the period of 300 days, prepare an application for condonation in form CHG-10 which shall be supported by a declaration by the secretary or director of the company that delay shall not affect the rights of creditors. After due compliance, Registrar shall issue certificate of registration in form CHG-2, where charge is registered under section 77(1) or 78 or in form CHG-3, where charge is registered under section 79.
• Where a charge is registered with the Registrar obtain a certificate of registration of such charge in Form No.CHG- 2. Where the particulars of modification of charge is 2 registered the Registrar shall issue a certificate of modification of charge in Form No. CHG-3
• If CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) is after 300 days, prepare an application for condonation in form CHG-8 and submit the same with Regional Director having territorial jurisdiction over the registered office of the company under The Companies Act, 2013.
• Pay the requisite penalty imposed by the Regional Director having territorial jurisdiction over the registered office of the company. Normally 15 days time is being given for the payment of penalty.
• After payment of requisite penalty, submit the Chalans with Regional director office with the covering letter containing request to issue and order allowing condonation of delay.
• Submit the order issued by the regional director with the ROC within the stipulated time given in the order itself in form INC 28.
• After the approval of the form INC 28, get the form CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) approved. After due compliance, Registrar shall issue certificate of registration in form CHG-2, where charge is registered under section 77(1) or 78 or in form CHG-3, where charge is registered under section 79.

PROCESS OF SATISFACTION OF CHARGE IS AS UNDER:-

• Gets the letter of satisfaction from the bank containing declaration that there are no dues towards the facility provided.
• Conduct a Board meeting to consider the letter of satisfaction and after taking note of the same in the said board meeting pass the resolution containing authorization to file form CHG-4 with letter of satisfaction as an attachment. It must be noted that the said form CHG-4 is required to be submitted within 30 days of satisfaction. The period of 300 days is applicable in case of creation/modification of charges only and for satisfaction of charges, there is no relaxation of time period.
• Make entries in the register of Charges maintained in form CHG-7 forthwith after the satisfaction and get it authenticated by Director or Secretary of the company or any person authorized by the board.
• Submit form CHG-4. After due compliance, Registrar shall issue certificate of registration of satisfaction in form CHG-5.
• If CHG-4 is not being submitted within the period of 30 days, prepare an application for condonation in form CHG-8 and submit the same with Regional Director having territorial jurisdiction over the registered office of the company under The Companies Act, 2013.
• Process same like above after filling of CHG-8.

[1] Not required to file MGT-14 in case of private Limited Company for borrowing.