The Institute of Company Secretaries of India (ICSI) has submitted a recommendation to the Ministry of Corporate Affairs (MCA) for amending Section 77 of the Companies Act, 2013. The amendment pertains to the registration of charges beyond the currently allowed 120 days by using ad valorem fees.
The Current Scenario
According to current law, companies have an initial 30-day period to register charges, which can be extended by 30 more days and then by another 60 days upon payment of ad valorem fees. Any lapse in adhering to these timelines results in harsh penalties and even renders the creditor as an unsecured creditor in the case of insolvency.
ICSI acknowledges that they have been receiving requests from stakeholders expressing challenges with the current provisions. The lack of an alternative for registering charges beyond the 120-day limit can lead to a deadlock situation during insolvency proceedings.
The institute suggests two main changes: (a) Implement a mechanism for charge registration beyond the 120-day period, either through Central Government approval or by paying ad valorem fees. (b) The rate of ad valorem fees should be based on the number of days delayed beyond 120 days, rather than from the date of charge creation.
The proposed changes could offer more flexibility to companies and financial institutions, mitigate risks associated with insolvency proceedings, and reduce penalties for honest errors or unavoidable delays.
ICSI’s recommendation to amend Section 77 of the Companies Act aims to provide much-needed relief to companies and financial stakeholders. By allowing charge registration beyond 120 days through a proposed mechanism, it offers a feasible solution to an issue that could otherwise have long-term governance and financial implications.
THE INSTITUTE OF
Company Secretaries of India
IN PURSUIT OF PROFESSIONAL EXCELLENCE
Statutory body under an Act of Parliament
(Under the jurisdiction of Ministry of Corporate Affairs)
CL: MCA: 2023 Dated: August 24, 2023
Dr. Manoj Govil, IAS
Ministry of Corporate Affairs
Government of India
Subject: Amendments in Section 77 of the Companies Act, 2013
Reference: ICSI Letter dated January 17, 2023
This has reference to the ICSI letter dated January 17, 2023 pertaining to section 77 of the Companies Act, 2013 pertaining to Registration of Charges. AS per the current provisions of the law, the initial time period stipulated for registration of charges by a company is 30 days. The same, on an application made by the company to the Registrar, can be extended by 30 days and by a further period of 60 days after payment of prescribed ad valorem fees. Non-compliance with these provisions tantamount to harsh penalties for the company as well as the officer-in-default. li further attracts the provisions of section 447 related to Fraud.
Although, it is quite understandable that the provisions of the law have been drafted to partake the goal of good governance; however, the Institute has been receiving requests from stakeholders to share the challenges being faced by them in this regard. Even if the registration of any charge is missed due to some-genuine reason and the company has not filed charge within the mandated period, there is no option available under the Companies Act, 2013 and rules made thereunder to the Company or Charge-holder or Banks / Financial Institutions to register the charge after the prescribed time period of 120 days of creation.
The same not only creates liability for penalty, but as per section 77(3) of the Companies Act, 2013, a charge created by a -company but not duly registered cannot be taken into account by the liquidator at the time of insolvency leading to the creditor being rendered as an unsecured creditor at the time of distribution of liquidation proceeds under section 53 of the Insolvency and Bankruptcy Code, 2016, thus creating a situation of deadlock.
Prior to the Companies Act, 2013, in terms of section 637B of the .Companies Act, 1956, the Central Government was empowered to condone the delay of any number of days in case the document is not filed within 60 days from the date of creation of charge.
In view of the above issues and their long-lasting impact on the overall governance of the company, it is suggested that:
(a) A mechanism may be put in place to register the charge after the total time period of 120. The registration may be allowed either with approval from the Central Government under section 460 or by paying ad valorem fees.
(b) The rate of ad valorem fees should be charged from the number of days delayed and not from the date of creation of charge. An approval route can be given by the Ministry of Corporate Affairs in this regard.
We hope that the above submission would be considered favorably.
We shall be pleased to provide any further information in this regard on hearing from your goodself.
(CS Manish Manish Gupta)
The Institute of Company Secretaries of India