While running business, whenever companies are short of capital and where there is a need to enhance the growth and to increase the capital, the simplest way is company borrows money from financial institutions or banks keeping its security as collateral. In this event charge is created for securing loans or debentures by way of mortgage on the assets of the company.
The main purpose of registration of charge is to give notice to the Registrar of Companies (RoC) and also to the people who advance money to the company about the encumbrance created on the assets of the company. Chapter VI of Company Act, 2013 (the CA, 2013) governs the registration of charges (Section 77 to 87).
1. WHAT IS CHARGE?
- In common parlance a charge is a right created by any person including a company referred to as “the borrower” on its assets and properties, present and future, in favour of a financial institution or a bank, referred to as “the lender”, which has agreed to extend financial assistance.
- As per Section 2(16) of the CA, 2013 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.
2. TYPES OF CHARGES?
- Fixed Charge:
- A charge which is identifiable with specific and clear asset/property at the time of creation of charge.
- The Company cannot transfer such identified and defined property unless the charge holder (creditor) is paid off his dues.
- Floating Charge:
- It covers the floating and circulating nature of properties of a company, like sundry debtors, stock in trade etc.
- The nature of the property charged may change from time to time.
- The floating charge crystallizes into fixed charge if the Company crystallizes or the undertaking ceases to be a going concern.
Ref: Maturi U. Rao v. Pendyala (A.I.R 1970 A.P 225) In this case, it was held that when floating charge crystallizes it becomes fixed and the assets comprised are subject to the same restrictions as the fixed charge.
OVERVIEW OF CHAPTER VI – REGISTRATION OF CHARGES
> Section 77: Duty to Register Charges, etc.:
1. Whose duty to register the charge: Section 77 cast the duty to register the charge on the Company which creates such charge.
2. What type of charge to be register:
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- Every type of charges whether created within or outside India
- on its property or assets or any of its undertakings
- whether tangible or otherwise, and situated in or outside India
3. Procedure to register the charge:
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- Every Company creating charge is required to register
- the particulars of such charge
- which should be signed by the company and the charge-holder together with the instruments, if any,
- with the Registrar within 30 days of its creation in the following mentioned e-forms.
4. In which form:
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- Form CHG-1 – for other than Debentures
- Form CHG-9 – for Debentures
5. What if delay in registering within 30 days;
Registrar may, on an application by the company, allow such registration to be made:
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- In case a charge is created before the commencement of the Companies (Amendment) Ordinance, [2019] the charge should be registered within 300 days of such.
- In case the charge is created on or after the commencement of the Companies (Amendment) Ordinance, [2019] it shall be registered within 60 days and by paying additional fees.
Provided further that if registration is not made within the period specified:
-
- The proviso to clause (a) states that if the charge created is not registered within 300 days, it shall be registered within 6 months from the commencement of the Companies (Amendment) Ordinance, [2019] by paying additional fees.
- The proviso to clause (b) states on payment of additional fees the registrar may extend the further period of 60 days.
6. Subsequent registration of a charge shall not prejudice any right acquired in respect of any property before the charge is actually registered.
7. Issue of certificate of registration:
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- Registrar shall issue, to the company or to the person in whose favor the charge is created, a —
-
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- certificate of registration of charge in form CHG-2 (w.r.t. section 77 and 78)
- certificate of modification of charge in form CHG-3 (w.r.t. section 79)
- Such Certificate shall be conclusive evidence that the requirements of Chapter VI of the Act and the rules made there under have been complied with.
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8. No charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered but shall not prejudice any contract or obligation for the repayment of the money secured by a charge.
Ref: ONGC Ltd v official liquidator of Ambica Mills Co Ltd (2006)
On failing to prove ONGC as secured creditor it was held that ONGC couldn’t be treated as a secured creditor, but it has also noted in the same case that the fact that it is not secured creditor doesn’t mean that charge is void nor debt is not recoverable.
> Section 78: Application for registration of charge by the charge holder:
1. Option to register the charge by charge holder:
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- Where a company fails to register the charge within 30 days
- Then the person in whose favour the charge along with the instrument is created may apply to the Registrar for registration of the charge in the form CHG-1 or CHG-9 as the case may be
- Within a period of 14 days after giving notice to the company.
2. However it shall be noted that company will still be liable in respect of any offence under this Chapter.
3. The charge holder shall be entitled to recover from the company the amount of any fees or additional fees paid by him to the Registrar for the purpose of registration of charge.
> Section 79 : Section 77 to Apply in Certain Matters:
The provisions of section 77 relating to registration of charges shall, so far as may be, apply to—
1. a company acquiring any property subject to a charge within the meaning of that section; or
2. any modification in the terms or conditions or the extent or operation of any charge registered under that section.
> Section 80: Date of Notice of Charge:
Where any charge on any property or assets of a company or any of its undertakings is registered under section 77, any person acquiring such property, assets, undertakings or part thereof or any share or interest therein shall be deemed to have notice of the charge from the date of such registration.
> Section 81: Register of Charges to be kept by Registrar:
1. The particulars of charges maintained on MCA shall be deemed to be the register of charges for the purposes of section 81 read with Rule 7 of the Companies (Registration of Charges) Rules 2014.
2. The register shall be open to inspection by any person on payment of fee.
> Section 82: Company to Report Satisfaction of Charge:
1. Within 30 days from the date of payment or satisfaction in full of any registered charge, Company shall give intimation to registrar in form CHG-4. Provided the same can be filed within 300 (30+270) days with additional fees. If company fails to file within 300 days then it shall file the form CHG-8 for condonation of delay.
(It shall be noted that CHG-8 can be filed for condonation w.r.t. creation, modification, satisfaction as the case may be)
2. Once the Registrar enters a memorandum of satisfaction of charge in full, he shall issue certificate of registration of satisfaction of charge in Form No.CHG-5.
> Section 83: Power of Registrar to Make Entries of Satisfaction and Release in Absence of Intimation from Company:
In the absence of intimation from company and on being satisfied, Registrar have a power to enter Memorandum of satisfaction in Register of Charge.
> Section 84: Intimation of Appointment of Receiver or Manager:
1. If any person obtains an order for the appointment or appoints (w.r.t power given under instrument) a receiver or manager for managing the property, subject to a charge, of a company, then he shall give intimation of such appointment to the company as well as to Registrar.
2. Such intimation shall be given in form CHG-6 within a period of thirty days from the date of the passing of the order or of the making of the appointment. (Also at the time of cessation)
3. Registrar shall register the particulars of such receiver/manager.
> Section 85: Company’s Register of Charges:
Every company shall keep at its registered office a register of charges in form CHG-7 and shall be open for inspection in business hours for any members and creditors without payment or by any other person on payment of such fees as may be prescribed.
> Section 86: Punishment for Contravention:
1. If any company contravenes any provision of this Chapter:
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- the company shall be punishable with fine – minimum Rs. 1 lac & maximum Rs. 10 lac
- every officer of the company who is in default shall be punishable with imprisonment — a term which may extend to 6 months or with fine – minimum Rs. 25000 & maximum Rs. 1 lac or with both
2. Recently pursuant to recommendation from the Company Law Committee, the Companies Amendment Bill, 2020 has been introduced which majorly aims to decriminalization of certain offenses and to improve the ease of doing business.
3. With this bill section 86 has also been amended and now the offence w.r.t. this chapter is now been kept civil wrong and changes made from fine to penalty to make it in house adjudication by Registrar or Regional Director.
4. Wherein section 86(2) states that if any person wilfully furnishes any false or incorrect information or knowingly suppresses any material information, required to be registered in accordance with the provisions of section 77, he shall be liable for action under section 447.
Disclaimer: The whole contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Thus Readers and users of this information are expected to refer to the relevant existing provisions of applicable Laws. I shall have no responsibility for the consequences of use of such information and in no event I shall be liable for any direct or indirect damage resulting from, arising out of or in connection with the use of such information.
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