Understanding Charges under Companies Act 2013 – Guide

The article discusses the Registration of Charges under the Companies Act, 2013 in India. It elaborates on the definition of a “Charge,” which is an interest or lien created on a company’s property or assets as security for a loan, including mortgages. The article explains the importance of registering a charge, different types of charges (fixed and floating), instruments for creating or modifying a charge, ranking, and the detailed process for registering, modifying, and satisfying a charge. Furthermore, it covers responsibilities related to acquisition, certificates of registration/modification/satisfaction, and the role of various stakeholders like the company, charge-holder, and purchaser. The piece serves as a comprehensive guide for understanding the regulations and requirements associated with the creation and handling of charges in a corporate context.

Introduction

A “Charge” is defined under section 2(16) of the Companies Act, 2013:

• Charge is an interest or lien,
• It is created on the Property or Assets of a company or any of its undertakings or both,
• It is created as a security for repayment of a loan,
• Charge includes mortgage.

Whenever a company borrows money by way of loans whether term loan or working capital loans from financial institutions or bank or any other person by offering the company’s property or assets as security, a charge is created on such property or assets of the company in favour of the person who lends money to the company.

Applicability or Purpose for Registration of Charge

1. Applicability:

Every company, who borrows money from financial institutions or bank or from any other person by providing a security for repayment of such borrowed money shall mandatorily register a charge in favour of a person who lends money to the company (“hereinafter refer to as the charge-holder”)

2. Purpose for Registration of Charge

• A charge is a security interest in the assets of a company. It is created when a company borrows money from a lender and uses its assets as collateral. This means that if the company defaults on the loan, the lender can seize the assets that are subject to the charge.
• The purpose of registering a charge is to give notice to other creditors of the company that there is a security interest in its assets. This is important because it helps to protect the interests of the lender in the event of a default. If a creditor does not know about a charge, they may lend money to the company thinking that they have the first claim on its assets. However, if there is a charge in place, the lender with the charge will have priority over other creditors.

Registration of Charge to act as a Constructive Notice [Section 80]

When a charge is registered with the Registrar of Companies, it is considered a public notice. This means that anyone who wants to buy a company’s assets or lend money to the company against the security of such property or assets can check the official website of the Ministry of Corporate Affairs (MCA) to see if there are any charges on the property or assets.

If such person does not refer to the public documents, he would still be considered or deemed to have seen it.

In case such person enters into the transaction without making any enquiry and later on suffers a loss because of the charges, he/she will not be able to claim the loss from the company. This is because the company will be able to argue that the person should have checked the MCA website before entering into the transaction.

Types of Charge

1. Fixed Charge

A fixed charge is a type of security interest that is attached to a specific asset or piece of property, such as real estate or equipment. This means that the lender has control over the asset, and the borrower cannot sell or dispose of the asset without the lender’s consent.

Fixed charges are typically used to secure loans, including term loans, or working capital loans, for large assets, such as property or equipment. This is because fixed charges offer lenders a high degree of security. If the borrower defaults on the loan, the lender can seize the asset and sell it to recoup their losses.

A Fixed charge can be:

• • A mortgage on a property.
  • A charge on equipment.
  • A charge on intellectual property.

Generally, a Fixed Charge is created by way of “Mortgage”, or “Deposit of Title Deeds” usually called as the “Instrument creating or modifying the charge”.

Key features of a fixed charge:

• • It is attached to a specific asset or piece of property.
  • The lender has control over the asset.
  • The borrower cannot sell or dispose of the asset without the lender’s consent.
  • Fixed charges are typically registered with the relevant authorities.
  • Fixed charges offer lenders a high degree of security.

Examples of Property or Assets under a Fixed Charge:

• • Land or Building.
  • Immoveable Fixed assets like Plant and Machinery etc.

2. Floating Charge

A floating charge is a type of security interest that is attached to a changing pool of assets, such as inventory, accounts receivable, and intellectual property. This means that the lender does not have control over the assets, and the borrower can sell or dispose of the assets without the lender’s consent.

Floating charges are typically used to secure loans for businesses that have a lot of current assets, such as inventory and accounts receivable. This is because floating charges offer lenders a high degree of flexibility. If the borrower defaults on the loan, the lender can seize the assets that are subject to the charge, even if the assets have been sold or disposed of.

A floating charge can be:

• • A charge on inventory.
  • A charge on accounts receivable.
  • A charge on intellectual property.

Generally, the asset under a floating charge is secured by way of “Hypothecation Deed” usually called as the “Instrument creating or modifying the Charge”.

Key features of a floating charge:

• • It is attached to a changing pool of assets.
  • The lender does not have control over the assets.
  • The borrower can sell or dispose of the assets without the lender’s consent.

Examples of Property or Assets under a floating charge:

• • Company’s moveable property like inventories including receivables.
  • Book Debts.
  • And such other current assets.

Instrument of Creation or Modification of Charge

1. An Instrument of creation or modification of charge is a document that creates or modifies a charge on the assets of a company.
2. The document of creation or modification of charge must be signed by person duly authorized by the board for signing and execution of documents, for or on behalf of board, for registration of charge.
3. The purpose of the instrument of creation or modification of charge is to provide the charge-holder a legal right to the property that is being charged.
4. Some examples of documents can be used to create or modify a charge:
   • Mortgage: A Mortgage is a charge on company’s land or building.
   • Hypothecation: A Hypothecation is a charge on company’s moveable property, such as inventories, book debts, current assets, vehicle, or equipment.
   • Pledge: A Pledge is a charge on company’s goods or chattels.
   • Debenture: A Debenture is a type of loan that is secured by the assets of the company.

The Specific requirements for the instrument of creation or modification of charge will vary depending upon the type of charge that is being created or modified.

Ranking of Charge

There are three main types of ranking of charge:

1. First charge: This is the highest-ranking charge. A first charge-holder has the first claim on the assets that are subject to the charge. This means that if the company defaults on the loan, the first charge-holder will be paid first.
2. Second charge: This is the second highest ranking charge. A second charge-holder has the second claim on the assets that are subject to the charge. This means that if the company defaults on the loan, the second charge-holder will be paid second, after the first charge-holder.
3. Pari-passu charge: This is a Latin phrase that means “on equal footing.” A pari-passu charge-holder has the same claim on the assets that are subject to the charge as other pari-passu charge-holders. This means that if the company defaults on the loan, all pari-passu charge-holders will be paid in proportion to their outstanding loans.
4. Senior or Sub-servant Charge: The term “sub servant charge” is not a legal term. It is a colloquial term that is sometimes used to describe a charge that is subordinate to another charge. In other words, a sub servant charge is a charge that has a lower ranking than another charge.

• • For example, let’s say that a company borrows money from two lenders. The first lender takes a first charge on the company’s assets, and the second lender takes a second charge on the company’s assets. The first charge is said to be “senior” to the second charge, and the second charge is said to be “sub servant” to the first charge.
  • This means that if the company defaults on its loans, the first lender will be paid first, and the second lender will only be paid if there are any assets remaining after the first lender has been paid in full.

The term “sub servant charge” is not used in legal documents. However, it can be a useful term to understand when discussing the ranking of charges.

Registration of Charge

1. Registration by the company

a. It shall be the duty of the company creating a charge 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 with the Registrar along with the Instrument evidencing the creation or modification of charge, as the case may be, withing the prescribed period of 30 days from the date of creation of charge.

b. The company is required to make an application to the registrar in the prescribed form [*].

[*] As per Rule 4(2) of the Companies (Registration of Charges) Rule, 2014, form CHG-1 or CHG-9 (in case of Debentures) is to be used.

c. If such company fails to register the charge within 30 days from its creation, then the company can register the same within next 30 days i.e., within 60 days from the creation of charge by paying prescribed additional fees [**].

[**] Currently the prescribed fee is two times of normal fees.

d. If the company fails to register the charge within 30 days of its creation and next 30 days grace period i.e., within 60 days from creation of the charge, then the company can register the charge within a further period of 60 days by paying prescribed ad valorem

2. Registration by the Charge-holder

a. If the company creating the 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, along with the instruments and such evidencing the creation or modification of charge, by making an application to the registrar in the same form CHG-1 or CHG-9 (in case of Debentures).

b. On receipt of application from the charge-holder, the Registrar shall give a notice to the company and if no objection is received within the period of 14 days after giving the notice to the company, the Registrar allow such registration on payment of the prescribed fees.

There is no need to send the notice if the application for registration or modification of charge is duly signed by the charge-holder.

It is to be noted that the company is primarily responsible for registration of the charge.

3. Registration by the Purchaser

Where a company purchase some property or asset in whose case a charge was already registered, in this case the company purchasing the property or asset shall get charge registered in its name in place of seller in the record of Registrar.

Modification of Charge

If there is any change or any modification in charge i.e.,

• change in the terms and conditions, or
• change in extent or operation of the charge, or
• change in property or asset under charge etc.

the charge should be registered by the company in accordance with section 77 of the Companies Act, 2013.

Examples of modification: –

• Variation in any terms and conditions of the existing charge;
• Enhancement or decreasing the limits;
• Change in ranking of the charge-holder;
• Change in rate of interest;
• Change in repayment terms;
• Partial release of charge on a particular property or asset.

Satisfaction of Charge

1. According to Section 82 of the Companies Act, 2013, a company is required to give intimation of payment or satisfaction in full of any charge earlier registered to the Registrar in the prescribed form [***].
   [***] As per Rule 8 of the Companies (Registration of Charges) Rules, 2014 Form No. CHG-4 is prescribed.
2. The intimation needs to be given within a period of 30 days from the date of payment or satisfaction in full.
3. According to section 82(1) of the Companies Act, 2013 read with Rule 8(1) of the Companies (Registration of Charges) Rule, 2014, on an application by the company of the holder of charge the Registrar may allow such intimation of payment or satisfaction to be made within a period of 300 days of such payment or satisfaction in full on payment of prescribed additional fees.

Acquisition of property subject to charge

If the property is sold, on which a charge has been already registered, by the permission of the charge-holder. It shall be the duty of the company to acquiring such property to get the charge registered in accordance with section 77 of the Companies Act, 2013. As a result, the earlier charge will get vacated and, in its place, a fresh charge will get registered by the company acquiring such property.

Issue of Certificate of Registration/Modification of Charge

According to Section 77(2) of the Companies Act, 2013 read with Rule 6(1) of the Companies (Registration of Charges) Rules, 2014, when a charge or modification is duly registered by the Registrar, a certificate of Registration/Modification shall be issued by the Registrar in the prescribed form [****].

The certificate so issued by the Registrar shall be the conclusive evidence that the requirements of the Chapter VI of the Companies Act, 2013 and the rules made thereunder as to registration of creation of charge have been complied with.

[****] Form No. CHG-2 is prescribed for Certificate of Registration of Charge and Form No. CHG-3 is prescribed for Certificate of Registration of Modification of Charge.

Issue of Certificate of Registration of Satisfaction of Charge

As per Rule 8(2) of the Companies (Registration of Charges) Rule, 2014, in case the Registrar enters a memorandum of satisfaction of charge in full, he shall issue a certificate of registration of satisfaction of charge in Form No. CHG-5.

Authentication of Documents and Deeds

The Form in which application is being made to the Registrar i.e., CHG-1 or CHG-9 or CHG-4 or any other documents or deeds which is required to be filed with the registrar shall be signed:

• By the person duly authorised by the Board by a Board’s Resolution, and
• By the charge-holder, and
• By the Chartered Accountant or by Cost Accountant or by Company Secretary in practice.

Penalty for Contravention

1. According to section 86(1) of the Companies Act, 2013, if a company is in default in complying with any provisions of this chapter;
   • The company shall be liable to a penalty of Rs 5 lakh; and
   • Every officer in default shall be liable to a penalty of Rs 50,000.
2. If any person wilfully furnishes:
   • Any false or incorrect information; or
   • Knowingly suppresses any material information;
     Which is required to be registered under section 77, he shall be liable for action under section 447 ‘punishment for fraud’.

Conclusion

The Companies Act 2013 lays down specific guidelines for the registration, modification, and satisfaction of charges, reflecting its significance in the corporate lending scenario. Understanding these guidelines is crucial for both companies and lenders to ensure compliance and legal validity. This process brings transparency and safeguards the interests of all parties involved, forming an essential aspect of corporate financial management. Therefore, adherence to these provisions is not merely a legal formality but a vital practice for robust financial governance.