Understand the nuances of a charge under the Transfer of Property Act, 1882, exploring its essentials, differences from mortgages, and the distinction between fixed and floating charges. Delve into legal intricacies, including crystallization of charges and relevant case laws, to grasp the complexities associated with property transactions.
According to Sec 100 of Transfer of Property Act,1882- Where immovable property of one person is by act of parties or operation of law pledged as security for the payment of the money to another, and the transaction does not constitute a mortgage, the latter would acquire the charge over the property.
WHAT ARE THE ESSENTIALS OF A CHARGE-
1. Immovable property of one person is made security for the payment of money to another.
2. This transaction does not amount to a mortgage.
3. By the act of parties or by operation of law.
NO MERGER IN CASE OF SUBSEQUENT ENCUMBRANCE
According to Sec 101 of Transfer of Property Act,1882- Any mortgagee of, or person having a charge upon, immoveable property, or any transferee from such Mortgagee or charge-holder, may purchase or otherwise acquire the rights in the property of the mortgagor or owner. As the case may be, without thereby causing the mortgage or charge to be merged as between himself and any subsequent mortgagee of, or person having a subsequent charge upon, the same property; and no such subsequent mortgagee or charge holder shall be entitled to for close or sell such property without redeeming the prior mortgage or charge or otherwise than subject thereto.
In simple language it means, the mortgagee of immovable property or the person who is having a charge on the immovable property or the transferee from such mortgagee or charge holder may acquire the rights in the property of the mortgage or the charge as between:
1. Himself and the subsequent mortgagee of the same property.
2. Himself and a person having charge upon the same property.
DIFFERENCE BETWEEN CHARGE AND MORTGAGE
|
SR. NO. |
BASIS | CHARGE | MORTGAGE |
| 1 | Section | Defined in Sec 100 of the Transfer of Property Act, 1882 Act | Defined in Sec 58 of the Transfer of Property Act, 1882 Act |
| 2 | Transfer of Interest | No transfer of interest | Transfer of an interest in the property. |
| 3 | Debt | There may or may not be a debt. | The mortgage is against a repayment of a debt. |
| 4 | Mode | It can be in oral and written form | It must be writing. |
| 5 | Rights | It is Right in Personam, that is, enforceable against a person. |
It is Right in Rem, that is, enforceable against a world. |
| 6 | Registration | Registration is compulsory only when it is created by the act of the parties. | Registration is compulsory. |
| 7 | Creation | Created either by operation of law or an act of parties | It can be created by an act of parties. |
| 8 | Enforcement | A simple mortgage can be enforced within 12 years and a mortgage other than a simple mortgage can be enforced within 30 years. | Can be enforced within 12 years. |
| 9 | Scope | Every mortgage is a charge | Every charge is not mortgage. |
DIFFERENCE BETWEEN CHARGE AND LEIN
|
SR. NO. |
BASIS | CHARGE | LEIN |
| 1 | Creation | A charge can be created either by the act of the parties or by operation of law. | A lien can be created by only the operation in law. |
| 2 | Type of Property | A charge can be created only on immovable property | A lien can be created either on movable property and immovable property. |
| 3 | Nature | A charge is not possessory in nature |
A lien is possessory in nature. |
TYPES OF CHARGES-
1. Fixed Charge- It is created on properties such as Plant and machinery, Land and Building whose identity does not change during the period of loan. At the time of creation of the fixed charge, there is a clearly specified and defined property, the identity of that property does not change during the period of the loan.
2. Floating Charge- It is created on assets which undergoes change during the period of loan. In floating charge, the security is allowed to be used in the ordinary course of business till the charge crystallizes. It is fluctuating or dynamic in nature i.e. price and quantity fluctuate time to time.
CRYSTALLISATION OF CHARGE-
Crystallization is the process by which a floating charge converts into a fixed charge. If any company fails to repay the loan or enters liquidation, the floating charge becomes crystallized and converts into fixed charge. This usually happens when the borrower defaults on his part or payment and the lender takes action to recover his loan amount. That means the charge becomes crystallized i.e. fixed when the company/ firm ceases to be a going concern or upon the commencement of winding up or the appointment of receiver.
DIFFERENCE BETWEEN FIXED AND FLOATING CHARGE-
| SR. NO. | BASIS | FIXED CHARGE | FLOATING CHARGE |
| 1 | Definition | It is created on properties such as Plant and machinery, Land and Building whose identity does not change during the period of loan | It is created on assets which undergoes change during the period of loan |
| 2 | Registration of charge | Registration of movable assets is voluntary, in case of fixed charge. | The registration is compulsory irrespective of the asset type, in case of floating charge. |
| 3 | Type | Legal | Equitable |
| 4 | Nature | Static or Fixed | Dynamic or fluctuating |
| 5 | Preference | First preference | Second preference |
| 6 | Type of asset | Noncurrent asset | Current asset |
| 7 | Dealing in asset | The company can not deal in the asset secured by the fixed charge. | The company can deal in the asset until the floating charge crystallizes. |
CASE LAWS OF CHARGE-
1. Raychand Jivaji vs. Basappa Virappa Bellary (1940) 42 BOMLR 1113
2. Hasan vs. Mt Kalawati 147 IC 302, AIR 1933 All 934
3. Debi Singh and Ors. vs. Jagdish Saran Singh AIR 1952 All 716
CONCLUSION-
The charge is different from pledge, lien, mortgage, hypothecation etc. Each term has their own differences. In this article the charge has been explained.
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