Registration of Charges – CA Inter Law Notes

Registration of Charges – CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern.

Registration of Charges – CA Inter Law Notes

Basics And Definition – Charge
Meaning of Charge
Charge is an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt.

Definition – Charge – Section 2(16)

• Section 2(16) of Companies Act, 2013 defined charge as interest or lien created on property or assets of company or its undertaking. It also includes mortgage.
• All charges created by company on its property or assets of company shall be registered with Registrar of Companies.

Types of Charge
Charge can be either:

• Fixed charge; or
• Floating charge

Fixed Charge

• Fixed charge is also known as specific charge.
• Such a charge is against a specific clearly identifiable and defined property.
• The property under charge is identified at the time of creation of charge.
• The nature and identity of the property does not change during the existence of the charge.
• The company can transfer the property charged only subject to that charge, so that the charge holder or mortgagee must be paid first, whatever is due to him before disposing of that property.

Floating Charge

• Such a charge is available only to companies as borrower.
• A floating charge does not attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc.
• It attaches to the property charged in the varying conditions which happen from time to time.
• Such a charge remains dormant until the person in whose favour charge is created takes steps to crystallise the floating charge.
• A floating charge on crystallisation becomes a fixed charge.

Differences Between Fixed Charge and Floating Charge

Fixed Charge	Floating Charge
It is against a specific clear­ly identifiable and defined property.	It is available only to compa­nies as borrower.
Property under fixed charge is identified at the time of creation of charge.	Does not attach to any defi­nite property but covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc.
Nature and identity of the property does not change during the existence of the charge.	Nature and identity of the property changes based on varying conditions from time to time.
No crystallisation is possible of fixed charge.	On crystallisation, floating charge becomes the fixed charge.

Difference Between Charge And Mortgage

Matter	Charge	Mortgage
Creation	Charge can be created either through the act of parties or by operation of law.	Mortgage is created by the act of the parties.
Registration	A charge created by operation of law does not require reg­istration. However, a charge created by act of parties re­quires registration.	Mortgage requires registration under the Transfer of Proper­ties Act, 1882.
Term	May be for perpetuity.	Requires fixed term.
Nature	It does not involve transfer of an interest in property. It only gives a right to receive payment out of a particular property.	Mortgage involves transfer of an interest in specific immov­able property.
Personal liability	No personal liability is creat­ed. But where a charge is the result of a contract, there may be a personal remedy.	Personal liability is created unless excluded by express contract in case of the simple mortgage.
Good against	Good against subsequent transferees with notice.	Good against subsequent transferees with or without notice.

Crystallisation of Charge
What is Crystallisation of Charge?

• When the charge holder takes steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge.
• Until a floating charge becomes a fixed charge, the company is free to deal with the property charged in any manner it deems fit.
• But once the floating charge crystallises, the company cannot dispose of the charged assets without paying off the charge holder. Otherwise, the charge holder can recover his dues from the proceeds.

When does Crystallization Take Place?
A floating charge crystallises or becomes fixed in following situations:

• Where the company ceases to carry on the business, whether the principal money has become payable or not, unless the debenture or trust deed contains the stipulation to the contrary.
• On commencement of winding up of the company.
• If a debenture holder, having become entitled to realise the securities by reason of the fact that principal money has become payable, intervenes for the purpose by appointing receiver or by making an application to the Court for appointment of receiver.
• On happening of event specified in the deed.

Effect of Crystallisation

• On crystallization, the floating charge converts itself into a fixed charge.
• It acquires priority over any subsequent equitable charge and other unsecured creditors.
• However, preferential creditors having priority for payment over secured creditors in the winding-up get priority over the claims of the debenture holders having floating charge.

Registration of Charge
Which Charges Require Registration?

• Section 77 states that it is the duty of every company to register the charges created:
  • on its property or assets or any of its undertaking,
  • whether tangible or intangible or otherwise,
  • created within or outside India
• Registration shall be done within 30 days.

Procedure for Registration By whom

• Primary responsibility – The company creating the charge – Section 77
• Where a company fails to register charges within specified time limit – The charge holder (the person in whose favour the charge is created) – Section 78

Form

• Particulars of charges are filed in Form CHG-1 or Form CHG-9 as the case may be.
• Above form should be signed by company and charge holder.

Effect of Registration – Section 80

• Once a charge is registered, it acts as a notice to the public at large that the charge holder has an interest in the charged property.
• No person can take a defence against the charge holder that he was not aware that a charge was created against the property. That person will be entitled to the property subject to the interest of the charge holder.
• Once certificate of charge is issued by the Registrar, it is conclusive evidence that the document creating the charge is properly registered.

Time limit of Registration
Normal time
Company must file details of charge with instrument of charge within 30 days of creation with ROC. – Section 77

Delay allowed by ROC

• Registrar may allow to register charges, if application is made by company on payment of additional fees up to 300 days. Registrar should be satisfied that there was sufficient reason which prevented company to register charges within 30 days.
• Application should be supported by declaration by secretary of company or director that delayed registration of charge will not affect right of creditors adversely. Application should be made in Form CHG-8.
• Alternatively, if company fails to register charge within period of 30 days, charge holder may apply to Registrar for registration of charge. On receipt of such request, Registrar issues notice to company to register charges within 14 days. If company shows inability to register charges, registrar shall allow registration of charge by charge holder.

Delay allowed by CG
If charge is not registered within 300 days, application for condonation of delay should be made to Central Government for registration of charge.- Section 87

Certificate of Registration ROC

• On registration of charge, Registrar will issue certificate of registration. – Section 77(2)
• The certificate of registration shall be in Form CHG-2.

Effect of Non-registration of Charge
Security becomes void

• A charge which is compulsorily required to be registered but which is not registered is void.
• This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them.

Repayment of money
Although the security becomes void by non-registration, it does not affect the contract or obligation of the company to repay the money thereby secured.

Punishment – Section 86

• Omission to register particulars of charge is punishable with fine.
• A company shall be liable to fine from ₹ 1 lakh to ₹ 10 lakhs.
• Defaulting officer of company is punishable for:
  • Imprisonment upto 6 months; or
  • Fine which is not less than ₹ 25,000 and not more than ₹ 1 Lakh; or
  • Both

Register of Charges – Section 85
Provisions for Maintaining Register of Charges
Place of maintenance

• Every company must keep a Register of charges at its registered office.
• Entry should be made forthwith on creation of charge, modification of charge or satisfaction of charge.

Authenticity of Register
Entry in register should be authenticated by director or secretary of company or by any other person authorized by Board in this behalf.

Permanent

• The register is maintained permanently.
• Instrument-creating charges or modification of charges shall be preserved for period of 8 years from date of satisfaction of charges.

Details or Particulars of Register of Charges

• The Register of charges shall be maintained in Form CHG- 7.
• In the Register of charges, all charges are required to be entered specifically affecting property of the company (fixed charges) and all floating charges on the undertaking or on any property of the company, giving in each case:
• A short description of the property charged; a The amount of the charge; and
• Except in the case of securities of bearer, the names of the persons entitled to charge.

Inspection Who can inspect?
Inspection of Register of charges can be done by creditors and members free of cost and by any other person on payment of a fee of such sum as may be prescribed.

Time
The Register of charges must be kept open for inspection at the registered office during business hours.

What if inspection is refused?
The Tribunal may also, by order, compel and immediate inspection of Register of charges.

Ratification of Register
Section 87 authorises Central Government to make rectification in Register of charges.

Modification Of Charge – Section 79
What is ‘Modification of Charge’?
Charge stands modified when there is change in terms and conditions of charge.

Following are examples of modification of charge:

• Extent of an existing charge or operation of an existing charge
• Terms of repayment of loans /limits for which the charge was created as security (not applicable for working loan repayable on demand)
• Change in rate of interest (other than bank rate)
• Terms of margin money for advances
• Enhancement of limits sanctioned by bank on same security
• Release of assets from available security (e.g. by sale of assets)
• Pari passu charge created on assets which are already charged
• Assignment of rights of charge holder to third party

Formality on Modification of Charge

• If there are changes in terms and conditions or extent of operation of charge already registered, the modification should be filed with ROC in prescribed form along with certified copy of instrument modifying the charge in 30 days.
• Certificate relating to modification of charges shall be in Form CHG-3.

Delay in Filing Modification of Charge
Registrar has power to condone delay upto 300 days for modification of charges.

Other Provisions In Relation To Charge Satisfaction of Charge – Section 82
What is satisfaction of Charge?
A company must make a report to the Registrar of payment of satisfying in full of any charge registered under this Act.

Provisions or formality

• The satisfaction of charges must be filed with the Registrar within 30 days from the date of such a payment of charge.
• The details have to be filled in Form CHG-4.
• On receipt of intimation to the company, the Registrar gives notice to the chargeholder calling upon him to show cause within time not exceeding 14 days as to why the payment of satisfaction should not be registered.
• If no cause is shown within the time stipulated above the Registrar must enter the satisfaction of the payment of charge.
• If some cause is shown, the Registrar must record note to that effect in the register and inform the company accordingly.
• Registrar will issue certificate of satisfaction of charge in Form CHG-5.

Important Note:

• Registrar has no power to condone delay for registration of satisfaction of charges.
• In case of specified IFSC public company and IFSC private company, Registrar on application of company allow registration within 300 days of creation on payment of additional fees.

Power of Registrar to make entries of satisfaction of charge – Section 83

• When company fails to send intimation of satisfaction of charge to the Registrar, Registrar may on receipt of satisfactory evidence of satisfaction register memorandum of satisfaction.
• The evidences may be:
  • The debt for which the charge was given has been paid or satisfied in whole or in part
  • Part of the property or undertaking charged has been released from the charge
  • Part of the property or undertaking ceased to form part of the company’s property or undertaking.

Intimation about Appointment of Receiver or Manager – Section 84

• If any person obtains an order for the appointment or appoints under the power contained in any instrument a receiver or manager for property, subject to a charge, of a company he should register the information about receiver or manager with ROC within 30 days along with a copy of the order or instrument and payment of prescribed fees.
• If person ceases to be receiver or manager, that fact should also be informed to ROC within 30 days.
• Intimation of appointment or cessation shall be filed with Registrar in Form CHG-6.

Acquisition of Property Subject to Charge – Section 79
Provisions of section 77 relating to registration of charges similarly applicable to a company acquiring any property subject to charge.

Practice Questions

Question 1.
A delay in filing of memorandum of satisfaction cannot be condoned by the Registrar of Companies. Comment.
Answer:
Registrar has power to condone the delay upto 300 days for creation and modification of charge but has no power at all to condone delay in case of satisfaction of charge.

Question 2.
A company may create a mortgage or a charge, including a floating charge, on any of its book-debts. Comment.
Answer:
Statement is correct. Company can create mortgage or charge, including a floating charge, on any of its book debt.

Question 3.
Rose Ltd. raised a loan from a State financial institution by creating hypothecation of book debts and also future debts of the company. Incidentally, the charge was not registered with the Registrar of Companies concerned. State financial institution demanded a certificate of registration of charge for the amount of loan so granted by it. The directors of the company replied to the State financial institution that the charge need not be registered for hypothecation of book debts. Is the action of the directors valid? Give reasons.
Answer:
Contention of directors is wrong. As per the Companies Act, 2013, every company should register charges with Registrar within period of 30 days from creation of charge in Form CHG-1 and obtain certificate of / registration. Accordingly, hypothecation of book debts and also future debts of company should be registered.

Question 4.
A charge requiring registration with Registrar of Companies was created on 1st February, 2015 by XYZ Limited. The Secretary of the Company realised on 15th March, 2015 that the charge was not filed with the Registrar. State the steps to be taken by Secretary to get charge registered with Registrar.
Answer:
The Registrar may allow the particulars of charge to be filed within 30 days next following the expiry of the period of 30 days, if the company satisfies the Registrar that it had sufficient cause for not filing the particulars within 30 days.

Past Examination Questions

Question 1.
What is the concept of ‘Charge’ under the provisions of the composition of the Companies Act, 2013? Point out the circumstances under which a floating charge becomes a fixed charge. (CA May 2004)
Or
What do you understand by the term ‘Floating Charge’? State the circumstances under which ‘Floating Charge’ becomes ‘Fixed Charge’? (CA May 2012)
Answer:

Question 2.
XYZ Limited realized on 3rd November, 2005 that particulars of charge created on 11th September, 2005 in favour of a bank w as not filed with Register of Companies for Registration. What procedure should the company follow to get the registered with Register of Companies? Would the procedure be different if the charge was created on 11th August, 2005 instead of 11th September, 2005? Explain with reference to the relevant provisions of the Companies Act, 2013. (CA November 2005)
Or
MNC Limited realised on 2nd May. 2016 that particulars of charge created on 12th March, 2016 in favour of a Bank were not filed with Registrar of Companies for Registration. What procedure should the company follow to get the charge registered with the Registrar of Companies? Would the procedure be different if the charge was created on 12th February, 2016 instead of 12th March, 2016? Explain with reference to the relevant provisions of the Companies Act, 2013. (CA November 2016)
Answer:
It is duty of company to file documents and register charges with Registrar within period of 30 days from date of its creation. If company could not register it within 30 days, Registrar may allow to register charge within, period of 300 days from its creation on payment of additional fees and on showing sufficient reason.
In the given case, charge was not filed within 30 days. Company shall apply to Registrar and seek for extension with sufficient reason. After permission from Registrar, charge can be registered within 300 days from date of its creation. Accordingly, situation will not be changed if the charge was created on 11th August, 2005. (For alternative question- 12th February, 2016)

Question 3.
What do you understand by ‘Charge’ under the Companies Act, 2013? Distinguish between ‘Fixed Charge’ and ‘Floating Charge’. (CA May 2006)
Answer:

Question 4.
While sanctioning working capital limit, the rate of interest has been fixed at a specified percentage above the bank rate as notified by RBI. There was a change in the interest rate due to RBI notification issued later. The bank insisted on filing a return of modification of charges. Is the stand of the bank correct? Discuss with reasons? (CA November 2007, 2009)
Answer:
Where under the relevant mortgage deed or agreement the term as to the rate of interest on a charge has been fixed at a specified percentage above the bank rate as notified by the RBI, a change in the rate of interest payable on the charge arising out of variation of the bank rate would not amount to a change in the term of the charge. Hence, in such a case, there is no requirement to file modification of charge.

Question 5.
If a registrable charge is not registered, the debt is not recoverable. (CA May 2013)
Answer:
Statement is incorrect. Debt can be recovered as unsecured debt.

Question 6.
Define the term ‘charge’ and also explain what is the punishment for default with respect to registration of charge as per the provisions of the Companies Act, 2013. (CA November 2014)
Answer: