Registration
of charge under the Companies Act, 2013
Author:
Dr. Rajeev
Babel
ACS, MBS,
Ph.D, LLB, AIIB,
M.Com,
DBM, DFS, DT&D
Company
Secretary in Practice
1. Meaning
of Charge:
1.1. As per the Companies Act:
1.1.1. As per the Companies Act, 2013: Section
2(16) of the Companies Act, 2013, defines, “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.
1.1.2. As per Companies Act, 1956: Section 124 "charge" includes a mortgage.
1.2. As per the Transfer of
Property Act, 1882: According to Section 100 of
the Transfer of Property Act, 1882, where an immovable property of one person
is by act of parties or operation of law made security for the payment of money
to another and the transaction does not amount to a mortgage, the latter person
is said to have a charge on the
property, and all the provisions here-in-before contained which apply to a
simple mortgage shall, so far as may be, apply to such charge.
2. Mis-conception about charge: Often the word charge is taken as synonym of
mortgage or lien. There is difference between these words.
2.1. Difference between Charge and Mortgage:
Charge
|
Mortgage
|
Charge
is not the transfer of any interest.
|
It is a
transfer of an interest in specific immovable property.
|
Charge
is created by act of parties or by operation of law.
|
Mortgage
can be created only by act of parties.
|
Creation
of charge does not necessarily imply the existence of a debt.
|
In
Mortgage the existence of debt is necessary.
|
Charge
is good only against subsequent transferee with notice.
|
Mortgage
is good against subsequent transferees and may be enforced against a bona
fide purchaser for value with or without notice.
|
Charge
created by operation of law does
not require registration. However charge created by act of parties requires registration irrespective of the amount
involved.
|
Where
the principal money secured is Rs 100 or upwards, a mortgage other than a
mortgage by deposit of title deeds can be effected only by a registered
instrument signed by the mortgagor and attested by at least 2 witnesses.
|
2.2. Difference between Charge and Lien:
Charge
|
Lien
|
A charge
may be created by act of parties or by operation of law.
|
A lien
can arise only operation of law.
|
A charge
not only empowers its possessor in many cases to hold the property charged,
if it is in his possession, but also to enforce it in a court of law.
|
A lien,
on the other hand is simply a right t possess and retain property until some
charge attaching to it is paid or discharged.
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A charge
is confined to immovable property.
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A lien
may be in respect of movable property.
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3.
The need of creating charge:
In
order to raise the capital for the requirement of running / expansion of the
business, the companies tend to borrow from the banks/ financial institutions
or raise the money through issuance of the debentures. The banks/ FIs usually
have the terms and conditions to create a charge in favour of them in order to
safe guard the money lent by them. Similarly while raising the money through
issuance of debentures, the assets of the company are put under the charge, to
create confidence among the investors / as per the stipulations by the SEBI.
The lending institutions always want to know, whether the assets, which are
being charged, are free from encumbrance and exclusively charged in favour of
them.
4. Nature and Type of charges:
4.1. As per nature of charges:
4.1.1. Pari-charge: It is a Latin
phrase, which means "equal footing",
that describes situations, where two or more assets, securities, creditors or
obligations are equally managed without any display of preference. An example
of pari-passu occurs during bankruptcy proceedings when a verdict is reached,
all creditors can be regarded equally, and will be repaid at the same time and
at the same fractional amount as all other creditors. Treating all parties the
same means they are pari-passu.[1]
4.1.2. Second charge: It
means, where the same asset is put under the charge of the subsequent lender.
The 2nd charge falls behind the 1st charge.
4.1.3. Fixed charge:
Under this charge, the asset is ascertainable and defined. Usually the assets
under this category is of immovable assets or movable assets like Plant and
Machinery etc.
4.1.4. Floating Charge:
Under this charge the asset is variable like stock in trade, Book debts etc. A floating charge is a special
charge which is recognised by the Indian Companies Act. A floating charge is
created by making the assets or the undertaking of the company a security for
the payment of debts into which a company enters. Such a charge might cover
properties which may be specified or unspecified in the document creating the
charge. The description may be a general one. A peculiar feature of this
transaction, however, is that it is not possible to predicate the exact
property on which the charge would operate until the happening of a future
event. This future event may be the appointment of a receiver at the instance
of the creditors of a company for the realisation of their debts or the winding
up of the company itself. Till such a future event happens, the charge is of an
ambulatory or roaming character. It remains in this hovering condition until
the contemplated future event takes place. Once, however, this future event
occurs, the charge settles down and attaches itself to a fixed property. The
right created under it is no doubt a right in praesenl. The security in respect
of which the right is created, however, becomes crystallised only when the
future event take place. It may, therefore, be said that, until the time such
further event occurs the right created thereby is a dormant right. The moment
such future event takes place, this dormant right assumes a dynamic form and
becomes capable of enforcement against certain specified property or properties
which answer the description of the properties given in the debenture. Whereas
before the happening of the future event the company did possess and unlimited
power to dispose of absolutely the property which was sought to be made the
subject-matter of the charge, after the happening of the said event the charge
fastens itself on the specified property thereby altering the situation. The
crystallisation of the security in this manner does to a certain extent limit
the right of the company, for it can be said that thereafter the property which
is the subject-matter of the charge having been specified and fixed becomes
subject to the charge created by the debenture and the fetters which the law
imposes on charged property begin to attach to such a property. The
unrestricted right of the company to deal with the said property can thus be
said to have been limited.[ Krishna Deva Bhargava v. Official Liquidator, U.P. Oil Industries Ltd.
[1962] 32 Comp. Cas. 925 (All.)]
4.2. Types of charges:
.
Uncalled
share capital
.
Calls made
but not paid
.
Immovable property
or any interest therein
.
Movable
property (not being pledge)
.
Floating
charge
.
Motor
Vehicle (Hypothecation)
.
Any property
for securing the issue of secured deposits
.
Goodwill
.
Patent
.
Licence
under a patent
.
Trade mark
.
Copyright
.
Book
debts
.
Ship or any
share in a ship
.
Property
situated outside India
5.
Why registration of charge is necessary:
Why the registration of charge is
necessary, has been explained in Section
77(3), which states that notwithstanding
anything contained in any other law for the time being in force, no charge
created by a company shall be taken into account by the liquidator or any other
creditor unless it is duly registered
under sub-section (1) and a certificate
of registration of such charge is given by the Registrar under sub-section
(2).
6. Duty to
register the charges:
Section
77. (1) of the Companies Act, 2013
states that it shall be the duty of every
company creating a charge within or
outside India, 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 signed
by the company and the charge-holder
together with the instruments, if any, creating such charge in such form,
on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days
of its creation.
7. Condonation
of delay:
Registrar may, on an application by the company, allow such
registration to be made within a period of 300 days of such creation on payment
of such additional fees as may be prescribed. Further if registration is not made within a period of 300 days of
such creation, the company shall seek extension of time in accordance with section
87 from
the Central Government.
8. Whether charge holder can
initiate action:
Section 78 states that where a company fails to register the
charge within the period specified in section 77, without prejudice to its liability
in respect of any offence under this Chapter, the person in whose favour the charge is created may apply to the Registrar
for registration of the charge along with the instrument created for the
charge, within such time and in such form and manner as may be prescribed and
the Registrar may, on such application, within
a period of 14 days after giving notice to the company, unless the company
itself registers the charge or shows sufficient cause why such charge should
not be registered, allow such registration on payment of such fees, as may be
prescribed. Where registration is effected on application of the person in
whose favour the charge is created, that person 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.
9. Procedure for registration of
charge:
Rule 3(1) of COMPANIES
(REGISTRATION OF CHARGES) RULES, 2014 deals with the matter. For registration
of charges as provided in subsection (1) of Section 77,
Section 78 and Section 79, the particulars of the charge together with a copy
of the instrument, if any, creating or modifying the charge in Form No.CHG-1
(for other than Debentures) or Form No.CHG-9 (for debentures), as the case may
be, duly signed by the company and the charge holder and filed with the
Registrar within a period of thirty days of the date of creation or
modification of charge along with the fee.
Rule 3(4) further provides that a copy of every
instrument evidencing any creation or modification of charge and required to be
filed with the Registrar in pursuance of Section 77, 78 or 79 shall be
verified, (a) where the instrument or deed relates solely to the property
situated outside India, the copy shall be verified by a certificate issued
either under the seal of the company, or under the hand of any director or
company secretary of the company or an authorised officer of the charge holder
or under the hand of some person other than the company who is interested in
the mortgage or charge; (b) where the instrument or deed relates, whether
wholly or partly, to the property situated in India, the copy shall be verified
by a certificate issued under the hand of any director or company secretary of
the company or an authorised officer of the charge holder.
10. Forms prescribed under the Rules:
e-Form No.
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Relevant Sections of CA, 2013
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Particulars
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CGH 1
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78
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Form for
registration of creation, modification of charge (other than those related to
debentures) including particulars of modification of charge by Asset
Reconstruction Company in terms of Securitization and Reconstruction of
Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI
|
CHG 2
|
77(2)
|
Certificate of registration of charge
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CHG 3
|
79
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Certificate of registration of modification of
charge
|
CHG 4
|
82
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Particulars
for satisfaction of charge thereof
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CHG 5
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82, 83
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Memorandum of satisfaction of charge
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CHG 6
|
Notice
of appointment or cessation of receiver or manager
|
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CHG 7
|
85
|
Register of charges
|
CHG 8
|
87
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Application
to Central Government for extension of time for filing particulars of
registration of creation / modification / satisfaction of charge OR for
rectification of omission or misstatement of any particular in respect of
creation/ modification/ satisfaction of charge
|
CHG 9
|
77,79
|
Application
for registration of creation or modification of charge for debentures or
rectification of particulars filed in respect of creation or modification of
charge for debentures
|
CHG 10
|
88
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Application
for condonation of delay shall be filed with Central Govt.
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INC 28
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87
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Order
passed by Central Govt for condonation of delay.
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11. Modification of charge:
Sometimes,
after the creation of charge, the modification is required in it on account of
addition or reduction of the amount secured. Section 79 of CA, 2013 provides
that the provisions of section 77 relating to registration of charges shall, so
far as may be, apply to (a) a
company acquiring any property subject to a charge within the meaning of that
section; or (b) any
modification in the terms or conditions or the extent or operation of any
charge registered under that section. From this it may be inferred that the
provisions relating to the certificate
of registration of charges etc. are also applicable on the modification of
charge.
12. Satisfaction of charge:
Where the
borrowings are repaid by the company or debentures are paid to holders thereof,
the charge is to be lifted. This is called the satisfaction of the charge.
Section 82(1) provides that, a company shall give intimation to the Registrar
in the prescribed form, of the payment or satisfaction in full of any charge
registered under this Chapter within a period of thirty days from the date of
such payment or satisfaction and the provisions of sub-section (1) of section 77 shall, as far as may
be, apply to an intimation given under this section.
13. Certificate of registration given by the
Registrar and its effect:
13.1. Certificate of
Registration: Section 77(2) states that where a charge is registered with
the Registrar under sub-section (1) of section 77, he shall issue a certificate
of registration of such charge in such form and in such manner as may be
prescribed to the company and, as the case may be, to the person in whose
favour the charge is created.Section 77(3) further provides that
notwithstanding anything contained in any other law for the time being in
force, no charge created by a company shall be taken into account by the
liquidator or any other creditor unless it is duly registered under sub-section
(1) and a certificate of registration of such charge is given by the Registrar
under sub-section (2).
13.2. The
certificate once issued by the Registrar
will be the conclusive evidence and no question about its validity/
effective date may be challenged. [Des Raj, Voluntary Liquidator v. Punjab Financial Corpn.
[1970] 40 Comp. Cas. 551 (Punj. & Har.)] [C.L. Nye Ltd., In re [1971] 41 Comp. Cas. 96 (CA)]
13.3. Effect of Certificate of Registration: Section 80
provides that 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.
14. Consequences of Failure to get
the charge registered:
All
charges which are required to be registered, if not got registered, will be
void and there is no legal sanctity of it. Section 86 provides that if any
company contravenes any provision of this Chapter, the company shall be
punishable with fine which shall not be
less than one lakh rupees but which may extend to ten lakh rupees and every
officer of the company who is in
default shall be punishable with
imprisonment for a term which may extend to six months or with fine which shall not be less than
twenty-five thousand rupees but which may extend to one lakh rupees, or with
both.
15. Maintenance of Register of Charges:
Section 85 provides that every company shall keep at its registered office, a register of
charges, in such form and in such manner as may be prescribed, which shall
include therein all charges and floating charges affecting any property or
assets of the company or any of its undertakings, indicating in each case such
particulars as may be prescribed. A copy of the instrument creating the charge
shall also be kept at the registered
office of the company along with the register of charges. The register of
charges and instrument of charges, kept under sub-section (1) shall be
open for inspection during business hours (a) by any member or creditor
without any payment of fees; or (b) by any other person on payment of
such fees as may be prescribed, subject to such reasonable restrictions as the
company may, by its articles, impose.
16. Charge- A comparison between CA, 1956 and CA 2013:
CA, 1956
|
CA, 2013
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Section
125(1) read with section 134 of the 1956 Act only cast an obligation on the
company to register with ROC specified charges [See section 125(2) of the 1956 Act] and not all charges created on property/undertaking of the company.
|
The 2013 Act, on the other hand,
requires the company to register the particulars of every charge created by it on its property or assets
or any of its undertakings with ROC.
|
Registration of pledge of movable property
was exempt from registration with ROC under the 1956 Act
|
It appears that even pledges of movable property will have to be registered with ROC
under the 2013 Act since the words used are 'every charge'. The 2013 Act
defines 'charge' as an interest or lien created on
property/assets/undertaking of company as security. In view of this
definition of 'charge', it appears that even pledges of movable property will
have to be registered with ROC under the 2013 Act.
|
The 1956
Act provided that the no charge created by a company shall be taken into
account by the liquidator or any other creditor unless particulars thereof with copy of instrument creating charge have been
filed with ROC within 30 days of creation of charge.
|
The 2013
Act contains more stringent
provisions in this regard, i.e., no
charge created by a company shall be taken into account by the liquidator or
any other creditor unless it is duly
registered and a certificate of
registration of such charge is given by the Registrar.
|
17. Some Judicial
pronouncements on the subject matter:
- An assignment of book debts for the purpose of securing an existing debt is a mortgage of such a character as falls within the ambit of section 109(d) of the 1913 Act. Unless it is registered as required by the provisions of the 1913 Act, an assignment will be inoperative as against the liquidator and the creditors of the company. [Ranjit Ray v. D.A. David [1935] 5 Comp. Cas. 281 (Cal.)]
- Absolute assignment of a future debt is not a charge and document making such assignment does not require registration. [ Ashby Warner & Co. v. Simmons [1938] 8 Comp. Cas. 111 (CA)]
- Debentures creating a charge on immovable property must also be registered under Indian Registration Act; registration under Companies Act is not enough. It is necessary that a debenture creating a charge whether floating or fixed over any immovable property should be registered according to the provisions of law laid down in section 17 of the Registration Act, in addition to the provisions of the Companies Act. The provisions of the Companies Act are intended to protect people who have business dealings with companies and to warn them to the extent to which the companies have created obligations over their property. The provisions of the Registration Act are intended to protect all those who may have dealings with property so that those persons, particularly those local persons, may have knowledge of the obligations which have been created over and in respect of the property [ K. Roy & Bros. v. Ramanath Das [1945] 15 COMP. CAS. 69 (Cal.)] [Official Liquidator v. Sri Krishna Deo [1959] 29 Comp. Cas. 476 (All.)]
- Where stock-in-trade is subject to mortgage or charge, such mortgage or charge should be registered. [ Raja of Vizianagaram v. Official Liquidator, Vizianagaram Mining Co. Ltd. [1952] 22 Comp. Cas. 1 (Mad.)]
- No pledge need be registered. A charge or mortgage too would not need registration if it related to stock-in-trade; but a charge or mortgage in respect of other movable property must be registered.[ V. Ramamurthi, Official Liquidator v. Indian Bank [1955] 25 Comp. Cas. 462 (Mad.)]
- Failure to register charge does not make security void when company is a going concern. [Chandbali Steamer Service Co. Ltd., In re [1956] 26 Comp. Cas. 109 (Cal.)]
- Registration under Registration Act is essential to make a charge in respect of immovable properties in favour of debenture holders valid and enforceable. [ State of Madras v. Madras Electric Tramways (1904) Ltd. [1956] 26 Comp. Cas. 398 (Mad.)]
- A charge on future debts can be created and such charge if not registered is void. [ Independent Automatic Sales Ltd. v. Knowles & Foster [1962] 32 Comp. Cas. 1090 (Ch. D)]
- Inaccuracy of particulars of charge in registration does not make charge invalid, for terms and effect of charge one must look at document creating charge. [Mechanisations (Eaglescliffe) Ltd., In re [1965] 35 Comp. Cas. 478 (Ch. D)]
- Even if date of creation of charge is false, charge as registered by Registrar is valid. [ERIC Holmes (Property) Ltd., In re [1965] 35 Comp. Cas. 811 (Ch.D.)]
- Once Registrar issues certificate, Court cannot go into question whether filing of particulars was done in time, or whether Registrar condoned delay. [Des Raj, Voluntary Liquidator v. Punjab Financial Corpn. [1970] 40 Comp. Cas. 551 (Punj. & Har.)]
- Certificate issued by Registrar is conclusive both qua date and qua amount and it is not permissible to go behind certificate even if it was presented for registration out of time. [C.L. Nye Ltd., In re [1971] 41 Comp. Cas. 96 (CA)]
- A holder of a lien is a secured creditor and if lien is statutory, his claim need not be registered under section 125 of CA 1956. [ K. Saradambal v. Jagannathan & Bros. [1972] 42 Comp. Cas. 359 (Mad.)]
- Claim of secured creditors holding second charge is not to be excluded at time of determining distribution ratio for purpose of distribution/payment between secured creditors and workmen. [Gujarat Steel Tube Employees Union & 1v.O.L. of Gujarat Steel Tubes Ltd. (In Liqn.) & 7, [2012] 27 taxmann.com 318 (Guj.)]
- In absence of creation of charge in favour of bank in respect of immovable properties of company-in-liquidation, Official Liquidator would be justified in adjudicating claims by keeping bank excluded in respect of an amount realized from immovable properties. [Tea Trading Corpn. of India Ltd. (In liquidation), In re. [2013] 40 taxmann.com 221 (Calcutta) ]
- Where guarantor company's director appended digital signature on Form 8 in respect of creating charge, but same could not be uploaded on MCA site due to said director's default in some other company, no relief could be availed by bank. [Kotak Mahindra Bank Ltd. v.Nagarjuna Travels & Hotels Ltd. [2014] 45 taxmann.com 198 (CLB - Chennai) ]
- Mere undertaking given by company-in-liquidation to pay for supply would not amount to creation of charge and, thus, supplier's claim for preferential payment as secured creditor would fail. [Oil and Natural Gas Corporation Ltd. v. Official Liquidator of Ambica Mills Co. Ltd. [2014] 44 taxmann.com 350 (SC) ]
- Where loan from bank is raised by pledging fixed deposit receipts, registration of charge is not necessary. [Sree Meenakshi Mills Ltd. v. Registrar of Companies [1966] 36 Comp. Cas. 961 (Mad.)]
- Contracts of insurance, guarantee, indemnity, etc., do not require registration. [Paul & Frank Ltd. v. Discount Bank (Overseas) Ltd. [1967] 37 Comp. Cas. 76 (Ch.D.)]
- A charge created by a hypothecation agreement over movables, or by a refinance hire-purchase agreement requires registration. [Official Liquidator, Manasuba & Co. (P.) Ltd. v. Commissioner of Police [1968] 38 Comp. Cas. 884 (Mad.)]
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