This article is written by Chandana Lakshman, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here she discusses “Implications of recent changes in requirements relating to registration of charges under the Companies Act, 2013”.

Introduction

Whenever companies are short of capital, and when there is a need to enhance the growth and to increase the share capital, the safety way companies go is they borrow money from any financial institutions or banks they give security to the banks assuring them they would repay them along with the interest charges. By doing so a 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. In case the company doesn’t register the charge, such unregistered charge shall not be taken by any creditors or liquidators at the time of winding up.

Meaning of Charge

In simple parlance, the charge is given as a security for loans or debentures which are borrowed from the lender. 

Section 2(16) of the Companies Act 2013 defines charge as “an interest or lien created on the property or assets of a company or any of its undertaking or both as security and includes a mortgage.

Dublin City Distillery Co v Degrey 1914 AC 823

In this case, it was held that charge includes a lien and equitable charge and whether created by an instrument in writing or by the deposit of title deeds.

Types of Charges

A charge may be created in two ways

1. Fixed or specific charge.
2. Floating charge.

Fixed or specific charge

When is a charge on the assets which are either definite in nature and which can be ascertained or capable of being ascertained and defined at the time of creating the charge? For example land, buildings or plants and machinery. The Important advantage of registering a fixed charge is when the company is wound up the debenture holder who is secured by a specific charge will be placed in the highest-ranking among the other creditors.

Floating Charge

A floating charge is not like fixed charge, this type of charge doesn’t create a charge on any definite property, but creates a charge on a fluctuating type like stock-in-trade. The interesting point about the floating charge is that companies can deal with the property in any manner which has been charged. For example, it may sell, mortgage or lease the property in the ordinary course of business provided it’s expressly mentioned in the memorandum of association.

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.

Registration of Charges- Companies Act, 2013

Section 77 of the companies act 2013 deals with registration of  charges

Section 77(1) charge may be created: 

1. within or outside India.
2. on its property or assets or any of its undertaking.
3. whether tangible or otherwise and situated in or outside India.

Shall be registered.

• All the particulars relating to charge which is being filed with the registrar of companies shall be signed by the company ( who is creating charge) and the charge holder in the Form No. CHG-1 ( other than debentures) or Form CHG-9 ( debentures).
• As soon as the charge is created it is to be registered within 30 days of its creation by filing an application by the company to the registrar.
• In case the company doesn’t register the charge within 30 days but it is created within 300 days on payment of additional 

1. 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 
2. 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.

Subsequent registration shall not prejudice any right

In case of subsequent registration of charge, the former charge holder rights will not be affected which is stated in the third proviso to section 77 (1).

When a company fails to register a charge

• When a company fails to register a charge within a period of 30 days from the creation, then the charge holder may register the charge himself by making an application to the registrar in Form no.CHG-1 or Form no.CHG-9 along with paying the fees.
• In Spite of not registering after giving notice to the company to register the charge, the registrar may allow registration of such charge within 14 days of giving notice to the company.

Notice of charge

Section 80 of Companies Act 2013 states whenever a charge is created on any of its assets or any of its undertakings than any person acquiring such assets or undertakings it is to be assumed that the subsequent person acquiring any of its assets or undertakings has complete knowledge of charge registered.

Register of charge maintained in ROC’s office

Section 81 of Companies Act 2013 states that registrar shall maintain a register which contains the particulars of the charge registered in respect of every company.

Consequences of non-registration of charges

Section 77 of Companies Act 2013 states that in case a company fails to register the charge with the registrar of companies for registration the same shall be void against the liquidator and the creditor of the company.

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 in same case, it was also mentioned that it is also important to note that this doesn’t mean that charge is void nor debt is not recoverable. Until and unless the company goes into liquidation the charge is good and maybe enforced.

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Void against the liquidator it means on the winding up of company it can ignore the charge and can treat the concerned creditor as an unsecured creditor.

Void against any creditor means when there is subsequent registration of charge and if the former charge fails to register the charge, the latter charge shall have priority over the asset.

Punishment for failing to register the charge

Section 86 states that if a company contravenes any of provisions relating to this chapter it shall be punishable with a fine of minimum one lakh and it may not go beyond ten lakhs.

Every officer of the company who is in default shall be punishable either with imprisonment which may extend to six months or with fine which shall not be less than twenty-five thousand but it may extend to one lakh or with both.

E- forms to be filed

Procedure for registration of charge

Section 180(2) Before creating it is essential for the company to pass special resolutions authorising the board of directors to borrow funds for the company

Section 180(1) authorises the board of directors to create a charge on the assets of the company to provide security for repayment of borrowings.

1. After passing a special resolution, the company needs to file a form MGT-14 of the Companies ( Management and Administration) Rules 2014 to be filed with the registrar.

2. Particulars of charge to be filed with the registrar within 30 days of creating in the Form No. CHG-l ( for other than debentures) or Form No. CHG-9 ( for debentures including rectification)

3. The following documents to be attached with e-form No. CHG-9/ CHG-1-

•  A certified true copy of evidencing any creation modification of charge.
• In cases where there are more than one charge holder, particulars of other charge holders.
• The instrument evidencing creation or modification of charge in case of acquisition of property which is already subject to charge together with the instrument evidencing such acquisition.

4. Payment of fees can be made online in accordance with Annexure B of Companies (registration office and fees) rules 2014.

5. If the charge is not registered within 30 days due to unavoidable reasons then it may be filed within 300 days after paying additional fees as under Annexure B of Companies (registration office and fees) rules 2014.

6. When there is a delay in filing any application it has to be filed in Form No. CHG-1 and it is also to be signed by its secretary or director that such filing shall not affect the rights of any other intervening creditors of the company.

7. Once the charge is registered, the registrar will issue a certificate of registration of such charge in Form No. CHG-2.

8. A company shall within 30 days from the date of payment be intimated to the registrar in Form No. CHG-4 along with prescribed fees.

9. Registrar shall obtain a certificate of registration of satisfaction of charge in Form No. CHG-5.

10. Whenever any changes are to be made in relation to creation, modification, and satisfaction of charge can do it filing the Form No. CHG.7 and enter in all the particulars of charges registered with the registrar.

11. All the entries in the register shall be authenticated either by a director of company secretary of the company or any other person who is authorised by the board.

12. The registrar of charge shall be secured safely and instrument creating a charge shall be preserved for a period of eight years.

13. In case satisfaction of charge is not filed within 30 days it s be filed with an application for condonation of delay with Central Government in Form No. CHG-8.

14. Where instrument creating a charge is not filed with the registrar within a period of 300 days it shall be filed with an application for condonation of delay with Central Government in Form no CHG-8.

Conclusion

A charge is one way of borrowing money from financial institutions or banks. The lender needs to carefully inspect the Index of charges and forms in the MCA Portal.

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