CHARGES AND THEIR IMPLICATIONS

Submitted by
Bharathi . M,
BA0130016.

Project Submitted to
K. Govindarajan
Associate Professor of Law

TAMIL NADU NATIONAL LAW SCHOOL

(A State University established by Act No. 9 of 2012)
NavalurKuttapattu, Srirangam (TK), Tiruchirappalli 620009.

MARCH 2016

1 | Page
 DECLARATION

I, Bharathi.M BA0130016, hereby declare that this project work entitled

charges and their implications, has been originally carried out by me under the guidance and

supervision of K. Govindarajan, Associate Professor of Law, Tamil Nadu National Law School,

Tiruchirappalli - 620 009. This work has not been submitted either in whole or in part of any

Degree / Diploma in this Institution or any other Institution/University.

Place : Trichy.

Date : 25/05/2017.

2 | Page
 ACKNOWLEDGEMENT

I express my deepest sense of gratitude to my reverend guide Govindarajan Sir for his
countenance advice, adherent interest and pain taking nature. He spent no pains in correcting and
expertly evaluating my project work.

It is pleasant opportunity to pay my regards and sincere thanks to him for him valuable
support, guidance and immediate help whenever I approached him.

Finally, I wish to thanks my parents and colleagues for their pleasant cooperation, support
and encouragement.

3 | Page
 TABLE OF CONTENTS

INDEX OF AUTHORITIES

List of abbrevations

CHAPTER 1

1.1 Introduction

1.2 Aims And Objective

1.3 Research Methodology

CHAPTER 11

2.1 Difference Between Charges, Mortgages And Pledges

2.2 Essential Characteristics Of Charges

CHAPTER 111

3.1 Registration of Charges

3.2 Time limit for Registration of Charges

3.3 Condemnation of delay by Registrar

CHAPTER 1V

4.1 Certificate of Registration of Chargers

4.2 Companys Registrar

4.3 Particulars of Charge

CHAPTER V

5.1 Consequences of Non- Registration of Charge

5.2 Conclusion

Bibliography and Reference

4 | Page
LIST OF ABBREVATIONS

1. AIR All India Report

2. All. Allahabad
3. Art. Article
4. Bom. Bombay
5. HC High Court
6. IPC Indian Penal Code
7. ICCPR International Convention on Civil and Political Rights
8. Mad. Madras
9. P. page number
10. Para paragraph
11. S. Section
12. SC Supreme Court
13. SCC Supreme Court Cases
14. V. Versus
15. UK United Kingdom
16. UN United Nation
17. USA United States of America

1.1 INTRODUCTION:

Almost all the large and small companies depend upon share capital and borrowed capital for
financing their projects. Borrowed capital may consist of funds raised by issuing debentures
which may be secured or unsecured or by obtaining financial assistance from Financial
institution or banks. The financial institutions/banks do not lend their monies unless they are sure

5 | Page
that their funds are safe and they would be repaid as per agreed repayment schedule along with
payment of interest. In order to secure their loans they resort to creating right in the assets and
properties of the borrowing companies which is known as a charge on assets. This is done by
executing loan agreements hypothecation agreements, mortgage deeds and other similar
documents which the borrowing company is required to execute in favour of the lending
institutions or banks etc. Every venture, company or business requires funds for the smooth
functioning of their operations. This money is usually borrowed from banks or financial
institutions. These lenders do not lend money until they are sure that their funds will be repaid
along with interest. So in order to secure their loans the lenders execute loan agreements
hypothecation agreements mortgage deeds and other similar documents which the borrower
executes in the favor of lender. The creation of rights in the assets and properties of borrowing
company is known as charge on assets.

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 which apply to a simple mortgage shall so far as
may be apply to such charge. A charge is basically a right which is created by a person or
company (borrower) on its assets and properties, whether present or future, in favor of a bank or
financial institution (lender) which lends financial assistance. Section 2(16) of the Companies
Act 2014 defines charges so as to mean 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. Let us analyze
the importance of charges in the new regime with the precedent cases.

1.2 AIMS AND OBJECTIVE:

To study the scope of charges in the contemporary scenario

To analyse the significant changes which charges brought out in the new Company Act
2013
To know about the advantages and disadvantages put forth by the legislature to avoid the
commercial disadvantage

6 | Page
1.3 RESEARCH METHODOLOGY:
The methodology used in the research is doctrinal method of analysis with critical view of the
given topic. This further enables the researcher to give contemporary scenario of creation of
charges in the banking and other ventures.

CHAPTER II

2.1 DIFFERENCE BETWEEN CHARGES, MORTAGES AND PLEDGES

Charges, mortgages, and pledges are all security interests that banks use to provide a lender with
security over the borrowers assets. A mortgage is different from a pledge in terms of asset
ownership; in a mortgage the assets remain the property of the borrower, whereas in a pledge the
assets will be delivered to the lender (lender will have legal title to the assets). Charges and
mortgages are quite similar to one another; especially, the fixed charge where fixed assets are
offered as collateral to secure loan repayment. Floating charges, on the other hand, refers to a
loan or mortgage on an asset that has a value that changes periodically to secure loan repayment.
Another difference is that, in a fixed charge, the assets need to be maintained until the debt is
repaid. In a floating charge, the borrower has the freedom to dispose of the asset (for example,
sell stock) in the course of normal business activities; however, if the borrower defaults on the
loan, the floating charge will freeze and will be treated like a fixed charge until debts are
recovered.

2.2 ESSENTIAL CHARACTERISTICS OF CHARGES:

There are two parties in every transaction of charge, the creator of charge (borrower) and
the holder of charge (lender).
The subject matter of the charge Current or future assets or properties of the creator of
charge.
The agreement of the charge, whether written or otherwise made by borrower in favor of
lender which reflects his intention to offer one or more of its specific assets or properties
as security for repayment of the borrowed money coupled with interest.

2.3 TYPES OF CHARGES:

7 | Page
FIXED CHARGES

Fixed Charge is defined as a lien or mortgage created over specific and identifiable fixed assets
like land & building, plant & machinery, intangibles i.e. trademark, goodwill, copyright, patent
and so on against the loan. The charge covers all those assets that are not sold by the company
normally. It is created to secure the repayment of the debt. In this type of arrangement the special
feature is that after the creation of charge the lender has full control over the collateral asset and
the company (borrower) is left over with the possession of the asset. Therefore if the company
wants to sell transfer or dispose off the asset then either previous approval of the lender is to be
taken or it has to discharge all the dues first. The bank or lender may have provided money to
acquire an asset like a building, printing press, car, etc. The company cannot sell this without the
lenders permission. The debt must be repaid as per the loan agreement or facility letter. For
example in a mortgage, A borrows money to buy a house, now A cannot own the house
outright until the debt is repaid, nor can A sell it without the lenders permission. The mortgage
is a form of fixed charge. Another example is an assignment of a company's debtor book through
factoring or invoice discounting. This means the bank buys the outstanding invoices and lends
money against them. The debtor book is then subject to a fixed charge. In effect, the book debts
belong to the bank or factoring company not the company. The factoring or discounting charge is
the most common fixed charge other than property. Another fixed charge is the Goodwill
payment in administration. For example, if the business fixed assets, sold by an administrator,
are worth 200,000 Rs, but the buyer pays 100,000 Rs for the business, the databases, the
customers and so forth, then 80,000 Rs is a goodwill payment. This is usually paid to the bank or
lender.

FLOATING CHARGE

The lien or mortgage which is not particular to any asset of the company is known as Floating
Charge. The charge is dynamic in nature in which the quantity and value of asset changes
periodically. It is used as a mechanism to secure the repayment of a loan. In this type of
arrangement the company (borrower) has the right to sell, transfer or dispose off the asset, in the
ordinary course of business. Hence no prior permission of the lender is required and also there is
no obligation to pay off the dues first. For example: Stock, finished or raw material , Work in

8 | Page
progress , Unfactored debtors , Fixtures and fittings, Cash Vehicles or assets not subject to fixed
charges The conversion of floating charge into fixed charge is known as crystallization, as a
result of it, the security is no more floating security. It occurs when the company is about to wind
up. The company ceases to exist in future. The receiver is appointed by the court. The company
defaulted in payment and the lender has taken action against it to recover the debts.

CHAPTER III

3.1 REGISTRATION OF CHARGES

Under section 77 of the Companies Act, 2013 every company creating a charge shall register the
particulars of charge signed by the company and its charge-holder together with the instruments
creating. Important points in the Act relating to charge creation

Any charge created within or outside India

on property or assets or any of the company s undertakings
Whether tangible or otherwise situated in or outside India shall be registered.

Hence all types of charges are required under the Act to be registered whether created within or
outside India.

3.2 TIME LIMIT FOR REGISTRATION OF CHARGES

A charge created by a company is required to be registered with the Registrar within thirty days
of its creation in such form and on payment of such fees as may be prescribed. According to
Companies (Registration of Charges) Rules, 2014 e-forms prescribed for the purpose of creating
or modifying the charge is Form No.CHG-1 (for other than Debentures) or Form No.CHG-9 (for
debentures including rectification).

3.3 CONDONATION OF DELAY BY REGISTRAR

On an application by the company the Registrar may allow registration of charge within three
hundred days of creation or modification of charge on payment of additional fee. Within a period
of thirty days of the date of creation of the charge the Registrar may on being satisfied that the
company had sufficient cause for not filing the particulars and instrument of charge allow the

9 | Page
registration of the same after thirty days but within a period of three hundred days of the date of
such creation of charge on payment of additional fee. The application for delay shall be made in
Form No.CHG-10 and supported by a declaration from the company signed by its secretary or
director that such belated filing shall not adversely affect rights of any other intervening creditors
of the company.

Condonation of delay by the Central Government: If company fails to register the charge even
within this period of three hundred days, it may seek extension of time in accordance with
Section 87 from the Central Government.

CHAPTER IV

4.1 CERTIFICATE OF REGISTRATION OF CHARGES

Where a charge is registered with the Registrar, Registrar shall issue a certificate of registration
of charge in Form No.CHG-2 and for registration of modification of charge in Form No.CHG-3
to the company and to the person in whose favor the charge is created. The certificate issued by
the Registrar whether in case of registration of charge or registration of modification, shall be
conclusive evidence that the requirements of Chapter VI of the Act (Registration of Charges) and
the rules made there under as to registration of creation or modification of charge, as the case
may be, have been complied with. Further the Act provides that no charge created by the
company shall be taken into account by the liquidator or any other creditor unless it is duly
registered and a certificate of registration is given by the Registrar. However, this does not
prejudice any contract or obligation for the repayment of the money secured by a charge.

4.2 COMPANYS REGISTER OF CHARGES

Under Section 85 every company must keep at its registered office a register of charges in which
all the charges and mortgages specifically affecting the property of the company must be entered.
The register must contain short description of the property charged, the amount of the charge, the
name of the person entitled to the charge, etc. 9 The company must keep at its registered office, a
copy of every instrument creating any charge requiring the registration. During the business
hours inspection by the creditor or member of the company is allowed to be without charge of

10 | P a g e
the register and documents. Any outsider can inspect them on the payment of Rs10 for each
inspection during the business hours. Registrar of the company must keep also the register of
charges in respect of each company and register therein full particulars relating to the charge
created by the company and registrable under the Act. This register is also open to inspect by any
person on payment of Rs 10 as fees. The company must submit to the Registrar the instrument
creating the charge or its certified copy which will be returned after the registration along with
the certificate of registration. The company must cause the copy of every registration to be
endorsed on every debenture or certificate of debentures stock which is issued by the company
and the payment of which is secured by the charge.

4.3 PARTICULARS OF CHARGE

The following particulars in respect of each charge are required to be filed with the Registrar

Date and description of instrument creating charge

Total amount secured by the charge
Date of the resolution authorizing the creation of the charge; (in case of issue of secured
debentures only)
General description of the property charged
A copy of the deed or instrument containing the charge duly certified or if there is no
such deed, any other document evidencing the creation of the charge to be enclosed
List of the terms and conditions of the loan and
Name and address of the charge holder.

CHAPTER V

5.I CONSEQUENCES OF NON-REGISTRATION OF CHARGE

According to Section 77 of the Companies Act, 1956, all types of charges created by a company
are to be registered by the ROC where they are non-compliant and are not filed with the
Registrar of Companies for registration it shall be void as against the liquidator and any other
creditor of the company. This does not however mean that the charge is altogether void and the
debt is not recoverable. So long as the company does not go into liquidation the charge is good
and may be enforced.

11 | P a g e
Void against the liquidator- means that the liquidator on winding up of the company can ignore
the charge and can treat the concerned creditor as unsecured creditor. The property will be treated
as free of charge i.e. the creditor cannot sell the property to recover its dues.

Void against any creditor of the company - means that if any subsequent charge is created on
the same property and the earlier charge is not registered the earlier charge would have no
consequence and the latter charge if registered would enjoy priority. In other words the latter
charge holder can have the property sold in order to recover its money. Thus non-filing of
particulars of a charge does not invalidate the charge against the company as a going concern. It
is void only against the liquidator and the creditors at the time of liquidation. The company itself
cannot have a cause of action arising out of non-registration

5.2 CONCLUSION:

There is merit in introducing a charge registration system for companies that deals
comprehensively with charges and mortgages created by a company regardless of the company
assets affected by those charges and mortgages. These merits have been undermined to an extent
however by introducing categories of excluded charge. The company every person who was in
charge of the companys affairs at the time of the issue of the cheque and every other officer
whose connivance or negligence brought about the debacle can be prosecuted under section 138
Negotiable Instruments Act, 1881 for dishonor of the companys cheque. The new companys
Act 2013 has brought so many rules to regulate the charges.

REFERENCES AND CASE LAWS

An assignment of book debts as security is a mortgage requiring registration. [Ranjit Ray

v D.A. David (1935) 5 Comp Cas 281 (Cal)]
o
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)]

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
CompCas 111 (CA)].

A transaction may amount to a mortgage, but if it also satisfies all the conditions of a

12 | P a g e
 pledge, it does not require registration. [T. Radhakrishnan Chettiar v Official
Liquidator,Madras Peoples' Bank Ltd. (1943) 13 Comp Cas 21 (Mad)].

Where a loan from the bank is raised by pledging fixed deposit receipts, the registration
ofcharge is not necessary. [Sree Menakshi Mills Ltd. v Registrar of Companies (1966) 36
CompCas 961 (Mad)].

A holder of a lien is a secured creditor and if lien is statutory, his claim need not be
registered under section 125. [K. Saradambal v Jaganathan & Bros. (1972) 42 Comp Cas
359 (Mad)].

If a decree was passed on an unregistered charge, before company was ordered to be

wound up, section 125 would still apply in case the decree kept the unregistered charge
alive.[Official Liquidator v Suryakant Natvarlal Surati (1986) 59 Comp Cas 147 (Bom)].

When a charge is created by a partnership which is later converted into a company,

registration is not necessary but it is obligatory on directors to bring it to notice of
Registrar.[Maharashtra State Financial Corpn. v Official Liquidator, Sidhu Tyres (P) Ltd.
(1988) 64Comp Cas 641 (Bom)].

An unsecured creditor could not challenge the validity of a charge or claim right over the
property on the ground that he incurred the liability prior to its registration. [C.K. Siva
Sankara Panicker v Kerala Financial Corpn. (1980) 50 Comp Cas 817 (Ker)].

Companies Act, 2013

Mortgage, Charges and Taking security available at
cw.routledge.com/textbooks/9780415497718/downloads/chap23.pdf

Registration of Charges, ICSI available at

www.icsi.edu/portals/0/REGISTRATION%20OF%20CHARGES.pdf

13 | P a g e