Borrower’s Legal Due Diligence

The Companies Act, 2013 – Security Provisions

• Perfecting and Registration of Charges (Sections 77, 78 & 79, ICA 2013)
Almost all companies depend on borrowed funds to finance their growth. Such borrowings are often
secured by a company’s fixed or intangible assets, investments or stocks. Lenders must create rights over
such security to be able to enforce ownership of them in the event the loan is not repaid. The provisions of
Section 77 of ICA 2013 mandate companies to register all such charges with the Registrar of Companies
(ROC) within 30 days of the creation of charge in favour of the bank.
For a creation of charge, form CHG-1 needs to be filed, with fees prescribed under the Act. Both the
company and the charge-holder need to sign the form. The ROC may on application by the company
allow the registration of charge within 300 days, that is, within an additional period of 270 days. Once the
filing is in order, the ROC will issue a certificate of registration of charge with form CHG-2.
It is the duty of the company to create the charge. However, as per Section 78, if the company fails to do
so, the charge-holder can file the form and is entitled to recover the fees from the company.
Important: As a lender, you need to ensure that your security is properly registered. As per Section 77(3),
if the charge is not registered with the ROC, the charge shall not be taken into account by the liquidator
or any other creditor. While the borrower is not relieved of their obligation to pay interest and repay the
credit, as a bank creditor, you will have forgone the opportunity to have a priority claim on the asset that
was meant to serve as security. Failure to properly perfect your security is bound to lead to a lower loan
recovery (or higher loss in the event of default).

• Charges Registry and Registry Searches (Section 81, the Companies Act, 2013)
Section 81 of the ICA, 2013, requires the Registrar of Companies to maintain a register of all charges
registered in respect of every company. This is done at the state level in the ROC within which the
registered office of the company is located.
Charges registers are open for inspection by any person with a vested interest, with the payment of a fee.
Important: Prior to entering into the credit agreement and as part of your legal due diligence to protect
against fraud, you should conduct a register search to ascertain that no prior charge has been created
in favour of another creditor on the same asset that has been pledged to your bank. If assets are being

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 pledged from a borrower’s different legal entities, you will need to conduct searches in each state in
which the company has registered operating subsidiaries. The search results will form part of your lending
records.

• Satisfaction of Charge (Section 82, the Companies Act, 2013)

If the credit has been fully repaid, unless the credit is a revolving facility such as a working capital facility
which can be repeatedly drawn and repaid, the security charge can be released. The release will allow the
company to offer the asset as security to another creditor. Releasing a security charge is called satisfaction
of charge.
An application for satisfaction of charge must be filed within 30 days of closure of the loan with form
CHG-4.

• Failure to Register Charges in a Timely Manner (Section 87, the Companies Act, 2013)
This section deals with how to handle the situation wherein the charge is not registered with the ROC
within the maximum period.
If the security charge is not registered within the required period of 30 days, but within 300 days, the
company needs to prepare an application for condonation of delay using form CHG-10. The application
must be supported by a declaration by the secretary or director of the company that the delay shall not
affect the rights of creditors. After due compliance, the Registrar shall issue the certificate of registration.
If the form to register the security charge is submitted after 300 days, an application for condonation
using form CHG-8 needs to be submitted with the Regional Director having territorial jurisdiction over the
company’s registered office, along with the requisite penalty. After payment of the same, the company
needs to:
1. Submit a challans with a covering letter containing a request to order allowing the condonation of
the delay.
2. Submit the order with the ROC within the stipulated time given in the order.

After approval of the order, and due compliance, the Registrar shall issue a certificate of registration.
Important: Perfecting your loan security requires that the borrower registers the charge with the
appropriate office. The credit facility agreement will contain an appropriate covenant requiring the
borrower to do so. Failure of the borrower to do so may significantly impact the risk of the bank’s credit
exposure and constitutes a breach of contract. Any delay in executing the necessary documents within the
required time can lead to a loan recall notice.

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Borrower’s Legal Due Diligence

Borrower Constitutional Documents and Approval

• Memorandum of Association
The Memorandum of Association (MOA) is the charter document of any company. An MOA is part of
the public domain, and every company stakeholder is expected to have knowledge of its provisions. This
expectation is known as the doctrine of constructive notice.
First and foremost, in its Object Clause, the MOA defines the permitted business scope of the company.
Any contract entered into by the company outside of the stated scope of the Object Clause is null and
void. This principle is called the doctrine of ultra vires.
The MOA’s Capital Clause states the amount of the company’s authorised capital. The MOA’s Liability
Clause, relevant only for companies limited by shares or by guarantee, stipulates the liability of its
members.
Important: You must ascertain and satisfy yourself that the purpose of the loan is consistent with the
company’s Object Clause.

• Articles of Association
The Articles of Association (AOA) are subordinated to the MOA. They contain regulations for the internal
management of the company, including the exercise of borrowing powers, use of the common seal and
the power of directors. These provisions are most relevant for the signing of the credit agreement.
You should verify the relevant sections of the AOA to ensure that:
1. The signatories to the credit agreement and any related documents are authorised by the board to
make borrowing decisions and bind the company accordingly.
2. The total borrowing of the company is within the authorised borrowing limit.

The AOA are also in the public domain. However, unlike with the case of the MOA, outside stakeholders of
the company can rely on the presumption that internal proceedings have been conducted as per the AOA
(unless one has knowledge otherwise). This is called the doctrine of indoor management.

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• Certificate of Incorporation
The Certificate of Incorporation (COI) is issued by the Ministry of Corporate Affairs (MCA). It proves that a
company is registered with the Registrar of Companies (ROC). The certificate denotes the date on which
the company assumed legal entity status. From this date onwards, the company is permitted to enter into
contracts in its own name. Obtaining this certificate is mandatory for limited companies.

• Certificate of Commencement of Business

The Certificate of Commencement of Business is an additional document required for public limited
companies, which are not permitted to commence business or borrow money without it.
• Board Resolutions and Lending Limit Provisions
A Board (or Corporate) Resolution formally documents a decision made by a company’s board of directors
or shareholders. After a resolution is made or a decision is taken during a board meeting, it is documented
and used for future reference. The substance of the resolution can be anything that can normally be
proposed as a motion.
A company’s borrowing powers are exercised by the Board. However, if the additional money to be
borrowed together with the already existing debt of the company exceeds the aggregate of the company’s
paid-up share capital and free reserves, the Board must seek the consent of the company’s shareholders
through a special resolution at their annual general meeting, as per Section 180 (1) (c) of the Companies
Act, 2013.
Part 5 of the same section states that “No debt incurred by the company in excess of the limit imposed by
clause (c) of sub-section (1) shall be valid or effectual, unless the lender proves that he advanced the loan
in good faith and without knowledge that the limit imposed by that clause had been exceeded.”

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