Definition: As stated in section 2(16) “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;
Provisions of Section: As stated in section 78(1) 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.
General: 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.
Security for Lender of Money: The financial institutions/banks do
not lend their monies unless they are sure 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/ banks etc.
Charge” as defined in 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 which apply to a
simple mortgage shall, so far as may be, apply to such charge.
Terms use under Charge Definition:
- Interest Lien Property
- Assets Undertaking Mortgage
Let’s discuss the meanings of the
terms use under the definition of charge:
The meaning of “interest” as
per Black’s law dictionary[1]is
– ‘legal share in something’.
The meaning of Lien as per
the Black’s law dictionary[2]
is – ‘a legal right or interest that a creditor has in another’s property
lasting usu
ASSETS
As per Schedule III Assets Include:
A. Fixed assets
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Tangible assets
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Intangible assets
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Classification shall be given as:
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(a) Goodwill;
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(a) Land;
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(b) Brands /trademarks;
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(b) Buildings;
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(c) Computer software;
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(c) Plant and Equipment;
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(d) Mastheads and publishing
titles;
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(d) Furniture and Fixtures
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(e) Mining rights;
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(e) Vehicles
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(f) Copyrights, and patents and
other intellectual property rights, services
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(f) Office equipment
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(g) Recipes, formulae, models,
designs and prototypes;
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(g) Others (specify nature).
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(h) Licences and franchise;
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(i) Others (specify nature).
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B. Non Current Investment:
(a) Investment property;
(b) Investments in Equity
Instruments;
(c) Investments in preference
shares;
(d) Investments in Government or
trust securities;
(e) Investments in debentures or
bonds;
(f) Investments in Mutual Funds;
(g) Investments in partnership
firms;
(h) Other non-current investments
(specify nature).
Undertaking
Section 180(1)(a) explanation states
that:
“undertaking” shall mean an
undertaking in which the investment of the company exceeds twenty per cent. of
its net worth as per the audited balance sheet of the preceding financial year
or an undertaking which generates twenty per cent. of the total income of the
company during the previous financial year;
Property
Mortgage:
A mortgage is a legal process
whereby a person borrows money from another person and secures the repayment of
the borrowed money and also the payment of interest at the agreed rate, by
creating a right or charge in favour of the lender on his movable and/or
immovable property.
Mortgage as defined in Transfer of
Property Act, 1882
According to Section 58 of the
Transfer of Property Act, a mortgage is the transfer of an interest in specific
immovable property for the purpose of securing the payment of money advanced or
to be advanced by way of loan, an existing or future debt, or the performance
of an engagement which may give rise to pecuniary liability.
Difference between Charge and
Mortgage
In the case of JK (Bombay) Pvt. Ltd.
v. New Kaiser-I-Hind Spg. & Wvg.Co. Ltd. AIR 1970 SC 1041 the Supreme Court
has distinguished a charge from a mortgage holding that in case of a charge,
there is no transfer of property or any interest therein but only the creation
of right of payment out of specific immovable property. In contrast, a mortgage
effectuates transfer of property or an interest therein
Following types of
transactions/agreements are charges and these should be registered with the
Registrar of Companies:
a) Mortgage by deposit of title
deeds: –
According to the Transfer of Property Act, a mortgage on immovable property can
be created by depositing the title deeds of the property with the lender as
security for the loan. No written instrument is necessary for creating this
type of mortgage. It is a common practice to prepare a memorandum of deposit of
title deeds listing out the title deeds deposited as a security for the loan.
Such mortgage creates a charge on the property mortgaged. Hence, it must be
registered as a charge.
b) Charge created by a Company
merged with another Company– When a Company is amalgamated with another Company pursuant
to the High Court’s order under section 394 of the Act, the transferee-Company
should file form CHG-1 with the Registrar, in respect of property of the
transferor-Company, acquired by it, subject to charge.
[1]9th
Edition, page no.885
[2]9th
Edition, page no. 1006
As per definition of the Charge “A
charge shall be created on the Assets/Property/Undertaking of the Company”.
Therefore, following questions arise from this definition:
Principle rule of Creation of Charge
is that “Charge will be creating only on the
Assets of the Company”, Assets as
defined in Schedule III of the CA-2013.
FAQ’S
I. Whether charge will create on
hypothecation of vehicle.
We keep on receiving queries time
and again as to whether Hypothecation of Motor Vehicle can be termed as
“charge” and whether this charge is required to be registered? Section 77(1) of
the Act has simply changed the list that was provided in the Companies Act, 1956
and requires registration of each and every charge created on the asses of the
Company whether tangible or otherwise, and situated in or outside India.
There is specific option given in
e-form CHG-1 charge on “Vehicle(hypothecation)”. It is clear that there is need
to crate charge on hypothecation of vehicle under Companies Act, 2013.
Definition of Hypothecation:
Section 3 (n) of the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act) defines ‘hypothecation as:
“Hypothecation” means a charge in or
upon any movable property, existing or future, created by a borrower in favour
of a secured creditor without delivery of possession of the movable property to
such creditor, as a security for financial assistance and includes floating
charge and crystallization of such charge into fixed charge on movable
property.
II. Whether charge will create on
Pledge.
Earlier there was list of
transaction on which charge was required to create. With the enactment of the
Companies Act, 2013, tire list of charges requiring registration done away
with. Thus, in the absence of a specific list of charges to be registered, and
the wide definition of the word “charge”, ‘pledges’ and ‘liens’ were also
required to be registered.
The companies creating pledge over
shares are compulsorily required to register the charge, which was not the case
with its predecessorThis question I have discussed in details in my separate
article.
Definition of Pledge:
Section 172 of the Indian Contracts
Act, 1872 defines a pledge as:
“The bailment of goods as security
for payment of a debt or performance of a promise is called “pledge”.”
In simple terms a pledge is a
security created on movable goods of the borrower or pledgor for the payment of
a debt wherein the lender or pledgee takes actual possession of the goods until
the entire debt amount is repaid by the borrower. The pledgee may retain the
goods pledged, not only for payment of the debt or the performance of the
promise, but for the interests of the debt, and all necessary expenses incurred
by him in respect to the possession or for the preservation of the goods
pledged.
III. Whether there is need to create
charge on the personnel guarantee of the Promoters.
– As per principle rule, Personnel
guarantee of the Promoters are not assets of the Company. Therefore, there is
no need to create charge on the personnel guarantee of the promoters.
IV. There are two Companies ABC Pvt
Ltd and PQR Pvt Ltd. ABC Pvt Ltd taking loan from the Bank and PQR giving
guarantee on its property.
- Whether Charge will be created in ABC Pvt Ltd?
- Whether charge will be created in PQR Pvt Ltd?
– As per principle rule, In the
above situation PQR is giving its assets as security to bank for loan to ABC,
therefore assets of the PQR is involved charge will be create in the PQR Pvt
Ltd.
– Here assets of the ABC are not
involved in the security, therefore no need to create charge in ABC Pvt Ltd.
V. Whether Guarantee given by
Company to other Company amount to creation of Charge.
Sometimes companies give
counter-guarantee to banks for the guarantee given by the banks to the
Government or other authorities. Such a guarantee does not create any
encumbrance on the company’s properties. So, it need not be registered- S.T.
Patil V. Registrar of Companies 10 CC
VI. Whether charge will be create on
FDR of the Company.
– Deposit of a fixed deposit receipt
with the Bank by way of security for a loan amount to pledge of movable property.
There is required to create charge on pledge under Companies Act, 2013.
Conclusion, So it need to be registered.
Under CA-1956 there was not required
to create charge on pledge at that time in a case of Sree Meenakshi Mills Ltd.
V ROC (1966) decisions was there is no need to register charge on fixed
deposit.
VII. Whether charge can be create on
future assets of the Company.
– As per principle rule, Future
assets are not part of the assets side of the balance sheet of the Company.
Company can’t create security on the same. Therefore, no need of creation of
charge on the future assets of the Company.
VIII. What is the time period to
file CHG-1 with ROC in case of creation of security out of India?
In the case of a charge created out
of India, and comprising solely property situate outside India, thirty days
after the date on which the instrument creating or evidencing the charge or a
copy thereof could, in due course of post and if despatched with due diligenee,
have been received in India, shall be substituted for 4hirty days after the
date of the creation of the charge, at the time within which the particulars
and instrument or copy are to be filed with the Registrar.
IX. Whether enhancement of a loan
amounts to modification
Provision: As per section 79 Company
required to file form for modification of charge for 4 (four) purposes. Any
modification in the terms or conditions or the extent or operation of any
charge registered under that section.
Example: In the case of companies it
is a normal practice that they obtain working capital facilities from banks.
There working capital facilities are usually secured by a charge on the current
assets of the company. Whenever the working capital facilities are increased a
company is required to give additional security which means the existing charge
has to be enhanced to cover the enhanced limits, by filing CHG-1 with ROC.
X. Whether Charge will be create on
hire purchase agreement?
A hire purchase agreement place the
financier in the position of a secured creditor. So a hire purchase agreement
must be registered as a charge- Official Liquidator, Manasuba & Co. (P.)
Ltd. V. Commissioner of Police {1968}
XI. From which date charge consider
as register.
It was held in the case of SBI v.
Haryana Rubber Industries (P.) Ltd. [1986] 60 Comp Cas 472 (Punj. & Har.)
that the charge stands registered from the date of filing of particulars even
if the ROC delays making entries in his books.
Moreover, it was held in the case of
Official Liquidator v. Union Bank of India that non-compliance does not mean
that the transaction is void or debt is not recoverable. Only consequence is
that security becomes void as against liquidator and creditors
XII. In case Company fails to
register the charge, when the charge holder got right to file the form with
ROC?
Language of Provision:
i. Section 78 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
ii. Section 77 It shall be the duty
of every company creating a 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
Opinion:
As per combined reading of Section
77(1) and section 78(1) it is clear that Charge holder can apply for creation
of charge to registrar (when company fails to register chare within period
mention in section 77) after expiry of 30 days of its creation.
Therefore, charge holder get right
of create of charge w.e.f 31st day of creation of charge.
XIII. Whether register of charge can
be maintain at any place other then registered office of the Company.
As stated in rule 10(1) registers
shall be kept at the registered office of the Company. Company can’t maintain
the register of Charge at any other place.
XIV. Who can authenticate the entry
in the Register of Charge?
Entries in the register shall be
authenticated by a director or the secretary of the Company or any other person
authorized by the Board for the purpose
XV. Who can inspect the register of
Charge of the Company?
- Any member or creditor of the company without fees;
- Any other person on payment of fee.
XVI. Whether provision of charge
will be applicable on One Person Company?
The provisions of this chapter shall
apply mutatis mutandis to One Person Company.
- See more at:
http://taxguru.in/company-law/charge-faqs.html#sthash.31H1DEjv.dpuf
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