Creation of Charge under Companies Act, 2013

Introduction

Creation of charge is one of the important fundamentals for elevating finance or any money matter for organisations. By the creation of charge on the asset or property of the company, money is guaranteed. However, for the creditor, money can also be reimbursed from the said stimulating benefits.

Statutory Definition

Under the Companies Act 2013, the charge is defined under Section 2(16) of the Companies Act, 2013[1] which principally says that charge can be any kind of interest or any kind of security on the property or any assets of a company or any of its happenings or both as security and includes a mortgage[2]. The Transfer of Property Act, 1882 also contains the definition of charge under Section 100 of the act which mentions that an immovable property of one individual by the act of other parties or any operation of law made security for the remission of money to another and the transaction does not amount to a debt, the latter person is said to have a charge on that particular property[3].

All the companies mostly hang on the dividing and conferring amount for supporting their projects. The borrowed amount for a company can be reserves which are mainly elevated by issuing debentures, which may be protected or unsecured or by obtaining support from a financial institution or banks.

Need and Specifics of Charges

Every company to run the company need money. Money can be raised either from the share capital and borrowed capital. But to borrow the capital, the company needs to create the charge because no bank or financial institution will provide the money without the security. The banks need to be sure that their amount will get refunded on time, and that is why they create the charge. The charge is created on the assets and properties of the borrowing companies. The charge is done by executing a loan agreement, creating a mortgage, hypothecation agreements.

To create the charge following things are to be followed:-

1. To create the charge, the Form CHG-1 is to be filed with fees as prescribed.
2. The form is to be signed by the charge holder and the company
3. Proper instrument for the creation of charge is to be made
4. The complete form, along with the instrument of charge is to be filed with the Registrar.[4]

Further, any other document demonstrating the formation of the charge to be enclosed. Theindex of the terms and conditions of the loan, as well as the name and address of charge holders to be provided[5].

Types of Charges

There are primarily two types of charges which the company can create, which are as follow:-

Fixed Charge: A fixed charge is created on the identified asset of the company. On the creation of charge, the company give up all its right on the property and therefore dispose or sale of the property. It remains identical irrespective of the number of businesses done. This type of charge is a frequent and foreseeable expenditure incurred by a firm. The company does not have any duty towards the fixed charge unless the charge holder has paid his left-over amount for the same.

Floating Charge: When the charge is created not on the definite property is called the floating charge. It mostly covers the property which is on fluctuation state like stock in trade. The property on which the floating charge is created keeps changing from time to time as the company is free to deal with the property as it deems fit. Constrain only arises when the holder of charge takes steps to enforce the security. In other words, the floating charge is created on the non-constant property. The property keeps alter its amount and worth[6].

Crystallization of Charge

This is applicable only in case of floating charges. Crystallization occurs in a situation when the company gets liquidation or when the charge holder asked for the repayment of company and the company fails to do so then in such cases, the charges holders go for fixing the charge. That is called as charge got crystallised. With the crystallisation, the company cannot sale or use the property on its will, and the lender get the possession of the asset as happened in the fixed charge.[7]

Registration of Charges under Companies Act, 2013

Section 77 of the Companies Act, 2013[8], states that the corporation must record all kinds of charges under the Registrar of Companies (ROC) within 30 days of the formation of that specific charge[9]. Also, it does not matter whether the charge is formed within India or outside India. The provision also mentions an increase of this period up to adding around 300 more days provided it has to be paid with an additional fee.[10]

The Duty of registration of the Charge

Any company whoever creates the charge needs to register the particulars of charge within 30 days of creation with a further extension of 300 days on the application of the company. Upon the registration of charge, certificate of registration of charge will be issued by the Registrar in the form of CHG-2. The certificate will be in the name of the person on whose favours the charge is created.[11]

If any corporation or firm is not registering for the charge no matter what, the individual who whose favours the charge is created may apply to the Registrar for the registration of charge along with the instrument created for the registration of charge. When such an application is made to the Registrar, then the notice of fourteen days will be provided to the company for registration of charge where the company either itself get the charge registered or shows the sufficient cause for non-registration. If the charge does not get registered within the time provided, then the charge can be registered by the holder of charge on payment of the fees. Also, the charge holder gets reimburse of the amount spent on registering of the charge.[12]

Modification of Charge

There are provisions for alteration or modification of charge. The process is identical to the creation of charge as the application needs to be submitted to Registrar of Companies who further issues the certificate of the required change.[13]

Register of Charge

Section 81 of Indian Companies Act, 2013 refers that the Registrar has to maintain the register mentioning all the details of the charges registered. The register will be open to inspection by any person on the payment of fees.

Satisfaction of Charge

It is provided under Section 82 of Indian Companies Act, 2013[14], that form for the satisfaction of charge will be filed in form CHG-4. When the company repaid the loan amount to the banks or other financial institution, then charge is satisfied, and that is called a satisfaction of charge. If the amount of the particular loan is reimbursed or debentures have been fully rewarded, or the main aim is satisfied, there is no essential charge.

When the intimation of the satisfaction of charge is made to the Registrar, then the Registrar will send the notice to the holder of charge to reply within fourteen days as to whether the full payment or satisfaction of the charge has been made. If no cause of reply shown within such time from the holder of charge, then the Registrar in his register of charge will record the satisfaction of charge and will also inform the company.

Punishment

There are punishments for the infringements of the laws. This clause is mentioned under Section 86 of the Indian Companies Act, 2013[15]. If the corporation infringes or violates the clauses, then the company will be liable for punishment. The fine can be imposed on the company which shall not be less than one lakh of rupees and which may reach up to ten lakhs of rupees.

Conclusion

The whole process of filling all different forms for various purposes is for the creation of charge. There are some ways which are provide in the e-filing of the charge the fee to be  paid in accordance with annexure as mentioned in provisions. The company sometimes took loan by providing lease of its property, and they might create a hold on the property of the Company. The creation of Charge for a corporation is very essential for them as they rely upon share capital and hire capital for financing their developments or missions.

All the banks or financial institutions do not give their money unless they are certain that their funds are protected, and they would be repaid as per agreed reimbursement schedule along with payment of interest. The giving of punishment under these provisions is very necessary as there should be decency which should be maintained. Charge in corporate law is very important in terms of lending loans.

[1]The Companies Act, 2013; Section 2(16)

[2] Charges, ICSI, available at https://www.icsi.edu/media/webmodules/publications/Lesson%2015.pdf

[3]Aastha, Debopam Dutta, India: Allahabad High Court on Stamp Duty on Debt Assignment, Mondaq, https://www.mondaq.com/india/financial-services/801534/allahabad-high-court-on-stamp-duty-on-debt-assignment (accessed on 24th September 2020 at 5:23pm)

[4] ACS Divesh Goyal, Creation of Charges under the Companies Act, Tax Guru, updated on 1st June 2016, available at https://taxguru.in/company-law/creation-charges-companies-act-2013.html (accessed on 24th September 2020)

[5]Jaya Sharma and Akash Deepak, an analysis of Charges under the Companies Act, 2013, TaxGuru, available at https://taxguru.in/company-law/analysis-charges-companies-act-2013.html (accessed on 24th September 2019 at 6:16 pm)

[6] Jamesh Chen: Floating Charge, Investopedia, updated on 1st June 2019, available at https://www.investopedia.com/terms/f/floating_charge.asp (accessed on 24th September 2020 at 7:09 pm)

[7] Ibid

[8]Companies Act, 2013; Section 77

[9]Companies Registration Charges Amendment Rules, Ministry of Corporate Affairs, https://www.mca.gov.in/Ministry/pdf/CompaniesRegistrationChargesAmendRule_01052019.pdf

[10]Condonation of delay by Registrar, E-book of MCA, available at http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=23283  (accessed on 24th September 2020 at 8:11 pm)

[11] Companies Act, 2013; Section 77(2)

[12] Companies Act, 2013; Section 78

[13] Companies Act, 2013; Section 79

[14] CS Deepak Seth, Company to Report Satisfaction of Charge, Tax Guru, updated on 11th October 2019, available at https://taxguru.in/company-law/company-report-satisfaction-charge.html  (accessed on 24th September 2020 at 8:33 pm)

[15] Companies Act, 2013; Section 86