CS Executive Company Law: Charges, Registration Process & Legal Provisions

A charge is a security interest created on a company's assets or property to secure the repayment of a loan or other financial obligations. It protects lenders by giving them a legal claim over the secured assets if the company defaults on its repayment commitments.

The Companies Act requires companies to register charges with the Registrar of Companies (ROC) within the prescribed time limit. Key areas of study include the meaning of charge, its types, creation, registration, modification, and satisfaction, making it an important topic in company law and corporate compliance.

Charges under Company Law 

Charges under Company Law involve creating a security interest over a company’s assets to secure loans, along with mandatory registration, modification, and satisfaction with the ROC. 

Below, explain the concept of charges under Company Law, including their meaning, registration process with ROC, legal compliance requirements, types of charges, modification and satisfaction procedures, key forms, and consequences of non-registration under the Companies Act 2013. 

Meaning of Charge

A Charge is created when a company places its asset as security against a loan or financial obligation. This means the company pledges or mortgages its assets to the lender. The entity in whose favor the charge is created is known as the Charge Holder.

Assets on which a Charge can be created:

• Movable property

• Immovable property

• Assets located in India

• Assets located outside India

• Any asset belonging to the company.

Importance of Registration of Charges

Registration of charges prevents fraud, particularly when a company might secure multiple loans using the same asset. Without registration, one asset could be pledged to multiple banks, leading to complex disputes.

Registration of Charges means that as soon as a company creates a charge, it must register it with the Registrar of Companies (ROC). Once registered, the information about the charge becomes publicly available. Any entity considering lending to the company can inspect this register to ascertain if any assets are already charged, thereby promoting transparency and trust.

Duty to Register Charge (Section 77)

It is the duty of the company to register a charge.

Process and Timelines for Registration:

• Within 30 days of charge creation, the company must file Form CHG-1 with the ROC. For debentures, Form CHG-9 is used.

• Extension for Registration:

• • If not registered within 30 days, an extension of 30 days is granted (total 60 days).

  • A further extension of 60 days is granted if still not registered (total 120 days from creation).

  • Beyond 120 days, the charge generally cannot be registered.

Fees for Delayed Registration:

• First 30 days: Normal fees apply.

• Next 30 days: Additional fees are charged.

• Subsequent 60 days: Ad valorem fees (fees based on the charge's value) apply.

Required Documentation:

• Particulars of the charge must be signed by both the company and the charge holder.

• Upon successful registration, the ROC issues Form CHG-2 as a Certificate of Registration of Charge.

Effect of Non-Registration of Charge

Non-registration of a charge has significant consequences:

• It is void against the liquidator.

• It is void against any other creditor.

• However, it is not void against the company.

Explanation of Non-Registration Effects:

• Void against Liquidator: If the company enters winding-up, the liquidator will not recognize an unregistered charge. The charge holder will be treated as an unsecured creditor, receiving payment only after secured creditors.

• Void against Other Creditor: If the same property is charged to another creditor and that charge is registered, the registered charge holder has the first right over the property during winding-up.

• Not Void against the Company: As long as the company operates, the unregistered charge remains valid between the company and the charge holder. The company cannot refuse payment due to non-registration. This void scenario applies primarily during liquidation.

Application for Registration by Charge Holder (Section 78)

If the company fails to register the charge within the initial 30 days, the Charge Holder can apply to the ROC for registration. The charge holder files Form CHG-1 (or CHG-9 for debentures). 

The ROC then issues a 14-day notice to the company. If the company fails to respond or register, the ROC will register the charge. Any fees paid by the charge holder for registration can be recovered from the company.

Modification of Charge (Section 79)

Modification of Charge refers to any change in the terms and conditions of an existing charge, which must also be registered.

 Examples of Modification: Changes in loan tenure, part payment of the loan, or a change in the rate of interest. If a company acquires property already subject to a charge, this acquisition also needs to be registered as a modification.

 The company must file Form CHG-1 (or CHG-9 for debentures) with the ROC. The timelines for registration of modification are the same as for initial charge creation (30 + 30 + 60 days). Upon successful registration, the ROC issues Form CHG-3.

Satisfaction of Charge (Section 82)

Satisfaction of Charge occurs when the company makes a complete repayment of the loan, fulfilling the financial obligation.

 Process and Timelines for Satisfaction:

• Within 30 days of satisfaction, the company must inform the ROC by filing Form CHG-4.

• An extension of 270 days is available if not filed within 30 days (total 300 days).

• If still not filed, condonation of delay can be sought under Section 87.

• The ROC issues Form CHG-5 as a Certificate of Satisfaction of Charge.

 ROC's Role in Satisfaction: If Form CHG-4 is signed by both the company and the charge holder, the ROC proceeds with registration. If not signed by the charge holder, the ROC issues a 14-day notice to the charge holder to confirm satisfaction. If no objection is received within 14 days, the ROC registers the satisfaction.

Condonation of Delay (Section 87)

Condonation of Delay allows for additional time to register certain events. It is possible for the registration of satisfaction of charge. However, condonation of delay is NOT possible for the initial registration of charge creation if the total 120-day period has elapsed. 

The company must apply to the Regional Director (RD) in Form CHG-8, and the RD has discretion to grant additional time.

Registers of Charges

Registers of Charges under Company Law include records maintained by both the ROC and the company, ensuring transparency, legal compliance, and proper documentation of all registered charges and related instruments. 

 A. Register of Charges maintained by ROC (Section 81):

• The ROC maintains a register with particulars of all registered charges for every company, primarily through the Ministry of Corporate Affairs (MCA) portal records.

• This register is open for inspection by any person upon payment of fees.

 B. Register of Charges maintained by Company (Section 85):

• Every company must maintain its own Register of Charges in Form CHG-7 at its Registered Office.

• This register must be permanently preserved.

• The instrument creating the charge must be preserved for 8 years from the date of satisfaction of the charge.

• Inspection:

• Members and Creditors can inspect the register free of cost.

• Any other person can inspect it upon payment of fees during business hours.

Notice of Charge (Section 80)

The Notice of Charge principle states that once a charge is registered with the ROC, it is assumed that everyone has knowledge of that charge. This is a form of constructive notice. Any party entering a contract with the company after registration is presumed aware of the charged asset(s).

Appointment of Receiver or Manager (Section 84)

When an order for the appointment of a receiver or manager for charged property is obtained, or if any person appoints such a receiver/manager, this event must be intimated. The appointment or removal of a receiver/manager must be notified to the company and the ROC within 30 days using Form CHG-6. The receiver is responsible for giving this notice.

 Penalties for Contravention (Section 86)

Any default in complying with provisions related to charges incurs penalties:

• The company is liable to a penalty of ₹5 Lakhs.

• Every officer of the company in default is liable to a penalty of ₹5 Lakhs.

Verification of Instrument Creating Charge

The copy of every instrument evidencing the creation or modification of a charge, filed with the ROC, must be verified.

14. Types of Charges

Charges are primarily classified into two types:

Crystallization of Floating Charge

Crystallization of a Floating Charge is the process by which a floating charge converts into a fixed charge. ( Conversion of floating charge into fixed charge. ) This occurs when the charge holder perceives a risk (e.g., company's financial distress) and wants to secure their position on specific assets.

Events that lead to Crystallization:

• Cessation of Business: When the company's business ceases operations, including winding up.

• Intervention by Debenture Holders: If debenture holders intervene.

• Happening of Specific Events: As specified in the mortgage deed (e.g., default in repayment terms).

Assets on which Charge can be Created (Comprehensive List)

A charge can be created on various types of assets:

• Immovable Property

• Movable Property

• Uncalled Capital

• Book Debts

• Stock in Trade

• Calls Made but Not Paid

• Ships

• Intangible Assets (e.g., patents, trademarks)

• Shares

• Any interest or lien created on the property of the company.