CHARGE FAQ’s
CHARGE FAQ’s
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
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:
ASSETS
A. Fixed assets
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).development
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;
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.
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:
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.
"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 predecessor This 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.
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