6.registration of Charges
6.registration of Charges
REGISTRATION OF
CHARGES
LEARNING OUTCOMES
1. INTRODUCTION
The law with respect to the registration of charges has been dealt in Chapter VI of
the Companies Act, 2013 consisting of sections 77 to 87 as well as the Companies
(Registration of Charges) Rules, 2014.
Definition of Charge
Section 2(16) of the Companies Act, 2013 defines “charge” as 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.
Types of Charge
A charge may be either fixed or floating.
Fixed Charge:
A ‘FIXED CHARGE’ is a charge on Specific assets of the borrowing company. These
assets are of permanent nature like land and building, office premises, machinery
installed by the company and the like. Further, these assets are identified at the
time of creation of charge. A fixed charge is usually created by way of mortgage or
deposit of title deeds.
When a charge is created on such assets, the charge remains ‘fixed’ and the
borrowing company is not permitted to sell such assets though it may use them.
Assets under fixed charge can be sold only with the permission or consent of the
charge-holder.
A fixed charge is vacated when the money borrowed against the assets subject to
fixed charge is repaid in full.
Floating Charge:
A ‘Floating Charge’ is created on assets or a class of assets which are of fluctuating
nature or changing in nature like raw material, stock-in-trade, debtors, and the like.
The assets under floating charge keep on changing because the borrowing
company is permitted to use them for trading or producing final goods for sale.
Example 2: A retail showroom will contain numerous articles kept for sale. The
owner of the showroom might have borrowed against the security of all those
goods in the showroom. But he may still sell or otherwise deal with them in the
ordinary course of business. The buyer will get it free of the charge.
Example 3: In case of a company which manufactures leather goods, the raw
material in the form of leather, which is subject matter of floating charge, may be
used to manufacture leather goods without seeking any permission from the
lender.
Thus, unlike a fixed charge, the assets offered as security by the company can be
dealt with by the company in the ordinary course of business. The buyer of the
asset will get it free of charge.
When the creditor enforces the security or the company goes into liquidation, the
floating charge will become a fixed charge on all the assets available on that date
and which may come into existence thereafter.
This is called crystallization of a floating charge.
1
As per Section 58 (f) of the Transfer of Property Act, 1882.
2
As per Section 77 (1) and Rule 3 (1) of the Companies (Registration of Charges)
Rules, 2014.
3
As per Rule 3, Form CHG-1 or Form CHG-9 (in case of debentures) is to be filled.
4
As per Rule 3 (4).
5
As per Clause (a) of First Proviso and also Clause (a) of Second Proviso to Section 77 (1).
6
As per Clause (b) of First Proviso and also Clause (b) of Second Proviso to Section 77 (1).
effected within the original period of 30 days), the Registrar may, on an application
by the company, allow such registration to be made within a period of 60 days of
such creation (i.e. a grace period of another 30 days is granted after the expiry of
the original 30 days), on payment of additional fees as prescribed.
If the charge is not registered within the extended period as above, the company
shall make an application and the Registrar is empowered to allow such registration
to be made within a further period of sixty days after payment of prescribed ad
valorem 7 fees.
Within 30 days
Register Charge
7
ad valorem means in proportion to the estimated value of the transaction concerned. In
this case it will be based on value of the charge i.e. the amount of loan advanced against
security of the property.
8
As per Rule 4.
9
As per Rule 4 (2) Form CHG-1 or CHG-9 (in case of debentures) is to be used.
3. CONSEQUENCE OF NON-REGISTRATION OF
CHARGE [SECTION 77 (3) & (4)]
No charge created by a company shall be taken into account by the liquidator
appointed under the Companies Act, 2013 or the Insolvency and Bankruptcy Code,
2016 or any other creditor unless it is duly registered and a certificate of registration
of such charge is given by the Registrar. 13
This means that the charge will become void against the liquidator and other
creditors of the company. That is to say, at the time of winding up, the creditor
whose charge has not been registered will be reduced to the level of an unsecured
creditor. Neither the liquidator nor any other creditor will give legal recognition to
a charge that is not registered.
But this shall not prejudice any contract or obligation for the repayment of the
money secured by a charge. 14 This means that the debt is valid and may be
enforced against the company through the courts by filing a suit, but the security
is lost.
10
As per Section 77 (2) and Rule 6 (1).
11
Form No. CHG 2 for fresh registration and in Form No. CHG 3 for modification.
12
As per Fourth Proviso to Section 77 (1) Inserted by The Companies (Amendment)Act,2017
- Amendment Effective from 7th May 2018
13
As per Section 77 (3)
14
As per Section 77 (4)
Further, it may be noted that failure to register charge shall not absolve a company
from its liability in respect of any offence under this Chapter.
Another important consequence of non-registration is that the charge-holder loses
priority. Any subsequent registration of a charge (i.e. even if it is registered within
the extended period instead of original thirty days) shall not prejudice any right
acquired in respect of any property before the charge is actually registered. 15.
Example 4: Bank A has advanced Rs. One Crore to Akash Limited against the
security of the company’s land and building at Mulund. The charge was created by
deposit of title deeds on 1st June 2019. The company did not register the charge
within 30 days. Subsequently, the charge was registered on 13th August 2019 after
payment of ad valorem fees and proving sufficient cause.
In the meantime, Bank B has advanced Rs. Two Crore to Akash Limited against the
security of the same property on 20th June 2019. This charge was duly registered
on 27th June 2019.
Subsequently, Akash Limited goes into liquidation and the property realises only
Rs. Two crores.
Now, Bank B will receive its loan back fully, but Bank A will not realise anything.
Because the subsequent registration of the charge in favour of Bank A will not
prejudice the right of Bank B which obtained its right before the charge in favour
of Bank A was actually registered. Thus, Bank B gets priority over Bank A even
though its charge was created later.
15
As per Third Proviso to Section 77 (1)
Register within a
Company must period of 14 days Registrar shall not
register charge after giving notice to allow registration
the company
16
A pari passu charge-holder is entitled to a proportionate share in the property mortgaged.
When this ceded the charge-holder will become a second charge-holder and as such his right
entitlement will be subject to full satisfaction of the First Charge-holders claim.
17
Satisfaction happens when the amount is not repaid but an asset of equal value is offered
in the place of the property being released from charge.
18
As per Rule 8, Form CHG-4 is to be used.
19
(1) In case of a specified IFSC public company, the Registrar may, on an application by the
company, allow such registration to be made within a period of three hundred days of such
creation on payment of such additional fees as may be prescribed (vide Notification No. GSR 8
(E), dated 04-01-2017).
(2) In case of a specified IFSC private company, the Registrar may, on an application by the
company, allow such registration to be made within a period of three hundred days of such
creation on payment of such additional fees as may be prescribed (vide Notification No. GSR 9
(E), dated 04-01-2017).
20
Proviso inserted vide the Companies (Amendment) Act, 2017.
21
Rule 8 (1) has been substituted vide the Companies (Registration of Charges),
Amendment Rules, 2018 (w.e.f. 05-07-2018) to provide for giving of intimation within three
hundred days instead of thirty days.
22
As per Section 82 (2).
23
As per Rule 8, Form CHG-4 is required to be filled for this purpose.
8. INTIMATION OF APPOINTMENT OF
RECEIVER OR MANAGER [SECTION 84]
Section 84 of the Act of 2013 deals with the appointment of a receiver or manager
and of giving intimation thereof to the company and the Registrar.
Accordingly,
♦ if any person obtains an order for the appointment of a receiver or a person
to manage the property which is subject to a charge, or
♦ if any person appoints such receiver or person under any power contained in
any instrument,
he shall give notice of such appointment to the company and the Registrar along
with a copy of the order or instrument within 30 days from the passing of the order
or making of the appointment.
In turn, the Registrar shall, on payment of the prescribed fees, register particulars
of the receiver, person or instrument in the register of charges.
On ceasing to hold such appointment 24, the person appointed as above shall give
a notice to that effect to the company and the Registrar. In turn, the Registrar shall
register such notice.
24
As per Rule 9, the notice of appointment or cessation shall be filed with the Registrar in
Form No. CHG-6.
25
Sub-section (2) of section 86 inserted vide the Companies (Amendment) Second
Ordinance, 2019 w.e.f. 02-11-2018.
26
As substituted by the Companies (Amendment) Second Ordinance, 2019 w.r.e.f.
02-11-2018.
27
As substituted by the Companies (Registration of Charges) Amendment Rules, 2019 w.e.f.
30-04-2019
28
Vide Notification No. S.O. 4090 (E), dated 19-12-2016, powers of the Central Government
with respect to Section 87 stand delegated to the Regional Directors.
SUMMARY
♦ “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.
♦ A charge created by a company is required to be registered with Registrar
within 30 days of its creation.
♦ In case a charge was created before 02-11-2018 but was not registered
within 30 days, the Registrar may, on an application by the company, allow
registration of charge within 300 days of such creation. In case registration is
not made within the extended period, it shall be made within six months from
02-11-2018 on payment of prescribed additional fees. Different fees may be
prescribed for different classes of companies.
♦ In case a charge was created on or after 02-11-2018 but was not registered
within 30 days, the Registrar may, on an application by the company, allow
registration of charge within 60 days of such creation on payment of
prescribed additional fees. If the registration is not made within the extended
period, the Registrar may, on an application, allow such registration to be
made within a further period of sixty days after payment of prescribed
advalorem fees.
♦ If a company fails to register the charge, the charge-holder can make an
application for registration of charge and can also recover the amount of any
fees or additional fees paid by him from the company.
♦ Modification in the terms and conditions, etc. of charge also requires
registration of charge afresh. On recording the particulars of modification of
charge, the Registrar shall issue a certificate of modification of charge.
♦ Any person acquiring a property which is subject to charge shall be deemed
to have notice of the charge from the date of such registration.
♦ The company shall give intimation to Registrar of payment or satisfaction in
full of any charge within a period of 30 days from the date of such payment
or satisfaction. If no intimation is given within 30 days, the Registrar may allow
such intimation to be made within 300 days of such payment or satisfaction
on payment of prescribed additional fees.
♦ On receipt of intimation, the registrar shall issue a notice to the holder of
charge calling upon him to show cause within such time not exceeding 14
days as to why payment or satisfaction in full should not be recorded as
intimated to the Registrar. If no cause is shown, the Registrar shall order
recording of memorandum of satisfaction.
♦ In case intimation of payment or satisfaction in full of charge is in prescribed form
and signed by the holder of charge no notice as mentioned above shall be sent.
♦ In case, the company fails to send intimation of satisfaction of charge to the
Registrar, the Registrar may enter in the register of charges memorandum of
satisfaction on receipt of evidence to his satisfaction regarding the same.
Question 4
Renuka Soaps and Detergents Limited realised on 2nd May, 2019 that particulars of
charge created on 12th March, 2019 in favour of a Bank were not registered with the
Registrar of Companies. What procedure should the company follow to get the charge
registered? Would the procedure be different if the company realised its mistake of
not registering the charge on 7th June, 2019 instead of 2nd May, 2019? Explain with
reference to the relevant provisions of the Companies Act, 2013.
Answer
The charge in the present case was created after 02-11-2018 (i.e. the date of
commencement of the Companies (Amendment) Second Ordinance, 2019) to which
another set of provisions is applicable. These provisions are different from a case
where the charge was created before 02-11-2018.
Initially, the prescribed particulars of the charge together with the instrument, if
any, by which the charge is created or evidenced, or a copy thereof, duly verified
by a certificate, are to be filed with the Registrar within 30 days of its creation.
[Section 77 (1)]. In this case particulars of charge were not filed within the
prescribed period of 30 days.
However, the Registrar is empowered under clause (b) of first proviso to section 77
(1) to extend the period of 30 days by another 30 days (i.e. sixty days from the date
of creation) on payment of prescribed additional fee. Taking advantage of this
provision, Renuka Soaps and Detergents Limited should immediately file the
particulars of charge with the Registrar after satisfying him through making an
application that it had sufficient cause for not filing the particulars of charge within
30 days of its creation.
If the company realises its mistake of not registering the charge on 7th June, 2019
instead of 2nd May, 2019, it shall be noted that a period of sixty days has already
expired from the date of creation of charge. However, Clause (b) of Second Proviso
to Section 77 (1) provides another opportunity for registration of charge by
granting a further period of sixty days but the company is required to pay ad
valorem fees. Since the first sixty days from creation of charge have expired on 11th
May, 2019, Renuka Soaps and Detergents Limited can still get the charge registered
within a further period of sixty days from 11th May, 2019 after paying the prescribed
ad valorem fees. The company is required to make an application to the Registrar
in this respect giving sufficient cause for non-registration of charge.
Question 5
Mr. Antriksh purchased a commercial property in Delhi belonging to NRT Limited
after entering into an agreement with the company. At the time of registration,
Mr. Antriksh comes to know that the title deed of the company is not free and the
company expresses its inability to get the title deed transferred in his name
contending that he ought to have the knowledge of charge created on the property
of the company. Explain, whether the contention of NRT Limited is correct?
Answer
According to section 80 of the Companies Act, 2013, where any charge on any
property or assets of a company or any of its undertakings is registered under
section 77 of the Companies Act, 2013, any person acquiring such property, assets,
undertakings or part thereof or any share or interest therein shall be deemed to
have notice of the charge from the date of such registration.
Thus, Section 80 clarifies that if any person acquires a property, assets or
undertaking in respect of which a charge is already registered, it would be deemed
that he has complete knowledge of charge from the date of its registration. Mr.
Antriksh, therefore, ought to have been careful while purchasing property and
should have verified beforehand that NRT Limited had already created a charge on
the property.
In view of above, the contention of NRT Limited is correct.
Question 6
ABC Limited created a charge in favour of OK Bank. The charge was duly registered.
Later, the Bank enhanced the facility by another Rs. 20 crores. Due to inadvertence
this modification in the original charge was not registered. Advise the company as to
the course of action to be pursued in this regard.
Answer
The company is advised to immediately file an application for rectification of the
Register of Charges in Form No CHG- 8 to the Central Government under Section
87 of the Companies Act, 2013.
Section 87 of the Act of 2013 and Rule 12 empowers the Central Government to
order rectification of Register of Charges in the following cases of default:
(i) when there was omission in giving intimation to the Registrar with respect to
payment or satisfaction of charge within the specified time;
(ii) when there was omission or mis-statement of any particulars in any filing
previously made to the Registrar. Such filing may relate to any charge or any
modification of charge or with respect to any memorandum of satisfaction or
other entry made under Section 82 (Company to report satisfaction of charge)
or Section 83 (Power of Registrar to make entries of satisfaction and release).
Before directing that the ‘time for giving the intimation of payment or satisfaction
shall be extended’ or the ‘omission or mis-statement shall be rectified’, the Central
Government needs to be satisfied that such default was accidental or due to
inadvertence or because of some other sufficient cause or it did not prejudice the
position of creditors or shareholders.
The application in Form CHG-8 shall be filed by the company or any interested
person. Therefore, OK Bank can also proceed under Section 87 as aforesaid.
The order of rectification shall be made by the Central Government on such terms
and conditions as it deems just and expedient.
Question 7
Ranjit acquired a property from ABC Limited which was mortgaged to OK Bank. He
settled the dues to Ok Bank in full and the same was registered with the sub-registrar
who has noted that the mortgage has been settled. But neither the company nor OK
Bank has filed particulars of satisfaction of charge with the Registrar of Companies.
Can Mr. Ranjit approach the Registrar and seek any relief in this regard? Discuss this
matter in the light of provisions of the Companies Act, 2013.
Answer
Section 83 of the Act of 2013 empowers the Registrar to make entries with respect
to the satisfaction and release of charges even if no intimation has been received
by him from the company. Accordingly, with respect to any registered charge if an
evidence is shown to the satisfaction of Registrar that the debt secured by charge
has been paid or satisfied in whole or in part or that the part of the property or
undertaking charged has been released from the charge or has ceased to form part
of the company’s property or undertaking, then he may enter in the register of
charges a memorandum of satisfaction that:
♦ the debt has been satisfied in whole or in part; or
♦ the part of the property or undertaking has been released from the charge or
has ceased to form part of the company’s property or undertaking.
This power can be exercised by the Registrar despite the fact that no intimation has
been received by him from the company.
Information to affected parties: The Registrar shall inform the affected parties
within 30 days of making the entry in the register of charges.
Issue of Certificate: As per Rule 8 (2), in case the Registrar enters a memorandum
of satisfaction of charge in full, he shall issue a certificate of registration of
satisfaction of charge in Form No. CHG-5.
Therefore, Ranjit can approach the Registrar and show evidence to his satisfaction
that the charge has been duly settled and satisfied and request the Registrar to
enter a memorandum of satisfaction noting the release of charge.