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Kinds of Charges in Company Law

What is a Charge?

A charge is a kind of right created by any person including a company known as “the borrower” on assets and properties, may it be present or future. The charge is generated in favour of financial institution or a bank referred to as “the lender”, which has agreed to extend financial assistance.

If we talk about the definition mentioned under the legal term, Section 2(16) of the Companies Act 2014 defines charges to mean an interest or lien created on the property or assets of a company. It also includes, any of its undertaking or both as security and includes a mortgage.

Kinds of Charge

On the basis of the nature of the charge, it is differentiated into two, namely:-

  1. Fixed or Specific Charge

It is a kind of charge which is created to cover assets that are associated and definite or are capable of being uncertain and defined, at the time of creating the charge.

  1. Floating Charge

Floating charge which is fluctuating one, so it is not attached to any definite property but covers property like stock in trade which does not remain fix.

Difference between Fixed and Floating Charge

  1. Fixed Charge is what can easily be identified with a certain asset. However, the charge created on the assets that change periodically is known as a Floating Charge.
  2. Fixed Charge is specific in nature whereas the floating charge is dynamic in nature.
  3. If we talk about fixed charge, registration of movable assets is voluntary. And in the case of floating charge, registration is compulsory irrespective of the asset type.
  4. The fixed charge is a legal charge while floating charge is an impartial one.
  5. Fixed Charge under the Companies Act is given first preference as compared to floating charge.
  6. Kinds of Charges in Company law, fixed charge covers assets which are specific, ascertainable and existing during the creation of the charge. While, floating charge covers present or future asset.
  7. When the asset is covered under fixed charge, the company cannot deal with the asset until and unless the charge holder agrees for so. However, in the case of floating charge the company can deal with the asset until the charge is converted to fixed charge.

Essentials of Charge

Charge contains some of the essential features which are given as under :-

  1. For a charge, there must be two parties to the transaction, one being the ‘creator of the charge’ and another as ‘charge holder’.
  2. The second essential includes the ‘subject matter of charge’ that can either be current or future assets and other properties of the borrower.
  3. Third essential, the intention of the borrower must be to offer one or more of its specific assets or properties as security for repayment of the borrowed money together with payment of interest at the agreed rate should be manifested by an agreement entered into by him.

Duty to Register Charge

The provision relating to the duty to register charge is given under Section 77 of the Companies Act 2013. Under this section, it is stated that every company creating a charge shall register the particulars of the charge signed by the company and its charge-holder together with the instruments creating.

Moreover, any charge created within or outside India on property or assets or any property or assets or any of the company’s undertakings. No matter, whether tangible or otherwise, situated in or outside India.

Time Duration for Registration of Charge

Well, a charge created by a company is required to be registered with the Registrar within 30 days of its creation in form on payment of such fees may be prescribed.

Certificate of Registration of Charge

As per the Companies Act,  whenever a charge is registered with the Registrar of Companies (ROC). After that, registrar grants a certificate of registration of charge in Form CHG-2. However, for registration of modification of charge in Form No. CHG-3 to the company and to the person in whose favour the charge is created.

It works as an evidence as to ensure every compliance mentioned under Chapter VI of the Act (Registration of Charge) and the rules made thereunder as to registration of creation or modification of charge, as the case may be.

Forms under Charge

Here are some of the forms required to file either for creation or satisfaction or modification of charge. The list of forms are as under-

  • Form CHG-1 : it is to be filed for creating or modifying the charge (other than debenture)
  • Form CHG-2 : it is the form in which the grant is issued and known as certificate of registration
  • Form CHG-3 : this form considered as Certificate of modification of charge
  • Form CHG-4 : this form is to be filed for intimation of the satisfaction to the Registrar
  • Form CHG-5 : Memorandum of satisfaction of charge
  • Form CHG-6 : Notice of appointment or cessation of receiver or manager
  • Form CHG-7 : Register of charges
  • Form CHG-8 : Application for condonation of delay shall be filed with the Central Government
  • Form CHG-9 : Creating or modifying the charge in (for debentures including rectification)
  • Form CHG-10 : Application for delay to be made in this form to the registrar

Particulars of Charges

The following particulars in respect of each charge are required to be filed with the Registrar:

(a) date and description of the instrument creating charge;
(b) total amount secured by the charge;
(c) date of the resolution authorizing the creation of the charge; (in case of issue of secured debentures only);
(d) general description of the property charged;
(e) a copy of the deed/instrument containing the charge duly certified or if there is no such deed, any other document evidencing the creation of the charge to be enclosed;
(f) list of the terms and conditions of the loan; and
(g) name and address of the charge holder

What are the consequences of Non-Registration of Charge?

As per Section 77 (3) of the Act, no charge created by a company shall be taken into account by a liquidator unless it is registered and a certificate of registration has been issued.

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