Legal Service India - Charge
Company Law


A charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt
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A charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt. Charges are of 2 types :-

1) Fixed Charge
: Such a charge is against a specific clearly identifiable and defined property. The property under charge is identified at the time of creation of charge. The nature and identity of the property does not change during the existence of the charge. The company can transfer the property charged only subject to that charge so that the charge holder or mortgage must be paid first whatever is due to him before disposing off that property.

2) Floating Charge
: Such a charge is available only to companies as borrower. A Floating charge does attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc. It attaches to the property charged in the varying conditions in which happens to be from time to time. Such a charge remains dormant until the undertaking charge ceases to be a going concern or until the person in whose favour charge created takes steps to crystallise the floating charge. A floating charge on crystallisation becomes a fixed charge.

Crystallization of floating charge:

When the charge holder takes steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge. Until a floating charge becomes a fixed charge, the company is free to deal with the property charged in any manner it deems fit. But once the floating charge crystallises, the company cannot dispose off the charged assets without paying of the chargeholder. Otherwise, the chargeholder can recover his dues from the proceeds. A floating charge crystallises or becomes the fixed in following situations :-

1) Where the company ceases to carry on the business, whether the principal money has become payable or not, unless the debenture or trust deed contains the stipulation to the contrary.

2) Upon the commencement of winding up of the company.

3) If a debenture holder, having become entitled to realise the securities by the reason of the fact that the principal money has become payable, intervenes for the purpose by appointing the receiver or by making an application to the court for appointment of the receiver.

Registration of charges:

Every company must keep at its registered office a register of charges in which all the charges and mortgages specifically affecting the property of the company must be entered. The register must contain short description of the property charged, the amount of the charge, the name of the person entitled to the charge, etc. The company must keep at its registered office, a copy of every instrument creating any charge requiring the registration. During the business hours inspection by the creditor or member of the company is allowed to be without charge of the register and documents. Any outsider can inspect them on the payment of Rs10 for each inspection during the business hours. Registrar of the company must keep also the register of charges in respect of each company and register therein full particulars relating to the charge created by the company and registrable under the Act. This register is also open to inspect by any person on payment of Rs 10 as fees . The company must submit to the Registrar the instrument creating the charge or its certified copy which will be returned after the registration along with the certificate of registration. The company must cause the copy of every registration to be endorsed on every debenture or certificate of debentures stock which is issued by the company and the payment of which is secured by the charge.

Charges requiring registration:

A company must file within 30 days of creation of a charge with the Registrar complete details of the charge together with the instrument of charge or its verified copy in respect of certain charges. Otherwise the charge will be void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them. The following charges are compulsorily registrable :-

# A charge for the purpose of securing any issue of any debentures
# A floating charge
# A charge on uncalled share capital
# Charge on calls made but not paid
# A charge on any immovable property
# A charge on ship
# A charge on book debts of the company
# A charge on goodwill or on patent or on license under the patent or on trademark or copyright or on the license under the copyright
# A charge other than a pledge on any movable property of the company.

Effects of Registration

Once a charge is registered, it acts as a notice to the public at large that the charge holder has an interest in the charged property. No person can take a defense against the charge holder that he was not aware that a charge was created against the property. That person will be entitled to the property subject to the interest of the charge holder. Once certificate of charge is issued by the Registrar, it is conclusive evidence that the document creating the charge is properly registered.

Consequences of Non-Registration

A charge which is compulsorily registarble but which is not registered is void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them.

Although the security becomes void by non-registration, it does not affect the contract or obligation of the company to repay the money thereby secured.

Omission to registrar particulars of charge is required punishable with fine. A company or every officer of company is in default shall be liable to fine upto Rs 500 for each day of continuing default. A further fine of Rs. 1000 may be impose on the company and every officer for other defaults relating to registration of charges.

Wherever the terms and conditions or the extent of the operation of any registered charge is modified , the company is required to file the particulars of modification within 30days thereof with the Registrar of Companies.

Memorandum of satisfaction

A company must make a report to the Registrar of payment of satisfying in full of any charge registered under this act. The satisfaction of charges must be filed with the Registrar within 30 days from the date of such a payment of charge. On receipt of intimation to the company, the Registrar gives notice to the charge-holder calling upon him to show cause within time not exceeding 14 days as why the payment of satisfaction should not be registered. If no cause is shown within the time stipulated above the Registrar must enter the satisfaction of the payment of charge. If some cause is shown, the Registrar must record note to that effect in the register and inform the company accordingly
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