COMPANY LAW
PROJECT
Topic: Charges Created by Companies
National University of Advanced Legal Studies
Kochi
Submitted To:
Prof. (Dr.) Anil R. Nair
NUALS, Kochi
Submitted By:
Dennis Jose
Roll No:1210
Vth Semester
Batch A
1
ACKNOWLEDGEMENT
I wish to express my sincere gratitude to Dr. Anil R. Nair, Associate Professor, National
University of Advanced Legal Studies (NUALS), Kochi for providing me an opportunity
to do a project on ‘Charges Created by Companies. Also, I wish to avail myself of
this opportunity, to express a sense of gratitude and love to my parents, family and friends
for their manual support, strength and help for everything. Last but not the least, I wish
to be grateful to God Almighty for all the blessings showered upon me.
2
Contents
1.
INTRODUCTION .................................................................................................................. 3
2.
CHARGES UNDER THE COMPANIES ACT ..................................................................... 4
3.
2.1.
FIXED CHARGES .......................................................................................................... 4
2.2.
FLOATING CHARGES .................................................................................................. 4
2.2.1.
CHARACTERISTICS OF FLOATING CHARGE ................................................. 5
2.2.2.
CRYSTALLIZATION OF FLOATING CHARGE ................................................. 5
REGISTRATION OF CHARGES .......................................................................................... 7
3.1.
EFFECTS OF REGISTRATION ..................................................................................... 7
3.2.
SCOPE OF REGISTRATION OF CHARGES ............................................................... 7
3.2.1.
4.
WHO CAN REGISTER ........................................................................................... 8
3.3.
EFFECTS OF NON-REGISTRATION ........................................................................... 8
3.4.
SATISFACTION OF CHARGE ...................................................................................... 9
REGISTER OF CHARGES .................................................................................................. 10
4.1.
COMPANIES REGISTER OF CHARGES ................................................................... 10
4.1.1.
INSPECTION OF THE REGISTER ...................................................................... 10
4.2.
REGISTRAR’S REGISTER OF CHARGES ................................................................ 10
4.3.
RECTIFICATION BY THE CENTRAL GOVT. .......................................................... 11
4.4.
PENALTY FOR NON-COMPLIANCE ........................................................................ 11
5.
APPOINTMENT OF RECEIVER ........................................................................................ 12
6.
DUTIES AND POWERS OF REGISTRAR OF COMPANIES .......................................... 13
7.
CONCLUSION ..................................................................................................................... 14
8.
SOURCES REFERRED ....................................................................................................... 15
BOOKS ..................................................................................................................................... 15
3
1. INTRODUCTION
The concept of charges on property is actually a creation of equity. From time immemorial, around
the globe, people have been satisfying the sudden requirements of money through various types of
charges like pledge, mortgage, hypothecation, etc. Though, initially companies sorted to satisfy
their financial requirement by way of issue of equity or preference shares, which constituted their
share capital, later on they had to find other techniques of borrowing such as the above mentioned.
Gradually, charges found their space, as an indivisible part, in the field of property law. And from
the inception of corporate personalities or companies, they have also engaged in the same idea of
charges. Now a situation has arisen, where, the whole corporate system would plummet without
the newly evolved and specific concept of ‘charges created by companies’.
The Companies Act does not give a proper definition as to what is a charge. But, what the
Companies Act, 2013 mainly focuses is on Registration of such charges. A whole chapter (Chapter
VI) in the Act discusses on the Registration of Charges alone. The method of registration of
charges devised by the Companies Act is the filling of particulars of charge along with the
instrument creating charge with the Registrar of Companies within the period prescribed.
The Registrar of Companies has certain functions with respect to registration of charges including
keeping a register of charges. Also the Central Government has a bigger role to play as it is plays
a kind of judicial function here, i.e. a discretionary power, as to pardoning defects, condoning
delays and even rectification of the register of charges.
4
2. CHARGES UNDER THE COMPANIES ACT
‘Charge’ means an interest or lien created, in favour of that person who lends money to the
company, on the property or assets of a company or any of its undertakings or both as security and
this also includes a mortgage. This is the definition given to charge under according to sub-section
(16) of Section 2 of the Companies Act, 2013. A Charge has also been defined in the Transfer of
Property Act, 1882 as, where 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 aid to have a charge on the property, and all the provisions
applicable to a simple mortgage shall be applicable to a charge as well.
In simple words, a charge is created when one person borrows a certain amount of money, by way
of loan/credit, from another person and makes the former’s property security for securing the loan
amount. Here the one who lends the money is the ‘chargee’ or the ‘charge-holder’ and the one who
borrows it or grants a charge over his property is known as the ‘chargor’. This means, charge can
be described as an interest created, in favour of the chargee over a property of the chargor which
causes an impediment over the title of the property, whereby the chargor may not dispose of the
property unencumbered. The term property may include immovable like land, building etc, as well
as movable, like automobiles, machines, etc.
Basically, there are two types of charges recognized by the Companies Act, 2013. They are
classified according the nature of the property in which a charge is created:i.
ii.
Fixed Charge
Floating Charge
Whether a charge is a fixed or floating will depend upon the words used in the instrument creating
the charge.
2.1. FIXED CHARGES
The simplest form of charge is a fixed charge. It is the ordinary type of charge that where charge
covers definite and ascertained assets of permanent nature or the property such as buildings, land,
machinery, etc. So when the charge is fixed, though the company may retain the possession of the
property the charge passes the legal title to such asset(s) and thereby the company loses the right
to dispose of the property, and can only deal with the property subject to the conditions of the
charge. The company can sell the property only with the permission of the chargee.
2.2. FLOATING CHARGES
The concept of floating charge is something which is available only in the realm of corporate law.
This concept arose out of the manufacturing and trading companies in England which could not
afford to lose any kind of rights over the title of the corporate entities’ property, as it would hamper
their successful working, but required financing via charges. This way the companies were left
free to use its mortgaged or hypothecated assets as well as to sell them without any hindrance from
the part of the lender so long as the company worked and continued to make periodical repayments
with interest.1
1
Yallamma Cotton, Wollen & Silk Mills Co. Ltd., In re [1970] 40 Comp. Cas. 466 (Mys.)
5
A floating charge is a security, such as a mortgage or lien, which may be present of future, that has
an underlying asset or group of assets whose quantity or value may from time to time may change.
When businesses use floating charges, it does not affect their ability to use the underlying asset in
the ordinary course. For example, the stocks-in-trade may be hypothecated, yet the company may
retain full rights over them and make use of it or sell it as if they were not hypothecated. Or in
simple words, the company may, in the ordinary course of business, deal with or sell the property
so charged in any manner without the consent of the lender or charge-holder, but has to pay the
interest without fail.
A floating charge gets frozen into a fixed charge with a definite value, only in the event of the
company fails to repay the loan amount or goes into liquidation. This process is called
‘crystallization of floating charge’. The lender or the charge-holder then becomes the first-in-line
creditor to be able to redeem the underlying asset. Also, “when such a crystallization happens and
becomes fixed, the underlying assets would be subject to the same restrictions”2.
i.
ii.
iii.
iv.
2.2.1. CHARACTERISTICS OF FLOATING CHARGE
It is a charge on a class of assets, present and future;
The class of assets charged is one which in the ordinary course of business, is changing
from time to time;
The company has the freedom to continue to deal with the assets charged in the ordinary
course of business, until charge crystallizes when the company fails to pay the interest or
goes into liquidation.
A floating charge can only be created by an incorporated body.
In the landmark English case of Government Stock and Other Securities Investment Co. v. Manila
Railway Co.3, Lord Macnaughten observed the nature of a floating charge and the assets so
charged, and the essence of such charge as that it remains dormant until the assets charged ceases
to be a ‘going concern’, i.e. an working and profiting business entity, or until the person in whose
favour the charge is created, or the charge-holder, intervenes for crystallization.
2.2.2. CRYSTALLIZATION OF FLOATING CHARGE
The transition of a floating charge to a fixed one is called as crystallization of a floating charge.
The so crystallized charge would then acquire a value fixed to the last value of the floating charge,
immediately before crystallization.
A floating charge crystallizes and the security becomes fixed only in one of the following
methods:i.
ii.
iii.
iv.
2
when the company goes into liquidation; or
when the company ceases to carry on the business; or
when the creditors or charge-holders take steps to enforce this security by appointing a
receiver or manager to take possession of the property charged4; or
on the happening of the specified event as a condition precedent according to the charge
deed.
Maturi U. Rao v. Pendyala, AIR 1970 A.P. 225
[1897] A.C. 81
4
ibid
3
6
It is not mandatory that the charges crystallize on winding-up of company. According to Section
332 of Companies Act, 2013 when a company is being wound up, a floating charge on the property
of the company would be affected and be invalidated if the charge was created within twelve
months immediately preceding the commencement procedure for winding up.
But this would not be the case when
i.
ii.
the company’s status was solvent immediately after the creation of the charge; and
the amount of any cash paid to the company at the time of, or right after the creation of,
and in consideration for, the charge, together with interest on that amount at the rate of 5%.
per annum or such other rate as may be prescribed by the Central Government.
This provision was created to protect unsecured creditors from being prejudiced by insolvent
companies by prohibiting such companies from creating any floating charge on their assets for
securing their past debts.
7
3. REGISTRATION OF CHARGES
Section 77 of the Companies Act, 2013 makes it clear that, any company which creates charge on
its property, tangible or otherwise, situated in India or even outside, has to register the charge with
the Registrar of Companies (RoC). The registration shall be accompanied by particulars of the
charge signed by the company and the charge-holder together with such instruments creating the
charge. This has to be done before a statutory time-period of 30 days and the procedure shall be in
such form and manner and on such payment of fee as may be prescribed.5
The Companies (Registration of Charges) Rules, 2014 provides clarity on any matter related to
registration of charges. The prescribed forms, manner, fees, time period, or whatever not
mentioned in the Companies Act may be found in the above Rules.
Although the time limit is 30 days, the company may seek extension from the Registrar for another
300 days on payment of such additional fess prescribed in the Companies (Registration of Charges)
Rules, 2014. This may further extended, if the central govt can be satisfied according to section 87
of the Act.
Though not really heard in the Indian Company hemisphere, the Registrar may exercise a power
to refuse registration if


RoC feels that there are discrepancies in the application form and the instruments submitted
The application form was not properly filled in accordance with the prescribed manner.
This principle may be incorporated to the Indian Law from a 1988 Privy Council judgment of Sun
Tai Cheung Credits Ltd. v. A.G. (1988) LRC (Comm) 752 [PC, Hong Kong]
3.1. EFFECTS OF REGISTRATION
On a successful registration the RoC will issue a certificate of registration which acts as a
conclusive evidence of registration according to Rule 6(3) of the Companies (Registration of
Charges) Rules, 2014.
Section 80 of the Act also describes that, from the date of registration of charge, any person
acquiring such property or undertaking charged, shall be deemed to have noticed the existence of
the charge.
3.2. SCOPE OF REGISTRATION OF CHARGES
The mandatory requirement of registration of charges, as given in section 77 may also be
applicable to
i.
ii.
iii.
5
6
a company acquiring any property subject to a charge within the scope of section 77
any modification, alteration, addition, omission, etc., in the terms and conditions or the
extent or operation of any existing registered charge, according to section 79
any debenture creating a charge on immovable property has to be registered under the
Companies Act as well as the Indian Registration Act.6
Section 77, Companies Act, 2013.
Krishna Deva Bargawa v. Official Liquidator, UP Oil Industries Ltd., [1962] 32 Comp. Cas. 925 (All.)
8
iv.
Charges created by any other form of business like a partnership which later converted
itself into a company.7
An assignment of book debts as security is a mortgage requiring registration8
Creation of charge on future book debts of a company9
A charge created by way of a hypothecation agreement of movable property
v.
vi.
vii.
But certain charges does not come under section 77 and hence, need not be registered with the
RoC:
i.
ii.
iii.
Creation of charge by operation of law, via an order or decree of a Court of Law or any
other authorized manner.10
An attachment by way of revenue recovery by a court of law may appear to a charge.11
Those charges-like loans availed by a company-in-liquidation from financial institutions
and/or banks.12 This also includes any inter-party agreement between two creditors or by
registration of guarantee bond.13
3.2.1. WHO CAN REGISTER
Though it’s the duty of the Company to duly register the charges created, application for
registration may also be applied by the charge-holder in case the company fails to register within
the 30 days’ span. Such application must be given within 30 days from the elapse of the before
mentioned 30 days given to the company to register according to the new Companies
(Amendment) Act, 2017. The RoC after giving notice to such company which failed to register,
may register the charge within 14 days. When such a registration is effected, the charge-holder is
then entitled to claim the fees paid by him to the RoC from such company. This has been dealt
with in Section 78 of the Act.
Such a provision is much needed because without such a certificate no charge created will be taken
into account, at the time of liquidation, by the liquidator or any other creditor as the case may be
and the charge may stand invalid.
3.3. EFFECTS OF NON-REGISTRATION
It is mandatory to register a registrable charge. But if somehow, such a charge is not registered
with the RoC within the prescribed time and/or the certificate of registration is not issued by the
RoC, then the charge may become void or invalid against any creditor and liquidator of the
company, especially at the time of liquidation, says sub-section (3) of Section 77.
In the case of Deutsche Bank v. S.P. Kale14, the Bombay High Court held that even the overdraft
facility granted by a bank to a company, charged on the company’s property, should be registered
7
Maharashtra State Financial Corp. v. Official Liquidator, [1988] 64 Comp. Cas. 641 (Bom.)
Ashby Warner & Co. v. Simmons, [1938] 8 Comp. Cas. 111 (CA)
9
Independent Automatic Sales Ltd. v. Knowles & Foster, [1962] 32 Comp. Cas. (Ch. D)
10
Indian Bank v. Official Liquidator, Chemmeens Export (P.) Ltd., 16 SCL 524 (SC).
11
Kerala State Financial Enterprises Ltd. v. Official Liquidator, [2006] 72 SCL 130 (SC)
12
Punjab State Industrial Development Corpn. Ltd. v. Punjab National Fertilizers & Chemicals Ltd. (In Liquidation),
[2009] 95 SCL 189 (Punj. & Har.)
13
A.P. State Financial Corporation v. Mopeds India Ltd. (In Liquidation), [2006] 65 SCL 38 (AP)
14
[1999] 20 SCL (Bom.)
8
9
duly in accordance with Act. Non-compliance would make the charge, by virtue of Section 77
itself, void against the liquidator.
But it has to be noted that, such debt, which arose out of a charge, remains valid and can be
recovered in the form of an unsecured debt against the company according to sub-section (4) of
Section 77. The adverse effect of invalidating the charge is only against the Official Liquidator or
any creditors, only on the event of winding-up of the company. But so long as the company is
operating or a ‘going concern’, the debt can be recovered and its not invalid against the creditors
of the company as well. The above principle has been summarized in a number of cases starting
from Marturi Umamaheshwara Rao v. Pendyala Venkatrayudu15, Official Liquidator v. Bharatpur
Princesses Trust, Mysore16, State Bank of India v. Viswaniryat (P.) Ltd.17
3.4. SATISFACTION OF CHARGE
A charge reaches satisfaction when the charger (the company which granted charge) pays the loan
amount in whole to the chargee and satisfies the charge. Every company is supposed to register
with the RoC the report on satisfaction of a charge. This shall be done according to the prescribed
form of Form No. CHG-4, and within 30 days from the date of such payment according to Rule
8(1) of the Companies Rules.
15
[1970] 40 Comp. Cas. 751 (AP)
[1971] 41 Comp. Cas. 978 (Mad.)
17
[1989] 65 Comp. Cas. 795 (Ker)
16
10
4. REGISTER OF CHARGES
The register of charges is that register where the details and particulars of all charges granted by a
company is preserved. The significance of such a register is that it provides a conclusive proof
which can is used to corroborate with the certificate of instrument creating charge. There are two
corresponding counterparts-like registers kept, one with the Company herself and the other with
the Registrar of Companies.
4.1. COMPANIES REGISTER OF CHARGES
Any company under Section 85 of the Companies Act is obligated to keep a register of charges
granted by it at its registered office in the prescribed manner and form. This register of charges
shall be kept permanently as long as the company is alive. This register shall contain particulars
of
i.
all charges; and
ii.
all floating charges,
affecting any property or assets or undertakings of the company, also indicating such
particulars in each case.
Rule 10 of the Companies Rules prescribes that the register shall be kept as per Form No. CHG-7.
Also the copy of the instrument creating such charge shall be preserved for a period of eight years
from the date of satisfaction of charge.
For each creation, modification or satisfaction of charge must be made an entry into the register of
charges. Every entry requires the authentication by a director or the company secretary or any
other person authorized to do so by the Board of Directors. Such a register of shall is required to
be up-to-date18.
4.1.1. INSPECTION OF THE REGISTER
According to Rule 11 of the Companies Rules, the register of charges and copies of instrument of
such charges shall be kept open for inspection at the registered office of the company during
business hours of the company by any
(i)
member or creditor of the company at free of cost, or
(ii)
other person, including outsiders to the company, on payment of such fees as may be
prescribed. Although, the company may be empowered, by virtue of its articles, to
impose reasonable restrictions on such inspection.
4.2. REGISTRAR’S REGISTER OF CHARGES
The registrar of companies, under Section 81 of the Companies Act, shall keep a register of
charges, for every company, with particulars of the charges registered in such form and manner
prescribed and it shall be opened to inspection by any person provided such prescribed fee is payed.
The register kept by the company has to be in conformity with the Register kept by the RoC. In
case of any conflict between these two registers, the RoC’s register would prevail over the
Company’s.
18
Basant Co. v. Benares Cotton & Silk Ltd., [1964] 34 Comp. Cas. 394 (All.)
11
The particulars of charges or the prescribed manner in which such a register is to be kept by the
RoC has been maintained on the Ministry of Corporate Affairs’ online portal19, under the Rule 7
of the Companies Rules.
4.3. RECTIFICATION BY THE CENTRAL GOVT.
A common phenomenon can be seen along the Companies Act empowering the Central
Government with powers with respect to a lot of matters. These powers are similar to a kind of
judicial powers envisaged to the Central Government. Its clear from the above that the govt. has
totalitarian powers in the realm of company law in India. However, the companies in India has to
comply with such arbitrary laws to run their business in India.
Such powers are also available to the central government with respect to the topic of Registration
of Charges. The powers are mainly related to pardons and/or condonations in certain matters like:
i.
ii.
iii.
when the company omits to Register the charges with the RoC with the proper particulars
of charges, a pardon by the Central govt.; or
when the company fails to register the charge with the RoC within the specified time period
under Section 77 of the Act, a condonation of delay by the govt.; or
when the company omits or mis-states any particulars with respect to any charge or
memorandum of satisfaction or any other entry made under section 82 or 83, a pardon by
the govt.
But such pardon or condonation is given only when the company on application, convinces the
central government that such an omission or delay was either accidental or due to inadvertence or
any other reasonable cause. However, the power is still at the discretion of the central government.
4.4. PENALTY FOR NON-COMPLIANCE
If any company contravenes any provision of Chapter VI – Registration of Charges, then:
 The company shall be punishable with fine in between Rs. 1 lakh and Rs. 10 lakh.
 any officer of the such a company who is in default/ or the man behind such a noncompliance, may also be punishable with imprisonment for a term which may extend to 6
months or with fine ranging between Rs. 25,000 and Rs. 1,00,000 or with both.
Even, non-registration of a charge granted by a company with the RoC is an offence under this
section as it violates section 77. In Silverlines Motors (P.) Ltd. v. State Bank of India20, the
company failed to register the charge on time nor did they seek extension. But the charge-holder
had to. So when such a mishandling was brought to the knowledge of the Registrar, the company
was held liable under section 142 of the Companies Act, 1956 (now Section 86).
19
20
www.mca.gov.in/MCA21
(2008) 84 CLA 9: (2008) 142 Comp. Cas. 4 (HP)
12
5. APPOINTMENT OF RECEIVER
A Receiver/Manager may be appointed by any person with respect to a charge, usually the chargeholder under Section 84 of the Act. But when someone obtains an order for the appointment to the
position of a receiver of, or of a manager to the property, subject to a charge, of a company or if
someone, by virtue of the power contained in any instrument, appoints such receiver or manager,
he is obliged to intimate such an appointment to the RoC and to the concerned company along
with a copy of the order or instrument. The same procedure shall be followed when such receiver
cease to hold the position.21
The particulars of the receiver, order and instrument shall be registered in the register of charges
by the RoC when applied in Form No. CHG-6 and on payment of such prescribed fee according
to Rule 9 of the Companies Rule.
21
Section 84, Companies Act, 2013.
13
6. DUTIES AND POWERS OF REGISTRAR OF COMPANIES
A huge pile of functions has been allotted to the Registrar of Companies (RoC) under the
Companies Act, 2013. In which, the duties and powers of the Registrar in respect to the Chapter
VI (Registration of Charges), forms only a small portion.
i.
ii.
iii.
iv.
v.
vi.
The primary duty of the Registrar is to register the charges of companies when applied in
the proper manner, form and fees according to section 77.
He has the power to give extension of 300 days to companies which seek condonation of
delay after the normal 30 days time period. (proviso S.77(1))
He has a duty to issue to a certificate of Registration of charges (S.77(2)).
Another important duty is to maintain a register of charges according to section 81.
The RoC has got power to make entries of satisfaction and release the charge in absence of
notice from the company according to Section 83.
The registrar shall take action against or bring to the notice of the Central Government such
violations of any provision in chapter VI, to penalize the company under 86.
14
7. CONCLUSION
Companies create charges over their assets or undertakings to secure loans. Such charges have to
be mandatorily registered with the Registrar of Charges. Registration of Charges is the primary
topic covered under the Companies Act, 2013. The whole Chapter VI in the Act deals with
Registration of Charges. The mandatory requirement to register is to protect charge-holders against
the liquidators or creditors of the company on winding-up. Non-complying companies and its
officers may be penalized as well.
The Registrar of Companies has a lot of roles to play with respect to registration of charges,
alteration, satisfaction, certificate of registration, extension of time-period, etc. A register of
charger will be kept updated, with the Company as well as the Registrar. The Central has also been
empowered with totalitarian kind of powers, similar to as seen along the Companies Act. The
Central Government can even act arbitrarily mainly on Rectification of the register of charges.
Other powers of the Central government includes pardoning of defects, condonation of delays, etc.
The Companies (Registration of Charges) Rules, 2014 has been the latest rules in this regard. The
prescribed forms, manner, fees and other related procedural matter can be found in this Rules.
15
8. SOURCES REFERRED
BOOKS:

A.K. Majumdar, Dr. G.K. Kapoor, Sanjay Dhamija, Taxmann’s Company Law & PracticeA Concise Commentary o Companies Act, 2013 (1st Edn., Taxmann Publications, 2014)

Dr. Avtar Singh, Business Law (11th Edn., Eastern Book Company, 2018)

A.K. Majumdar, Dr. G.K. Kapoor, Sanjay Dhamija, Taxmann’s Company Law & PracticeCommentary on Companies Act, 2013 (1st Edn., Taxmann Publications, 2014) vol 2

A Ramaiya, Guide to the Companies Act (18th Edn., LexisNexis Butterworths, 2015) vol 1

Dr. Avtar Singh, Company Law (17th Edn., Eastern Book Company, 2018)
LEGISLATIONS:
o Companies Act, 2013
o Companies (Registration of Charges) Rules, 2014
o Transfer of Property Act, 1882.
ONLINE RESOURCES:

www.mca.gov.in

www.hsc.co.in

www.taxmann.com

www.westlawindia.com

www.corporatelaws.taxmann.com

www.corporate-cases.com

www.jstor.org

www.shodhganga.inflibnet.ac.in

www.academia.edu

www.investopedia.com
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