Creation & Modification of Charge as per Companies Act, 2013

A charge is a right created by any person which may also include a business entity or a company which are referred to as “the borrower”. Such charge can be on assets and properties, present and future, in favour of a financial institution or a bank, who are referred to as “the lender”, which has agreed to extend financial assistance. In simple words, a charge is a right created by a company i.e. “Borrower” on its assets or properties or any of its undertakings present or future, in favor of a financial institution or a bank or any other lender, i.e. “creditor” who has agreed to extend financial assistance

This article will help you understand various procedural aspects relating to creation, registration, modification and satisfaction of charges by the companies under Companies Act, 2013.

Definition of Charge under different laws

• Section 2(16) of the Companies Act, 2013 defines charges so as to mean 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.
• 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.

Essential Features of the Charge

• There should be two parties to the transaction, the creator of the charge and the charge holder.
• The subject-matter of charge must be current or future assets and other properties of the borrower.
• Both the parties to the transaction must enter into a legal agreement specifying assets or properties kept as security for the repayment of money, interest rate charged etc.
• A charge may be fixed or floating depending upon its nature.

Need for creating a Charge

The Financial Institutions and Banks do not lend their money to company unless they are assured that their funds are safe and they would repay borrowed fund along with interest as per the schedule decided. Therefore, in order to secure their fund, they resort to creating rights on the assets and properties of the borrowing companies, which is known as Charge on Assets.

Type of Charges

• Fixed Charges: Charge created on Fixed Assets of the company.
• Floating Charges: Charge created on Current Assets or the Stock of the company.

Who is liable to register Charge?

As per Section 77 of the Companies Act, 2013 every company creating a charge shall register the particulars of charge signed by the company and its charge – holder together with the instruments creating.

Any charge created within or outside India on property or assets or any of the company’s undertakings Whether tangible or otherwise, situated in or outside India shall be registered. Hence all types of charges are required under the Act to be registered whether created within or outside India.

What is Modification of Charges?

The term ‘modification’ includes variation of any of the terms of the agreement including variation of rate of interest which may be by mutual agreement or by operation of law.Even if the rights of a chargeholder are assigned to a third party ,it will be regarded as a modification. The provisions applicable to the registration of a charge under Section 77 shall apply to modification of the charge.

Time Limit for Registration of creation or modification of Charges
A company creating charge, shall register the particulars of the said charge with the Registrar of Companies (ROC) within 30 days of its creation. According to Companies (Registration of Charges) Rules, 2014 e-forms prescribed for the purpose of creating or modifying the charge are as follows:

• For other than debentures: Form No.CHG-1
• For Debentures including any rectification: Form No.CHG-9

Delay in Registration of Charges

The Registrar may allow delay in registration of any charges :

• If Charge is created before 02.11.2018: Within A period of 300 days from the creation of charge
• If charge is created after 02.11.2018: Within a period of sixty days of creation of charge. However, additional fees is applicable in this case

Certification of Registration of Charge

When a charge is registered with the Registrar, Registrar shall issue a certificate of registration of charge in Form No.CHG-2 and 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. The certificate issued by the Registrar shall be the conclusive evidence that the charge is registered.

Register of Charges to be kept by Registrar (ROC)

• The Registrar shall, in respect of every shall keep a register containing particulars of Charges registered, in such form and in such manner as may be prescribed
• Register shall be kept open for inspection by any person on payment of such fees as may be prescribed

Duty of Company
Every company shall maintain at its registered office a Register of Charges in e-form CHG-7 which shall be open for inspection by:

• Any member and creditor Without any payment
• By any other person on payment of such fees as may be prescribed

Concept of Satisfaction of Charge

• If the amount of  borrowed fund is repaid or fully paid or other purpose is fulfilled by the borrower, there remains no necessity of charge, and it is called satisfaction of charge. The company shall give intimation to the Registrar of the payment or satisfaction in full of any charge within a period of thirty days from the date of such payment or satisfaction in Form No.CHG-4 along with the fee.
• The Registrar may, on an application by the company or the charge holder, allow such intimation of payment or satisfaction to be made within a period of three hundred days of such payment or satisfaction on payment of such additional fees as may be prescribed.
• After receiving such intimation, the Registrar shall issue a notice to the holder of the charge calling a show cause within such time not exceeding fourteen days, as to why payment or satisfaction in full should not be recorded as intimated to the Registrar.
• If no cause is shown, by such holder of the charge, the Registrar shall order that a memorandum of satisfaction shall be entered in the register of charges maintained by the registrar under section 81 and shall inform the company. If the cause is shown to the Registrar shall record a note to that effect in the register of charges and shall inform the company accordingly

Certificate of registration of satisfaction of charge

 As per Rule 8 of the Companies(Registration of Charges)Rules,2014 the Registrar enters a memorandum of satisfaction of charge in full in pursuance of section 82 or 83, he shall issue a certificate of registration of satisfaction of charge in Form No.CHG-5.

Important forms under Charge Management

Wrapping up 

The intent to introduce the concept of charge was to ensure that all encumbrances made by the company on its property or assets or any of its undertakings are made public. This is especially required to protect the interest of the lenders to ensure that the assets being offered as security for their proposed facilities are not already encumbered. Once a charge is registered, it will be in the public domain and the lender can verify the details of financial facilities obtained and charge created on property or assets or any of its undertakings. Hence, it prevents the company from simultaneously borrowing on the same assets without notice to previous lender and providing clear information to the new lender about the status of the assets.

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