A charge is a security given to the creditors for securing loans and debentures by creating mortgage on the assets of the company. The charges are created on both existing as well future property by agreeing to the terms for making the create charges available as a security for the repayment of debt. The legal right of the creditor can be invoked during insolvency, winding-up or with any enforced date governing the loan or when such governance are not met. The creditor only gets the rights to have the security made available and gets no other legal right either absolute or special rights with regards to the charges created on the property.
In simple words, Change means an interest or lien created on the company’s property or assets or any of its undertaking. The created charge acts as a security for the creditor who have advanced loan to the company.
Fixed charges are otherwise known as specific charges which are identifiable and definite property. These type of charges are identified and at the time if creation if charges. The company can transfer the property charged only to that particular charge, thus, during the time of winding up or insolvency the mortgagee must be paid first and settled off with the amount arising out of such property.
A floating charge doesn’t attach to any definite property but covers the property of fluctuating nature such as stocks. Such charged properties are subjective to vary its condition from time to time. The essence of such charges is that the securities of such created charges remain dormant until it is fixed or crystallised. Such charge includes all the assets of the company and since its not a specific security the holder of such charges cannot affirm on specifically been allotted as a mortgaged property.
Ministry of Corporate Affairs (MCA) is the primary governing authority with filing and registration of charges and aspect concerning to the definition, creation, registration and procedures are laid down in Companies Act, 2013 and the proper authority takes care of the issues and matters covering and concerning charges.
Crystallization of Charge
Meaning of Crystallization :Floating charges are created on all the assets of the company and when the charge holder takes steps to enforce the floating charges it becomes fixed charge ie. Crystallization. Until then the company is free to deal and utilize the company’s property which is authorized by the Memorandum of Association.
With the crystallisation the company has to discharge the duty by paying off the charge holder.
Initiation of crystallization : A floating charges becomes crystallises on following condition-
Where the company cease to carry on the business
Commencement of winding up
The charge holder becomes entitled to realise the securities
Occurrence of events specified in the deed
Particulars of Charges
Name and address of the charge holder
Date and description on instrument creating charges
Total amount secured by the charge
Date of resolution authorizing the creation of the charge
General description of the property charged
A copy of deed or agreement with the description evidencing the creation of the charge to be enclosed
Fees for creation/ modification of charges
Nominal capital less than 1, 00, 000, applicable fee INR 200
Nominal capital INR 1, 00, 00, 000 and more, applicable fee INR 600
Registration of charges
Form No. CHG 1 – A charge has to be registered within 30 days of the date of creation or modification of charges.
Form No. CHG 9 – A charge created on debentures
Form No. CHG 8 – the created charge can be registered from 30 days to 300 days with the registrar by paying an additional fees and after 300 days of creating a charge can be still registered by ROC if the delay of condoned agreed by central government.
Form No. CHG 2 – certificate of registration of charges issued by ROC
Form No. CHG 3 – Modification of registration of charges issued by ROC
Form No. CHG 4 – intimation about the issuance of satisfaction of charges
Form No. CHG 5 – Memorandum of satisfaction of charges
Form No. CHG 6 – The notice of appointment or cessation of a receiver shall be filed with the ROC
Form No. CHG 7 – The registered charges shall be maintained by the registrar a preserved permanently for the period of 8 years.
Form No. CHG 8 – application of condone delay
Form No. CHG 9 – creation/ modification/ rectification of charges for debentures
Form No. CHG 10 – application for delay to the registrar
Note – The registrar of chargers and instruments of the charges created shall be kept open for the inspection during the business hours by members, creditors or any other person subjective to those who have reasonable restriction by the company.
Section 85 Registrar of charges
ROC shall maintain a registrar containing particular of the charges registered in respect of every company. The particular of the charges maintained on the Ministry of Corporate Affair’s portal which shall be deemed to be the registrar of charges. This charge registrar shall remain open to inspection by any person on payment of the fee for each inspection exempting restricted to the person banded by the company.
Section 80 Effects of Registration
With the registration of charges the created charge acts as a notice to the public at large
Once the certificate of charge is issued by the registrar, it becomes the conclusive evidence upon the charge created on the company’s property.
Section 79 – Modification of charges
The charges gets modified when there is change in terms and conditions of the entered charges such as –
Extent of an existing charges
Terms of repayment of loans/ limits for which the charge was created as securities
Change in rate of interest
Release of assets from available security
Pari passu clause created on assets which are already charged
Assignment of rights of charge holder to third party.
If the charges in terms and conditions the modification of such changes should be filed with the ROC within 30 days of such charges or 300 days with the condone approval from the central government.
Penalty for infringing provision of charges
The penalty of INR 1, 00, 000 lakh which shall be extended up-to INR 10, 00, 000 with an imprisonment for a term of 6 months or both shall be imposed on those who infringes any provision with regards to registration of charges.
Every company desirous to raise their capital can prefer either issuing new shares or through debentures. Wherein which the person buying shares become the shareholder of the company with contrary to share holder a debenture holder is just a creditor to the company but, during winding up or before the company declaring insolvent the debenture holders are paid first and after setting the debt of the debenture holders shareholders are paid off.
Being the creditors of the company the debenture holders are provided with an opportunity to secure their lent amount by creating charges on the assets if the company. With creation of charges the ROC has to be filed with the registrar by filing up FORM CHG 1 within 30 days of such creation.
The purpose of registration of charges is to encourage the people who intend to advance money to the company. The lender may also inspect the RoC files at MCA portals and with non registration of charges it doesn’t make the transaction invalid rather the created charges shall not be considered by the liquidators or creditors of the company.
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