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Chapter 5
CHARGES

WHAT IS A CHARGE?
According to Section 2(16) of the Act, “charge” means an interest or lien created on the
property or assets of a company as security and includes a mortgage.
A charge is a security given for securing loans or debentures by way of a mortgage on the assets
of the company. A company, like a natural person, can offer security for its borrowings.
Normally, the debentures and other borrowings of the company are secured by a charge on the
assets of the company. Where property, both existing and future, is agreed to be made
available as a security for the repayment of debt and creditors have a present right to have it
made available, a charge is created.
In simple terms 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.

Kinds of Charge

Fixed or Specific Charge

 A charge is called fixed or specific when it is created to cover assets which are
ascertained and definite or are capable of being ascertained and defined, at the
time of creating the charge e.g., land, building, or plant and machinery.
 A fixed charge, therefore, is a security in terms of certain specific property and the
company gives up its right to dispose off that property until the charge is satisfied.
 In the winding-up/Liquidation of the company, a debenture holder secured by a
specific charge will be placed in the highest ranking class of creditors.
Floating Charge
 A floating charge, as a type of security, is peculiar to companies as borrowers. A
floating charge is not attached to any definite property but covers property of a
fluctuating type e.g., stock-in-trade and is thus necessarily equitable.
 A floating charge is a charge on a class of assets present and future which in the
ordinary course of business is changing from time to time and leaves the company
free to deal with the property as it sees fit until the holders of charge take steps to
enforce their security.
 “The essence of a floating charge is that the security remains dormant until it is
fixed or crystallised”.
 But a floating security is not a future security.

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Crystallisation of Floating Charge
A floating charge crystallises and the security becomes fixed in the following cases:
a. when the company goes into liquidation;
b. when the company ceases to carry on its business;
c. when the creditors or the debenture holders take steps to enforce their security e.g. by
appointing receiver to take possession of the property charged;
d. on the happening of the event specified in the deed.

In the aforesaid circumstances, the floating charge is said to become fixed or to have
crystallised. Until the charge crystallises or attaches or becomes fixed, the company can deal
with the property so charged in any manner it likes.

EFFECT OF CRYSTALLISATION OF A FLOATING CHARGE

On crystallization, the floating charge converts into a fixed charge on the property of the
company. It has priority over any subsequent equitable charge and other unsecured creditors.
But preferential creditors who have priority for payment over secured creditors in the winding-
up get priority over the claims of the debenture holders having floating charge.

Invalidity of Floating Charge

 Accordingly, Section 332 of the Companies Act, 2013 provides that a floating charge on
the undertakings or property of the company, which is created within 12 months
immediately preceding the commencement of the winding up proceedings of a
company shall be invalid, unless it is proved that the company was solvent immediately
after the creation of the charge.
 But the charge will be valid to the extent of the amount of any cash paid to the company
at the time of or after the creation of, and in consideration for the charge.

Registration of charges- Section 77

Any charge created
a. within or outside India,
b. on its property or assets or any of its undertakings,
c. whether tangible or otherwise, and situated in or outside India
Shall be registered.

 The Charge has to be registered within 30 days of its creation. It may be registered on an
application by the company to the registrar beyond 30 days but within 60 days from
creation, on payment of an additional fees.

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  If a charge remains unregistered even after 60 days from creation, it can be registered
within 60 days from the expiry of 60 days from the date of creation, on payment of an
ad-valorem fees.

SUBSEQUENT REGISTRATION SHALL NOT PREJUDICE ANY RIGHT

Third Proviso to Section 77(1) states that any subsequent registration of a charge shall not
prejudice any right acquired in respect of any property before the charge is actually registered.

Certificate of Registration of Charge/ Modification of charge

 According to Section 77(2), 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 whether in case of registration of charge or
registration of modification, as the case may be shall be conclusive evidence that the
requirements under Companies Act 2013, as to registration of creation or modification
of charge, as the case may be, have been complied with.

Satisfaction of Charges
 According to section 82 read with the rules, 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.
 On receipt of 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.

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Company’s Register of Charges.
 Every company shall keep at its registered office a register of charges which shall include
therein all charges and floating charges affecting any property or assets of the company
or any of its undertakings, indicating in each case such particulars as may be prescribed.
 The entries in the register of charges maintained by the company shall be made
forthwith after the creation, modification or satisfaction of charge, as the case may be.
 All the entries in the register shall be authenticated by a director or the secretary of the
company or any other person authorised by the Board for the purpose.
 The register of charges shall be preserved permanently and the instrument creating a
charge or modification thereon shall be preserved for a period of eight years from the
date of satisfaction of charge by the company.
 A copy of the instrument creating the charge shall also be kept at the registered office of
the company along with the register of charges

CONSEQUENCES OF NON-REGISTRATION OF CHARGE

According to Section 77 of the Companies Act, 2013, all types of charges created by a company
are to be registered by the ROC, where they are non-compliant and are not filed with the
Registrar of Companies for registration, it shall be void as against the liquidator and any other
creditor of the company.
In the case of ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd, the ONGC had not been
able to point out whether the so called charge, on the basis of which it was claiming preference
as a secured creditor, was registered or not. It was held that in the light of this failure, ONCG
could not be treated as a secured creditor.

Void against the liquidator means that the liquidator on winding up of the company can
ignore the charge and can treat the concerned creditor as
unsecured creditor. The property will be treated as free of charge
i.e. the creditor cannot sell the property to recover its dues.
Void against any creditor of the company means that if any subsequent charge is created
on the same property and the earlier charge is not registered, the
earlier charge would have no consequence and the latter charge if
registered would enjoy priority. In other words, the latter charge
holder can have the property sold in order to recover its money.

Thus, non-filing of particulars of a charge does not invalidate the charge against the company as
a going concern. It is void only against the liquidator and the creditors at the time of liquidation.

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 CASE LAW CASE LAWS Case Laws CASE LAW CASE LAWS CASE LAWS
Official Liquidator v. Sri Krishna Deo,
The plant and machinery of a company embedded in the earth or permanently fastened to
things attached to the earth became a part of the company’s immovable property and
therefore apart from the registration under the Companies Act, registration under the Indian
Registration Act would also be necessary to make the charge valid and effective. S
Maturi U. Rao v. Pendyala
When the floating charge crystallizes it becomes fixed and the assets comprised therein are
subject to the same restrictions as the fixed charge.
Government Stock Investment Co. Ltd. v. Manila Railway Co. Ltd
the debentures were secured by a floating charge. Three months’ interest
became due but the debenture holders took no steps and so the charge did not crystallize but
remained floating. The company then made a mortgage of a specific part of its property. Held,
the mortgagee had priority. The security for the debentures remained merely a floating security
as the debenture holders had taken no steps to enforce their security.

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 Practice Questions
1. Write a short note on consequences of non-registration of charge? (june 2014)
2. Discuss the provision regarding registration and modification of charges. (June 2008)
3. What is floating charge? When does it crystallize? What is the effect of crystallization of
a floating charge? (June 2009)

4. What is the effect of crystallization of a floating charge? (June 2010)

5. What are the consequences of non-registration of a charge which requires registration
under section 77? (Dec 2010)
6. What is meant by floating charge and how it would crystallize? (June 2014)
7. Explain clearly the meaning of the terms fixed charge and floating charge? State the
circumstances under which floating charge automatically becomes fixed. (Dec 2015)
8. Daisy Limited a company registered under Companies Act, has failed to register a charge
which requires registration under section 77 and the charges not registered as per
section 77. What will be the consequences of such non registration? (June 2011)
9. Rose Limited raised a loan from a state financial institution by creating hypothecation of
book debts and also future debts of the company. Incidentally the charge was not
registered. State financial institution demanded a certificate of registration of charge for
the amount of loan granted. The directors of the company replied to the state financial
institution the charge need not be register for hypothecation of book debts. Is the
action of the directors valid? (Dec 2014)

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