FAQs on Creation and Modification of Charges – Complete Prospective
Q 1. What is a Charge?
A charge is a security given for securing loss or Debenture by way of mortgage on the assets of the company. Normally, the Debentures and other borrowings of the company are secured by a charge on the assets of the company.
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.
Q 2. Explain the essential features of Charge-
- A) There are minimum two parties to the transaction, the creator of the charge and the charge Holder
- B) The subject matter of the charge may be on current or future assets and properties of the borrower.
- C) The intention of the borrower to offer one or more of its specific asset or properties as security for repayment of the borrowed money together with payment of interest at the agreed rate should manifest from an agreement entered by him in favour of the lender, written or otherwise.
Q 3. Explain kind of Charges-
- A) On the basis of the nature of Charge
- B) A charge on the property of the company as security for debts may be of the following kinds, namely-
1) Fixed or specific Charge-
A charge is fixed when it is created to cover assets which are ascertained and definite at the time of creating charge. E.g- Land, Building, Plant and machinery. The company can deal with such property, subject to the charge so that the charge holder’s interest in the property is not affected and the charge Holder gets priority over all subsequent transferees except a bona fide transferee for consideration without notice of the earlier charge. 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.
2) Floating Charge-
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. Floating security is a present security, which presently affects all the assets of the company expressed to be included in it. Most interesting part is, the advantage of a floating charge is that the company may continue to deal in any way with the property which has been charged.
Q 4. What is meant by crystallisation of floating charge and also explain effect of crystallisation?
A floating charge attaches to the company’s property generally and remains dormant till it crystallizes or becomes fixed. A floating charge crystallised 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 use 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.
Effects-
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.
Q 5. Whether Preferential Creditors having priority over the floating chargeholder?
Yes, 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.
Q 6. In which scenario there can be chances of postponement of Floating charge?
The floating charge is postponed in favour of the following circumstances-
– A landlord who distrains for rent
– A creditor who obtains a garnishee order absolute.
– A judgement creditor who attaches goods of the company and gets them sold.
– The employees of the company
– Other preferential Creditors in the event of winding up of the company.
Q 7. Explain the provision of companies act under section 77, Registration of charges?
1.Charges created within/Outside India
2.Charges created on its property or Assets or any of its undertaking.
To be registered with the registrar in form CHG-1(Other than Debentures)
Or form CHG-9(Debentures)
It is mandatory to all company to create its charges in above form along with payment of fee with the registrar within 30 days of its creation.
Q 8. If company fails to registration of charges within 30 days from the date of creation, then which kind of remedies has explained in companies act?
– After 30 days
Before the companies amendment 2019, Company has commenced- | Company should creation of charge not exceeding 300 days and make an application to the ROC for condonation of delay (section 87) |
After the companies amendment 2019, Company has commenced- | Company should creation of charges within a period of 60 days along with payment of additional fees. |
Beyond 60 days, in clause(a) in the first proviso, the registration of charge shall be made within 6 month from the date of the commencement of the companies + additional and different fees prescribed as per the Different classes of the companies ( Amendment Rule, 2019)
In clause (b) to the first proviso, allow such Registration for further next 60 days after the payment.
Q 9. Is it possible that, fixed charges turn into floating charge?
As per the case law( Cosslett (contractors) Ltd. Re, (1996) 1 BCLC 407 (Ch D) A construction company’s washing machine which was in use at the site was declared under the terms of the contract to be the employer’s property during the period of construction. This was held to have created a fixed charge and not a floating charge on the machine because the machine was only one fixed item and was not likely to change.
Q 10. Explain the E- Form of charge management-
1 | CHG -1 | Application for registration of charge (Other than Debentures) |
2 | CHG-2 | Certificate of registration |
3 | CHG-3 | Certificate of modification of charge |
4 | CHG-4 | Intimation of the satisfaction to the registrar |
5 | CHG-5 | Memorandum of satisfaction of charge |
6 | CHG-6 | Notice of appointment or cessation of receiver or manager |
7 | CHG-7 | Register of charges |
8 | CHG-8 | Application for condonation of delay shall be filled with the central government |
9 | CHG-9 | Creating and modifying the charge |
Q 11. Pari Passu Charge, Exclusive Charge, Further Charge
In thus situation, when borrower company goes into dissolution, the asset over the charge created would be distributed among creditors on proportion basis.
– Exclusive Charge
Exclusive charge is provided to a particular lender only.
– Further Charge
With the consent of the first charge Holder, the particular asset having charge provided to other lenders, known as Further charge.
Q 12. What are the consequences of non-filing of 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 ROC, where they are non compliant and are not filled with ROC, 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 (2006) 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 in view of specific provisions of section 125 and the statutory requirement under the said section.
Q 13. What is the Penalty for non-filing of registration of charge?
- A) The penalty more than 1 lac and less than 10 lakhs.
- B) For officer who is in default shall be punishable fine more than 25 thousand rupees upto 1 lac or 6 month Imprisonment or both.