Law and You > Corporate Laws > Companies Act, 2013 > Registration of Charges
In the world of secured lending, a charge on an asset is a critical legal mechanism used by lenders to protect their interests when extending credit. It gives the lender a form of security over the borrower’s property or assets, ensuring that in the event of default, the lender has a legal right to claim or recover the asset to satisfy the outstanding debt. This article explores the registration of charge, the nature of charges on assets, the differences between fixed and floating charges, and the legal and practical consequences of creating such security interests.
Charge:
A charge is a right created by any person including a company referred to as “the borrower” on its assets and properties, present and future, in favour of a financial institution or a bank, referred to as “the lender”, which has agreed to extend financial assistance.
Section 2(16) of the Companies Act, 2014 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
For example, a company takes a loan from a bank and creates a fixed charge on its plant and machinery. If the company fails to repay the loan, the bank has the legal right to sell the machinery to recover its dues.
Essential Features of Charge:
The following are the essential features of the charge which are as under:
- There should be two parties to the transaction, the creator of the charge and the charge holder.
- The subject-matter of charge, which may be current or future assets and other properties of the borrower.
- The intention of the borrower to offer one or more of its specific assets or properties as security for repayment of the borrowed money together with payment of interest at the agreed rate should be manifested by an agreement entered into by him in favour of the lender, written or otherwise.
Need for Creating a Charge on a Company’s Assets
- Facilitates Borrowing: Companies often require external funding for operations, expansion, or capital expenditure. By creating a charge on assets, a company assures lenders of their ability to recover the loan in case of default, making it easier to obtain credit.
- Security for Lenders: The creation of a charge provides lenders with a legal right over specific assets of the company. In the event of non-payment, the lender can enforce the charge and recover dues by selling or taking possession of the charged assets.
- Establishes Priority of Claims: Registration of charges under Section 77 of the Companies Act helps determine the priority of claims among various creditors. Registered charges take precedence over unregistered ones or unsecured creditors.
- Transparency and Public Notice: Registration of charges creates a public record, which informs other creditors and stakeholders about the encumbrances on the company’s assets. This promotes transparency and reduces the risk of fraudulent dealings. According to section 80, where any charge on any property or assets of a company or any of its undertakings is registered under section 77, any person acquiring such property, assets, undertakings or part thereof or any share or interest therein shall be deemed to have notice of the charge from the date of such registration.
- Legal Compliance and Governance: Creating and registering charges is a statutory obligation under corporate law in many jurisdictions. Non-compliance may lead to penalties, loss of creditor rights, or loss of reputation.
- Enforceability of Security: A properly created and registered charge ensures that the lender can legally enforce the charge through courts or tribunals in case of default, insolvency, or winding up of the company.
Particulars of Charges:
The following particulars in respect of each charge are required to be filed with the Registrar:
- date and description of instrument creating charge;
- total amount secured by the charge;
- date of the resolution authorising the creation of the charge; (in case of issue of secured debentures only);
- general description of the property charged;
- a copy of the deed/instrument containing the charge duly certified or if there is no such deed, any other document evidencing the creation of the charge to be enclosed;
- list of the terms and conditions of the loan; and
- name and address of the charge holder.
Registration of Charge:
Under 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. All types of whether created within or outside India must be registered with the Registrar within thirty days of its creation in such form and on payment of such fees as may be prescribed.
The Registrar may on an application by the company allow registration of charge within three hundred days of creation or modification of charge on payment of additional fee. The Registrar may, on being satisfied that the company had sufficient cause for not filing the particulars and instrument of charge, if any, within a period of thirty days of the date of creation of the charge, allow the registration of the same after thirty days but within a period of three hundred days of the date of such creation of charge or modification of charge on payment of additional fee.
According to Section 78 where a company fails to register the charge within the period specified above, the person in whose favour the charge is created may apply to the Registrar for registration of the charge alongwith the instrument created for the charge in prescribed form, duly signed along with fee.
Where a charge is registered with the Registrar, Registrar shall issue a certificate of registration of charge in prescribed format and for registration of modification of charge in prescribed format 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, shall be conclusive evidence that the requirements of Chapter VI of the Act (Registartion of Charges) and the rules made there under as to registration of creation or modification of charge, as the case may be, have been complied with.
Section 79 of the Act makes it clear that the requirement of registering the charge shall also apply to a company acquiring any property subject to charge or any modification in terms and conditions of any charge already registered.
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 prescribed form along with the fee. 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.
According to Section 77 of the Companies Act, 1956, all types of charges created by a company are to be registeredby the ROC, where they are non-compliant and are 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. This does not, however, mean that the charge is altogether void and the debt is not recoverable. So long as the company does not go into liquidation, the charge is good and may be enforced.
Kinds of Charge:
A charge may be fixed or floating depending upon its nature.
Fixed Charge:
A fixed charge on an asset is a type of security interest that a lender takes over a specific, identifiable asset of a borrower. This gives the lender a legal right over that asset until the debt is repaid.
For example, a company takes a loan from a bank and grants a fixed charge over its headquarters building. In this case, the company cannot sell or lease the building without the bank’s permission and if the company defaults, the bank can seize and sell the building to recover the loan.
Characteristics of a Fixed Charge:
- It attaches to a specific asset: For example, land, buildings, or machinery.
- The asset is typically non-current (long-term) and non-tradeable.
- The borrower cannot sell or dispose of the asset without the lender’s consent.
- If the borrower defaults, the lender can take control of and sell the asset to recover the debt.
Floating Charge:
A floating charge is a type of security interest that a lender takes over a class of changing or circulating assets of a borrower, rather than a specific, fixed asset. It is commonly used in corporate finance, especially for working capital loans.
For example, a company takes a loan from a bank and grants a fixed charge over its inventory and accounts receivable
Crystallization of Charge:
Crystallization of charge takes place, when the borrower defaults on the loan or the borrower goes into liquidation or receivership or a specified event in the loan agreement occurs.
Once charge is crystallized, the lender gains control over the assets covered by the charge (as they are “frozen”) and the borrower can no longer dispose of those assets freely.
Characteristics of a Floating Charge:
- Covers a class of assets that can change over time, such as inventory, accounts receivable, cash, stock-in-trade
- The borrower can freely deal with (sell, use, replace) the assets in the ordinary course of business until the charge “crystallizes.”
- When the charge crystallizes, it converts into a fixed charge over the assets held at that time.
Distinguishing between Fixed Charge and Floating Charge:
| Fixed Charge | Floating Charge |
| A fixed charge on an asset is a type of security interest that a lender takes over a specific, identifiable asset of a borrower. | A floating charge is a type of security interest that a lender takes over a class of changing or circulating assets of a borrower, rather than a specific, fixed asset. |
| Fixed charge is created on fixed, tangible, identifiable assets like land, buildings, or machinery | Floating Charge is created on changing assets like inventory and accounts receivable |
| It is static in nature | It is dynamic in nature |
| The borrower cannot sell or dispose of the charged asset without the lender’s consent. | The borrower can freely deal with (sell, use, replace) the assets in the ordinary course of business until the charge “crystallizes.” |
| It is vacated when money repaid in full | On crystallization of floating charge, due to enforce security company goes into liquidation |
| Examples: mortgage or deposit of title deeds | Crystallization of floating charge – Enforce security or company goes into liquidation |
Conclusion:
Charges on assets play a vital role in secured lending, offering protection to lenders and influencing how businesses manage their assets and liabilities. Whether in the form of a fixed charge—providing strong security over specific assets—or a floating charge—offering flexibility over classes of shifting assets—these legal instruments balance risk between borrowers and creditors.
Understanding the distinction between fixed and floating charges is crucial for structuring financial agreements, ensuring compliance with legal obligations, and protecting stakeholder interests, especially in times of financial distress or insolvency. As business finance grows more complex, the importance of clear, well-documented charges on assets continues to increase—making it essential for companies and lenders alike to seek informed legal and financial guidance when creating or managing such arrangements.