Reconceiving the provision of Charges

Corporate frequently uses Debt in its Capital Structure because it helps in reserving the profit as only equity holders have a right on profit. Debt structure helps in saving taxes as the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession is an allowed expense for deduction as per Income Tax Act,1961.
Banks or Financial Institution often grants loan after securing the loan on some collateral or mortgage on property  as it ensures repayment of principal and interest and Secured Debt has a higher degree of seniority in case of bankruptcy.
As per Companies Act,2013 it is the duty of the company to file the registration of charge created on its property to Registrar of Companies (ROC).

1. What is Charge?
As per the Section 2(16) of Companies Act,2013 "charge" means 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;

The essentials for the creation of charges are:

A. Two Parties: Creator of Charge and Charge Holder.

B. Subject Matter: Current or Future Assets or properties

C. Intention: the company shall offer its property as Security that means it has the intention to pay the principal and interest.

Type of charge

A charge on:

• Uncalled share capital
• Calls made but not paid
• Solely of Property situated outside India
• Immovable property or any interest therein
• Movable property (not being pledge)
• Floating charge
• Motor Vehicle (Hypothecation)
• Any property for securing the issue of secured deposits
• Goodwill
• Patent
• Licence under a patent
• Trademark
• Copyright
• Book debts
• Ship or any share in a ship
• Others

Ques. Can a Charge be created on Inventory or Stock-in-Trade of the Company?

Ans. Yes,This is not a fixed charge.It is known as Floating Charge.In this case, the company will deal with the asset(inventory) as usual in the ordinary course of business and the charge will freeze in the event of default of payment and charge will be converted into Fixed Charge.

The provision of Registration of Charges is governed by Chapter VI of Companies Act,2013 as amended by Companies Ordinance 2019 w.e.f 2-11-2018 containing Section No. 77 to 87 read with Companies (Registration of Charges)Rules,2014.

2. Registration of Charges

According to section 77(1), It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating such charge in Form No.CHG-1 (for other than Debentures) or Form No.CHG-9 (for debentures including rectification), on payment of fees with the Registrar within thirty days of its creation

Q1 What is the form for Registration if company fails to file within 30 days but seeking extension from ROC?

Ans The condonation of delay shall be done by the registrar and company shall condone the delay in Form CHG-1 only.

Q2 What if company fails to file form CHG-1 or CHG-9 within 30 days , can a charge holder file for registration?

Ans. As per Secrion 78 if form chg-1 is Not filed within 30 days by company then Charge Holder may file form CHG-1 or CHG-9 and the Registrar may, on such application, within a period of fourteen days after giving notice to the company, unless the company itself registers the charge or shows sufficient cause why such charge should not be registered, allow such registration on payment of such fees, as may be prescribed: Fees can be recovered from the company

Q3 What is the form for condonation of delay by CG (6 Months extension for charge pending registration on 2-11-2018)?

Ans The application for condonation of delay and for such other matters covered in sub-clause (a),(b) and (c) of clause (i) of sub-section (1) of section 87 of the Act shall be filed with the Central Government in Form No.CHG-8  along with the fee.

As per Section 79, The provisions of section 77 relating to registration of charges shall, so far as may be, apply to—

(a) a company acquiring any property subject to a charge within the meaning of that section; or

(b) any modification in the terms or conditions or the extent or operation of any charge registered under that section.

3.CERTIFICATE OF REGISTRATION

Where the charge is registered under section 77 or 78,e the ROC shall issue certificate in Form CHG-2.

Where the modification of charge is registered under Section 79 , the ROC shall issue certificate in Form CHG-3

Ques.What are the consequences of non registration of charges?
Ans. The certificate will be treated as a conclusive evidence that Chapter VI of Companies Act,2013 is complied.No charge created by a company shall be taken into account by the liquidator 1["appointed under this Act or the Insolvency and Bankruptcy Code, 2016, as the case may be,"] or any other creditor unless it is duly registered  and a certificate of registration of such charge is given by the Registrar.

The world will be treated to have notice of charge if it is registered: As per 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.

4. Satisfaction of Charge

Satisfaction of charge means charge secured on the property is abandoned after the payment of principal and interest.

Analysis of Section 82 -Company to Report Satisfaction of Charge

Section 83-Power of Registrar to Make Entries of Satisfaction and Release in Absence of Intimation from Company

The Registrar may, on evidence being given to his satisfaction with respect to any registered charge,—

(a) that the debt for which the charge was given has been paid or satisfied in whole or in part; or

(b) that part of the property or undertaking charged has been released from the charge or has ceased to form part of the company’s property or undertaking,

enter in the register of charges a memorandum of satisfaction in whole or in part, or of the fact that part of the property or undertaking has been released from the charge or has ceased to form part of the company’s property or undertaking, as the case may be, notwithstanding the fact that no intimation has been received by him from the company.

The Registrar shall inform the affected parties within thirty days of making the entry in the register of charges.

5.  Intimation of Appointment of Receiver or Manager.

As per section 84(1), If any person obtains an order for the appointment of a receiver of, or of a person to manage, the property, subject to a charge, of a company or if any person appoints such receiver or person under any power contained in any instrument, he shall, within a period of thirty days from the date of the passing of the order or of the making of the appointment, give notice of such appointment in FORM NO. CHG-6 to the company and the Registrar along with a copy of the order or instrument and the Registrar shall, on payment of the prescribed fees, register particulars of the receiver, person or instrument in the register of charges.

Any person appointed under section 84(1) shall, on ceasing to hold such appointment, give to the company and the Registrar a notice to that effect in CHG-6 and the Registrar shall register such notice.

6.Register of Charges

7. Rectification by Central Government in Register of Charges

As per section 87, The Central Government (CG) on being satisfied that —

(a) the omission to give intimation to the Registrar of the payment or satisfaction of a charge, within the time required under this Chapter; or

(b) the omission or misstatement of any particulars,in any filing previously made to the Registrar with respect to any such charge or modification thereof or with respect to any memorandum of satisfaction or other entry made in pursuance of section 82 or section 83,

was accidental or due to inadvertence or some other sufficient cause or it is not of a nature to prejudice the position of creditors or shareholders of the company, it may, on the application in form no. CHG-8 of the company or any person interested and on such terms and conditions as it deems just and expedient, direct that the time for the giving of intimation of payment or satisfaction shall be extended or, as the case may require, that the omission or misstatement shall be rectified.

The order of CG shall be filed in Form INC-28 to ROC.

ANALYSIS- This section is amended by companies ordinance 2019.It removes the provision where CG allow the condonation of delay of registration of charges after the prescribed limit that is  the omission to file with the Registrar the particulars of any charge created by a company or any charge subject to which any property has been acquired by a company or any modification of such charge;.However charges pending for registration as on 2-11-2018 shall be condoned by CG within 6 months.For registration of new charges created after 2-11-2018, after the prescribed limit, no condonation by CG shall be allowed.

8. Transgression of Chapter VI

AS PER SECTION 87, If any company contravenes any provision of this Chapter,

1.the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees AND

2. every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

If any person wilfully furnishes any false or incorrect information or knowingly suppresses any material information, required to be registered in accordance with the provisions of section 77, he shall be liable for action under section 447.

ABOUT THE AUTHOR

Shivam Gera: Commerce Graduate from Satyawati College, University of Delhi and a Budding Company Secretary (All India Rank Holder)

Contact: LinkedIn Profile(CLICK HERE)

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, We assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. We assume no responsibility for the consequences of the use of such information.

This article is a property of lawthoro and no part of it shall be reproduced in any manner without our explicit permission.

We invite professionals or students who have a passion to write Legal Blogs. You can send your articles at lawthoro@gmail.com and it will be published after appraisal