By Rupin Chopra and Apalka Bareja
Most companies depend on borrowed funds for their capital requirements. Unlike equity, debts allow companies to decrease their tax liabilities, they are a cheaper source of financing than equity and allow retaining profits within the business.
These borrowed funds often take the form of ‘secured loans’, i.e. where the company pledges an asset as collateral for guarantee of payment to the lender. However, there have been numerous instances where the same collateral was provided for multiple loans – essentially defeating the purpose of the loan, as the collateral no longer covers the loan amount.
To provide more security to lending institutions and ensure that the collateral being offered is not already encumbered, the Companies Act, 2013 (the Act) envisions registration of charges.
Duty to Register Charges
Section 77 of the Act prescribes every company creating a charge to register the same with the Registrar of Companies. Such a charge may be within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise. The following types of charges are envisaged –
|· Uncalled share capital||· Calls made but not paid|
|· Immovable property or any interest therein||· Movable property|
|· Floating charge||· Motor Vehicle (Hypothecation)|
|· Any property for securing the issue of secured deposits||· Goodwill|
|· Patent||· Licence under a patent|
|· Trade mark||· Copyright|
|· Book debts||· Ship or any share in a ship|
|· Solely of Property situated outside India||· Others|
Essentially, all types of charges are required to be registered.
Section 79 further requires the registration in cases where a company acquires any property subject to a charge, and where any modification in the terms or conditions or the extent or operation of any charge registered.
Manner of Registration of Charges
Charges shall be registered under Form CHG – 1 (other than debentures) and Form CHG – 9 (for debentures).
Apart from information regarding the company, the following information is required to be filled for registration –
- Type of charge
- Particulars of the property/asset charged
- Particulars of charge holders
- Details of the loan –
- Amount secured
- Rate of interest
- Terms of repayment
- Extent and operation of charge
Time Limit to Register Charges
The charge shall be registered with the Registrar within thirty days of its creation. However, upon application and payment of additional fees, the registration may be made within three hundred days from the creation of the charge. The application for delay shall be supported by a declaration from the company signed by its secretary or director that such belated filing shall not adversely affect rights of any other intervening creditors of the company.
However, if the registration is not made within three hundred days, the Registrar shall not register the same unless the delay is condoned by the Central Government. An application for condonation can be made through Form CHG – 8.
Registration by Charge Holder
In case the company fails to register the charge under Section 77, the same may be applied to be registered by the charge-holder under Section 78 of the Act. The Registrar shall then give a notice to the company to register the charge or show sufficient cause as to why such charge should not be registered. The Registrar may allow registration of such charge within fourteen days after giving notice to the company.
Certificate of Registration
Where a charge is registered with the Registrar under section 77 or section 78, a certificate of registration of such charge is issued under Form No. CHG – 2. As per Rule 6(3) of the Companies (Registration of Charges) Rules, 2014, this certificate shall be the conclusive proof that requirements of Chapter VI of the Act and the rules made thereunder have been complied with.
Reporting Satisfaction of Charges
As per Section 82, companies shall give intimation of the payment or satisfaction in full of any charge that has been registered, under Form No. CHG – 4 within a period of thirty days from the date of such payment or satisfaction.
Upon such reporting, the Registrar shall call upon the charge-holder to show cause within fourteen days as to why the payment or satisfaction should not be recorded. If no cause is shown, the Registrar shall order a memorandum of satisfaction in the register of charges.
The Registrar may make an entry of satisfaction without reporting of the company himself as well, if provided with adequate evidence of the same under Section 83. In such a case, the Registrar shall inform the affected parties within thirty days of making the entry of satisfaction.
Consequences of Non-Registration of Charges
As per Section 77(3) of the Act, no charge created by a company shall be taken into account by a liquidator unless it is registered and a certificate of registration has been issued. Hence, charged assets or undertakings will be treated as unsecured at the time of winding up. Further, a charge is void as against a creditor as well, unless it is registered. Thus, where a subsequent charge is created on an asset and registered, the first charge will not be of any consequence.
Under Section 86, companies shall be punishable with a fine not less than 1 lakh rupees but may extend to 10 lakh rupees. Officers in default shall be punishable with imprisonment up to six months with fine up to 1 lakh rupees.
Companies must keep in mind that the process of a loan doesn’t complete when the money is received in the bank, the provisions under Chapter VI of the Companies Act, 2013 are essential and must not be overlooked.
For banks and lending institutions that are interested to check whether a property or asset is already under charge, or to see existing charges with ROC records to ascertain viability / credibility of the financial proposals of the company, they may visit the Index of Charges page on the Ministry of Corporate Affairs website.