CHARGES
NEHA JINDAL
MOHINI GANDHI
TYPES
A charge means an interest or right which a lender or creditor
obtains in the property of the company by way of security that
the company will pay back the debt. Charges are of 2 types :-
Fixed Charge : It is against a specific clearly identifiable and
defined property.
The property under charge is identified at the time of creation
of charge.
The nature and identity of the property does not change during
the existence of the charge.
The company can transfer the property charged only subject to
that charge so that the charge holder or mortgage must be paid
first whatever is due to him before disposing off that property.
It is a legal charge.
Floating Charge :
A Floating charge is an equitable charge.
It does attach to any definite property but covers the property
of a circulating and fluctuating nature such as stock-in-trade,
debtors, etc.
It remains dormant until the company undertaking charge
ceases to be a going concern or until the person in whose
favour charge is created takes steps to crystallize the floating
charge.
A floating charge on crystallization becomes a fixed charge.
A company cannot make any further floating charges once its in
the liquidation process.
CHARACTERISTICS OF FLOATING
CHARGE
It should be charged upon a class of assets both present
and future.
The class of assets charged must be one which in the
ordinary course of business of the company would be
changing from time to time.
It should be contemplated by the charge that until some
step is taken by the chargee, the company is free to use
the assets comprised in the charge in the ordinary course
of its business.
CRYSTALLIZATION OF FLOATING
CHARGE
A company can deal in the property charged until the
charge crystallizes to become a fixed charge. i.e. in the
following conditions
When the company goes into liquidation
When the company ceases to carry on business
When a debenture holders takes steps to enforce their
security by appointing a receiver or making an
application to the court for appointment of the receiver.
REGISTRATION OF CHARGES
Any charge over a company’s property is required to be registered with the
registrar of the companies. Charges requiring registration are:
A charge for the purpose of securing any issue of any debentures
A floating charge
A charge on uncalled share capital
A charge on any immovable property
A charge on book debts of the company
A charge on goodwill or on patent or on license under the patent or on
trademark or copyright or on the license under the copyright
A charge other than a pledge on any movable property of the company.
REGISTRATION PROCEDURE
Registration must be effected within 30 days of creation of
charge. Registrar may extend the time up to next 30 days
Registrar shall give the certificate of registration, which can be
endorsed by the company on every debenture or certificate or
debenture stock.
The certificate is an evidence of requirements of registration
being complied with(sec. 132). It indicates the amount secured.
To determine the validity of a charge the date of registration is
considered and not the date of execution.
MODIFICATION OF CHARGES
The modification should be made for following conditions:
Variation in rate of interest(if due to change in RBI rate
then not necessary)
Additional securities/extension of existing securities
Increase or decrease in the limits
EFFECT OF NON-REGISTRATION
If a company fails to register within the stipulated period, any
charge requiring compulsory registration under the act then
such charge is will be void against the liquidator and any
creditor of the company.
The debt becomes unsecured and repayable immediately.
Omission to register particulars of charge is punishable with
fine. A company or every officer of company in default shall
be liable to fine upto Rs 500 for each day of continuing
default.
While the company is a going concern even an unregistered
charge is valid.
ACQUISITION OF PROPERTY SUBJECT TO CHARGE
If a company acquires a property which is subject to a
subsisting charge, such a charge must also be registered
in the same manner as if it were a charge created by
company itself.
The registration of this should be made within 30 days
after the date of acquisition.
LEGAL ISSUES
Negative Lien: A company may not get this registered as it
doesn’t create any burden on the assets immediately.
Winding up: All floating charges on the property of the
company created within 12 months immediately preceding the
commencement of winding up is declared invalid unless:
The company was solvent immediately after the creation of charge
The amount was paid to the co. in cash subsequently to the creation
of, and in consideration for, the charge together with interest @5%
p.a. or the rate prescribed by Central Govt.
RIGHTS OF A CHARGEE
Depends upon the terms and conditions agreed upon by the
parties
Legal precedence: right to bring about suitable changes
in the staff associated with the charged property
The instruments creating charges and the register of
charges are open to free inspection of the chargee and to
any other person on payment of a fee.
DIFFERENCE:MORTGAGE & CHARGES
In mortgage a transfer of property occurs, however in case
of charges, the chargee gets right of preference over other
creditors for clearing of the debts.
Company can mortgage a property which already has a
floating charge, however the company cannot create a
charge on a mortgaged property.
The company doesn’t enjoy the right of free usage of the
property under mortgage, but if there is a floating charge on
a property the company is free to use the property.(except
simple mortgage and mortgage by title of deed)
Charge doesn’t affect the leverage of the company, however
mortgage affects it.
The security under charge can be used in the event of
winding up only, however this is not so for mortgages.
THANK
YOU
