Any security obtaining loans or debentures by way of a mortgage on the assets of the company is defined as a Charge. A company, like a natural person, can offer security for its borrowings upon which loans are given by banks and financial institutions. Normally, the debentures and other borrowings of the company are secured by a charge on the assets of the company.
A charge is created when any asset of the company is agreed to be made available as a security for the repayment of debt and creditors have a present right to have it made available. The creditor can enforce certain rights against the charge at some future date if certain conditions governing the loan are not met. The creditor gets no legal right either absolute or special to the property charged. He only gets the right to have the security made available/enforced by an order of the Court.
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.
Why is it necessary to Create a Charge?
All financial institutions/banks lend their monies only after making sure that their funds would be repaid as per agreed repayment schedule along with payment of interest. The assets and properties of the borrowing companies for creating a right in order to secure their funds, is termed as charge on assets. This is done by executing loan agreements, hypothecation agreements, mortgage deeds and other similar documents, which the borrowing company is required to execute in favour of the lending institutions/ banks, etc.
Once a charge is registered, it will be in the public domain and the lender can verify the details of financial facilities obtained and charge created on property or assets or any of its undertakings.
This section serves two fold purpose:
*preventing the company from simultaneously borrowing on the same assets without notice to previous lender and
* providing clear information to the new lender about the status of the assets.
Registration of Charge
It is the obligation of the company to register the charge with the Registrar of Companies soon after the creation of a charge. The charge may be within India or outside India on the properties of the company or assets or any of its undertakings and situated outside India. The properties may be tangible or intangible. The company is 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 such form, on payment of such fees and in such manner as may be prescribed.
Form CHG-1(for other than debentures)/CHG-9(for debentures) is to be filed for the registration of charge by a company. Further a Certificate of Registration of charge will be issued by the registrar in Form CHG-2 to the company or to the person in whose favor the charge is created.
Time Limit for Registration of Charge
Every company who has created or modified a charge on its assets is required to file the respective forms within 30 days from the date of creation.
The MCA has prescribed the additional fees to be paid by the company due any late filing of charge.
- The fee specified by the MCA for delay upto 30 days is 3 times the normal fee for small companies and One person company and 6 times normal fees for other than small companies and One person Company.
- If the period of delay in filing is more than 30 days and upto 90 days(upto 120 days from date of creation of charge) every small companies and One person company is to pay 3 times of normal fees plus an ad valorem fee of 0.025 per cent. of the amount secured by the charge, subject to the maximum of rupees one lakh and 6 times pf normal fees, plus an ad valorem fee of 0.05 per cent of the amount secured by the charge, subject to the maximum of rupees five lakhs for other than small companies and One person Company.
The provisions of the act restricts the company to register any charges created by them after the expiry of 120 days from the date of creation of charge. However it is of the opinion that any creation of charge can be filed after 120 days by entering into a supplementary loan agreement with the Bank, which is wholly in the discretionary power of the Bank.
Modification of Charge
A change/variation of any of the terms of the agreement including variation of rate of interest, increase / decrease in amount of borrowings, change / swap of security, extension of time for repayment, which may be by mutual agreement or by operation of law is termed as modification of charge. For filing modification of charge Form CHG-3 is to be filed.
Satisfaction of Charge
The term satisfaction of charge means repayment of secured loans completely to the lender and the property or the asset charged has been released from the respective charge.
The company shall intimate the registrar about satisfaction of charges within a period of 30 days from the date of payment of the charge registered in form CHG-4 along with the prescribed fees. Moreover the registrar will issue a Certificate of registration of satisfaction of charge in Form CHG-5 thereafter the asset of the company will be released from the obligation and will be reflected in the MCA database also.
Penalty
If any company contravenes any provision of the section, 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 every officer of the company who is in default shall be punishable with imprisonment for a term up to six months or with fine not less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
