Registration of Charges - CA Intermediate PDF Download

 Page 1


 
 
LEARNING OUTCOMES 
 
REGISTRATION OF 
CHARGES 
At the end of this chapter, you will be able to know and 
understand: 
? the meaning of Charge  
? the difference between a Floating Charge and a Fixed Charge 
? the steps involved in Registration of Charges 
? The consequences of non-registration of a charge the steps 
to be followed for registering satisfaction of charge 
? the penal provisions in case of default 
 
 
 
  
CHAPTER 
6 
Page 2


 
 
LEARNING OUTCOMES 
 
REGISTRATION OF 
CHARGES 
At the end of this chapter, you will be able to know and 
understand: 
? the meaning of Charge  
? the difference between a Floating Charge and a Fixed Charge 
? the steps involved in Registration of Charges 
? The consequences of non-registration of a charge the steps 
to be followed for registering satisfaction of charge 
? the penal provisions in case of default 
 
 
 
  
CHAPTER 
6 
6.2 CORPORATE AND OTHER LAWS 
1. INTRODUCTION
The law with respect to the registration of charges has been dealt in Chapter VI of 
the Companies Act, 2013 consisting of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
Section 2(16) of the Companies Act, 2013 defines “charge” as 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. 
CHARGE
Meaning of Charge [Sec. 2 (16)]
Duty to Register Charge [Sec. 77]
Application for registration of Charge [Sec. 78]
Date of Notice of Charge [Sec. 80]
Satisfaction of Charge [Sec. 82 & 83]
Punishment and Rectification in Register of Charges [Sec. 86 & Sec. 87]
Page 3


 
 
LEARNING OUTCOMES 
 
REGISTRATION OF 
CHARGES 
At the end of this chapter, you will be able to know and 
understand: 
? the meaning of Charge  
? the difference between a Floating Charge and a Fixed Charge 
? the steps involved in Registration of Charges 
? The consequences of non-registration of a charge the steps 
to be followed for registering satisfaction of charge 
? the penal provisions in case of default 
 
 
 
  
CHAPTER 
6 
6.2 CORPORATE AND OTHER LAWS 
1. INTRODUCTION
The law with respect to the registration of charges has been dealt in Chapter VI of 
the Companies Act, 2013 consisting of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
Section 2(16) of the Companies Act, 2013 defines “charge” as 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. 
CHARGE
Meaning of Charge [Sec. 2 (16)]
Duty to Register Charge [Sec. 77]
Application for registration of Charge [Sec. 78]
Date of Notice of Charge [Sec. 80]
Satisfaction of Charge [Sec. 82 & 83]
Punishment and Rectification in Register of Charges [Sec. 86 & Sec. 87]
 
 
6.3 
 
REGISTRATION OF CHARGES 
 
Whenever a company borrows money by way of loans including  term loans or 
working capital loans from financial institutions or banks or any other persons, by 
offering its property or assets, as security a charge is created on such property or 
assets in favour of the lender. Such a charge is compulsorily registrable under the 
provisions of the Companies Act, 2013 in accordance with Chapter VI and the rules 
made in this regard.    
Registration of Charge to act as Constructive Notice (Sec. 80) 
All charges registered with the registrar are public documents. This means that any 
person who wishes to lend money to the company against the security of such 
property or buy it can refer to the MCA Portal and find out if there is any charge 
created on that asset.  
Please remember that any document filed with the registrar for registration acts as 
Constructive Notice. Constructive means “deemed”. Notice means “knowledge”. So 
Constructive notice means deemed knowledge. This means even though the third 
party has not referred to the public document he would still be considered or 
deemed to have seen it. This is because a deeming provision creates a legal fiction.  
This principle is contained in Section 80 which states that “where any charge 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. 
Thus, every person proposing to deal with a company should verify whether the 
asset has any charge by going through the record of charges maintained at the 
office of registrar of companies before entering into the transaction.  
In case he enters into the transaction without making any enquiry and later on 
suffers loss because of charge, he cannot claim the loss from the company for it 
shall be deemed that he had notice of charge. 
You will appreciate that compulsory registration of charges also acts as a method 
of preventing a company from offering the same assets as security to borrow funds 
fraudulently from a different lender. 
Example 1: Vishnu Marketing Limited obtained a term loan of ` fifty lacs from Beta 
Commercial Bank Limited by creating a charge on one of its office buildings and 
the charge was duly registered. Later on, if the building is sold to Neeraj, he is 
deemed to have notice of such charge. In other words, it is presumed that Neeraj 
knew beforehand that the building was mortgaged to the bank for obtaining a loan. 
He cannot plead against such presumption by contending that he did not know 
about the charge if he suffers any loss at a later date because of the mortgage.      
Page 4


 
 
LEARNING OUTCOMES 
 
REGISTRATION OF 
CHARGES 
At the end of this chapter, you will be able to know and 
understand: 
? the meaning of Charge  
? the difference between a Floating Charge and a Fixed Charge 
? the steps involved in Registration of Charges 
? The consequences of non-registration of a charge the steps 
to be followed for registering satisfaction of charge 
? the penal provisions in case of default 
 
 
 
  
CHAPTER 
6 
6.2 CORPORATE AND OTHER LAWS 
1. INTRODUCTION
The law with respect to the registration of charges has been dealt in Chapter VI of 
the Companies Act, 2013 consisting of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
Section 2(16) of the Companies Act, 2013 defines “charge” as 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. 
CHARGE
Meaning of Charge [Sec. 2 (16)]
Duty to Register Charge [Sec. 77]
Application for registration of Charge [Sec. 78]
Date of Notice of Charge [Sec. 80]
Satisfaction of Charge [Sec. 82 & 83]
Punishment and Rectification in Register of Charges [Sec. 86 & Sec. 87]
 
 
6.3 
 
REGISTRATION OF CHARGES 
 
Whenever a company borrows money by way of loans including  term loans or 
working capital loans from financial institutions or banks or any other persons, by 
offering its property or assets, as security a charge is created on such property or 
assets in favour of the lender. Such a charge is compulsorily registrable under the 
provisions of the Companies Act, 2013 in accordance with Chapter VI and the rules 
made in this regard.    
Registration of Charge to act as Constructive Notice (Sec. 80) 
All charges registered with the registrar are public documents. This means that any 
person who wishes to lend money to the company against the security of such 
property or buy it can refer to the MCA Portal and find out if there is any charge 
created on that asset.  
Please remember that any document filed with the registrar for registration acts as 
Constructive Notice. Constructive means “deemed”. Notice means “knowledge”. So 
Constructive notice means deemed knowledge. This means even though the third 
party has not referred to the public document he would still be considered or 
deemed to have seen it. This is because a deeming provision creates a legal fiction.  
This principle is contained in Section 80 which states that “where any charge 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. 
Thus, every person proposing to deal with a company should verify whether the 
asset has any charge by going through the record of charges maintained at the 
office of registrar of companies before entering into the transaction.  
In case he enters into the transaction without making any enquiry and later on 
suffers loss because of charge, he cannot claim the loss from the company for it 
shall be deemed that he had notice of charge. 
You will appreciate that compulsory registration of charges also acts as a method 
of preventing a company from offering the same assets as security to borrow funds 
fraudulently from a different lender. 
Example 1: Vishnu Marketing Limited obtained a term loan of ` fifty lacs from Beta 
Commercial Bank Limited by creating a charge on one of its office buildings and 
the charge was duly registered. Later on, if the building is sold to Neeraj, he is 
deemed to have notice of such charge. In other words, it is presumed that Neeraj 
knew beforehand that the building was mortgaged to the bank for obtaining a loan. 
He cannot plead against such presumption by contending that he did not know 
about the charge if he suffers any loss at a later date because of the mortgage.      
 
 
6.4 
 
CORPORATE AND OTHER LAWS 
Types of Charge 
A charge may be either fixed or floating. 
Fixed Charge: 
A ‘FIXED CHARGE’ is a charge on Specific assets of the borrowing company. These 
assets are of permanent nature like land and building, office premises, machinery 
installed by the company and the like. Further, these assets are identified at the 
time of creation of charge. A fixed charge is usually created by way of mortgage or 
deposit of title deeds. 
When a charge is created on such assets, the charge remains ‘fixed’ and the 
borrowing company is not permitted to sell such assets though it may use them.  
Assets under fixed charge can be sold only with the permission or consent of the 
charge-holder.  
A fixed charge is vacated when the money borrowed against the assets subject to 
fixed charge is repaid in full. 
Floating Charge:  
A ‘Floating Charge’ is created on assets or a class of assets which are of fluctuating 
nature or changing in nature like raw material, stock-in-trade, debtors, and the like. 
The assets under floating charge keep on changing because the borrowing 
company is permitted to use them for trading or producing final goods for sale.  
Example 2: A retail showroom will contain numerous articles kept for sale. The 
owner of the showroom might have borrowed against the security of all those 
goods in the showroom. But he may still sell or otherwise deal with them in the 
ordinary course of business. The buyer will get it free of the charge.  
Example 3: In case of a company which manufactures leather goods, the raw 
material in the form of leather, which is subject matter of floating charge, may be 
used to manufacture leather goods without seeking any permission from the 
lender. 
Thus, unlike a fixed charge, the assets offered as security by the company can be 
dealt with by the company in the ordinary course of business. The buyer of the 
asset will get it free of charge. 
When the creditor enforces the security or the company goes into liquidation, the 
floating charge will become a fixed charge on all the assets available on that date 
and which may come into existence thereafter. 
Page 5


 
 
LEARNING OUTCOMES 
 
REGISTRATION OF 
CHARGES 
At the end of this chapter, you will be able to know and 
understand: 
? the meaning of Charge  
? the difference between a Floating Charge and a Fixed Charge 
? the steps involved in Registration of Charges 
? The consequences of non-registration of a charge the steps 
to be followed for registering satisfaction of charge 
? the penal provisions in case of default 
 
 
 
  
CHAPTER 
6 
6.2 CORPORATE AND OTHER LAWS 
1. INTRODUCTION
The law with respect to the registration of charges has been dealt in Chapter VI of 
the Companies Act, 2013 consisting of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
Section 2(16) of the Companies Act, 2013 defines “charge” as 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. 
CHARGE
Meaning of Charge [Sec. 2 (16)]
Duty to Register Charge [Sec. 77]
Application for registration of Charge [Sec. 78]
Date of Notice of Charge [Sec. 80]
Satisfaction of Charge [Sec. 82 & 83]
Punishment and Rectification in Register of Charges [Sec. 86 & Sec. 87]
 
 
6.3 
 
REGISTRATION OF CHARGES 
 
Whenever a company borrows money by way of loans including  term loans or 
working capital loans from financial institutions or banks or any other persons, by 
offering its property or assets, as security a charge is created on such property or 
assets in favour of the lender. Such a charge is compulsorily registrable under the 
provisions of the Companies Act, 2013 in accordance with Chapter VI and the rules 
made in this regard.    
Registration of Charge to act as Constructive Notice (Sec. 80) 
All charges registered with the registrar are public documents. This means that any 
person who wishes to lend money to the company against the security of such 
property or buy it can refer to the MCA Portal and find out if there is any charge 
created on that asset.  
Please remember that any document filed with the registrar for registration acts as 
Constructive Notice. Constructive means “deemed”. Notice means “knowledge”. So 
Constructive notice means deemed knowledge. This means even though the third 
party has not referred to the public document he would still be considered or 
deemed to have seen it. This is because a deeming provision creates a legal fiction.  
This principle is contained in Section 80 which states that “where any charge 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. 
Thus, every person proposing to deal with a company should verify whether the 
asset has any charge by going through the record of charges maintained at the 
office of registrar of companies before entering into the transaction.  
In case he enters into the transaction without making any enquiry and later on 
suffers loss because of charge, he cannot claim the loss from the company for it 
shall be deemed that he had notice of charge. 
You will appreciate that compulsory registration of charges also acts as a method 
of preventing a company from offering the same assets as security to borrow funds 
fraudulently from a different lender. 
Example 1: Vishnu Marketing Limited obtained a term loan of ` fifty lacs from Beta 
Commercial Bank Limited by creating a charge on one of its office buildings and 
the charge was duly registered. Later on, if the building is sold to Neeraj, he is 
deemed to have notice of such charge. In other words, it is presumed that Neeraj 
knew beforehand that the building was mortgaged to the bank for obtaining a loan. 
He cannot plead against such presumption by contending that he did not know 
about the charge if he suffers any loss at a later date because of the mortgage.      
 
 
6.4 
 
CORPORATE AND OTHER LAWS 
Types of Charge 
A charge may be either fixed or floating. 
Fixed Charge: 
A ‘FIXED CHARGE’ is a charge on Specific assets of the borrowing company. These 
assets are of permanent nature like land and building, office premises, machinery 
installed by the company and the like. Further, these assets are identified at the 
time of creation of charge. A fixed charge is usually created by way of mortgage or 
deposit of title deeds. 
When a charge is created on such assets, the charge remains ‘fixed’ and the 
borrowing company is not permitted to sell such assets though it may use them.  
Assets under fixed charge can be sold only with the permission or consent of the 
charge-holder.  
A fixed charge is vacated when the money borrowed against the assets subject to 
fixed charge is repaid in full. 
Floating Charge:  
A ‘Floating Charge’ is created on assets or a class of assets which are of fluctuating 
nature or changing in nature like raw material, stock-in-trade, debtors, and the like. 
The assets under floating charge keep on changing because the borrowing 
company is permitted to use them for trading or producing final goods for sale.  
Example 2: A retail showroom will contain numerous articles kept for sale. The 
owner of the showroom might have borrowed against the security of all those 
goods in the showroom. But he may still sell or otherwise deal with them in the 
ordinary course of business. The buyer will get it free of the charge.  
Example 3: In case of a company which manufactures leather goods, the raw 
material in the form of leather, which is subject matter of floating charge, may be 
used to manufacture leather goods without seeking any permission from the 
lender. 
Thus, unlike a fixed charge, the assets offered as security by the company can be 
dealt with by the company in the ordinary course of business. The buyer of the 
asset will get it free of charge. 
When the creditor enforces the security or the company goes into liquidation, the 
floating charge will become a fixed charge on all the assets available on that date 
and which may come into existence thereafter. 
6.5 
 
REGISTRATION OF CHARGES 
 
This is called crystallization of a floating charge. 
A floating charge remains dormant until it becomes fixed or crystallises. On 
crystallisation, the security (i.e. raw material, stock-in-trade, etc.) becomes fixed and 
is available for realization so that borrowed money is repaid. Crystallisation of 
floating charge may occur when the terms and conditions of floating charge are 
violated or the company ceases to continue its business or the company goes into 
liquidation or the creditors enforce the security covered by the floating charge. 
 2. DUTY TO REGISTER CHARGES, ETC. 
[SECTION 77] 
Section 77 of the Companies Act, 2013 contains provisions regarding registration 
of charges with the Registrar of Companies.  
A. Registration of Charges 
Registration by the company creating a charge: It shall be duty of the 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.  
Thus, charge may be created within India or outside India. The subject-matter of 
the charge i.e. the property or assets or any of the company’s undertakings, may 
be situated within India or outside India.  
The property or asset charged may be a tangible asset such as land and building. 
It may be otherwise, i.e. it may be a financial asset like a share or debenture which 
may be pledged. It may also be an intangible asset such as patent, copyright or 
trademark.  
Note: The word otherwise when used in a section would have the effect of widening 
the scope and operation of the provision.  
A charge is created by deposit of title deeds (normally banks agree for this mode 
of charge instead of proper mortgage) is also registrable by the borrowing 
company.
1
  
Registration by the charge-holder: Section 78 (explained later) provides that in 
case the company creating a charge fails to register the charge within the 
1
 As per Section 58 (f) of the Transfer of Property Act, 1882.