ICAI Notes: Registration of Charges | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


 
 
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
6 
 
 
 
REGISTRATION OF 
CHARGES 
 
 
 
At the end of this Chapter, you will be able to: 
? Define Charge  
? Know about Fixed Charge and Floating Charge   
? Explain the steps involved in Registration of Charge 
? Identify the consequences of non-registration of a Charge and the 
steps to be followed for registering Satisfaction of Charge 
? Know the applicability of penal provisions in case of default 
  
© The Institute of Chartered Accountants of India
Page 2


 
 
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
6 
 
 
 
REGISTRATION OF 
CHARGES 
 
 
 
At the end of this Chapter, you will be able to: 
? Define Charge  
? Know about Fixed Charge and Floating Charge   
? Explain the steps involved in Registration of Charge 
? Identify the consequences of non-registration of a Charge and the 
steps to be followed for registering Satisfaction of Charge 
? Know the applicability of penal provisions in case of default 
  
© The Institute of Chartered Accountants of India
a
 
 
6.2 CORPORATE AND OTHER LAWS 
 
 
 
 
1. INTRODUCTION 
Chapter VI Consists of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
 Loan taken  
  
created on the 
property or assets of 
a company 
 
 
CHARGE
Definition of Charge [Sec 2 (16)]
Duty to Register Charges,etc [Sec 77]
Application for registration of Charge [Sec 78]
Date of Notice of Charge [Sec 80]
Keeping of Register of Charges [Sec 81 & 85]
Satisfaction of Charge [Sec 82 & 83]
Punishment and Rectification in Register of Charges [Sec 86 & Sec 87]
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 3


 
 
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
6 
 
 
 
REGISTRATION OF 
CHARGES 
 
 
 
At the end of this Chapter, you will be able to: 
? Define Charge  
? Know about Fixed Charge and Floating Charge   
? Explain the steps involved in Registration of Charge 
? Identify the consequences of non-registration of a Charge and the 
steps to be followed for registering Satisfaction of Charge 
? Know the applicability of penal provisions in case of default 
  
© The Institute of Chartered Accountants of India
a
 
 
6.2 CORPORATE AND OTHER LAWS 
 
 
 
 
1. INTRODUCTION 
Chapter VI Consists of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
 Loan taken  
  
created on the 
property or assets of 
a company 
 
 
CHARGE
Definition of Charge [Sec 2 (16)]
Duty to Register Charges,etc [Sec 77]
Application for registration of Charge [Sec 78]
Date of Notice of Charge [Sec 80]
Keeping of Register of Charges [Sec 81 & 85]
Satisfaction of Charge [Sec 82 & 83]
Punishment and Rectification in Register of Charges [Sec 86 & Sec 87]
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
a
    
 6.3 
REGISTRATION OF CHARGES 
 
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. 
 
Whenever a company borrows money by way of loans including term loans or 
working capital loans from financial institutions or banks or any other person by 
offering its property or assets as security or any of its undertakings, then 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.    
  
an interest or lien
•of a company or
•any of its undertakings or
•both 
created on the property or assets
It is created as Security for repayment of loan
Charge includes Mortgage
© The Institute of Chartered Accountants of India
Page 4


 
 
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
6 
 
 
 
REGISTRATION OF 
CHARGES 
 
 
 
At the end of this Chapter, you will be able to: 
? Define Charge  
? Know about Fixed Charge and Floating Charge   
? Explain the steps involved in Registration of Charge 
? Identify the consequences of non-registration of a Charge and the 
steps to be followed for registering Satisfaction of Charge 
? Know the applicability of penal provisions in case of default 
  
© The Institute of Chartered Accountants of India
a
 
 
6.2 CORPORATE AND OTHER LAWS 
 
 
 
 
1. INTRODUCTION 
Chapter VI Consists of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
 Loan taken  
  
created on the 
property or assets of 
a company 
 
 
CHARGE
Definition of Charge [Sec 2 (16)]
Duty to Register Charges,etc [Sec 77]
Application for registration of Charge [Sec 78]
Date of Notice of Charge [Sec 80]
Keeping of Register of Charges [Sec 81 & 85]
Satisfaction of Charge [Sec 82 & 83]
Punishment and Rectification in Register of Charges [Sec 86 & Sec 87]
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
a
    
 6.3 
REGISTRATION OF CHARGES 
 
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. 
 
Whenever a company borrows money by way of loans including term loans or 
working capital loans from financial institutions or banks or any other person by 
offering its property or assets as security or any of its undertakings, then 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.    
  
an interest or lien
•of a company or
•any of its undertakings or
•both 
created on the property or assets
It is created as Security for repayment of loan
Charge includes Mortgage
© The Institute of Chartered Accountants of India
a
 
 
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, machinery, office premises, 
etc. Further, these assets are identified at the time of creation of charge. A fixed 
charge is usually created by way of mortgage or by 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 during the period of 
charge 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. 
Example 1: Pearl Electronics Limited raised a term loan 
` 
10 lakh from Everest 
Commercial Bank Limited, against the security of its office building. In this case, 
the company shall create a charge on specific asset i.e. its office building and such 
charge shall be a fixed charge. The company can sell this particular office building 
either by repaying the borrowed amount in full or after seeking permission from 
the charge-holder i.e. lender bank. 
Floating Charge  
A ‘Floating Charge’ is created on assets or a class of assets which are of 
fluctuating or changing in nature- like raw material, stock-in-trade, debtors, etc. It 
is a charge upon assets both present and future. The assets under floating charge 
keep on changing because the borrowing company is permitted to use them for 
Types of Charge
Fixed Charge Floating Charge
© The Institute of Chartered Accountants of India
Page 5


 
 
LEARNING OUTCOMES 
a    
 
 
CHAPTER 
6 
 
 
 
REGISTRATION OF 
CHARGES 
 
 
 
At the end of this Chapter, you will be able to: 
? Define Charge  
? Know about Fixed Charge and Floating Charge   
? Explain the steps involved in Registration of Charge 
? Identify the consequences of non-registration of a Charge and the 
steps to be followed for registering Satisfaction of Charge 
? Know the applicability of penal provisions in case of default 
  
© The Institute of Chartered Accountants of India
a
 
 
6.2 CORPORATE AND OTHER LAWS 
 
 
 
 
1. INTRODUCTION 
Chapter VI Consists of sections 77 to 87 as well as the Companies 
(Registration of Charges) Rules, 2014. 
Definition of Charge 
 Loan taken  
  
created on the 
property or assets of 
a company 
 
 
CHARGE
Definition of Charge [Sec 2 (16)]
Duty to Register Charges,etc [Sec 77]
Application for registration of Charge [Sec 78]
Date of Notice of Charge [Sec 80]
Keeping of Register of Charges [Sec 81 & 85]
Satisfaction of Charge [Sec 82 & 83]
Punishment and Rectification in Register of Charges [Sec 86 & Sec 87]
CHAPTER OVERVIEW 
 
© The Institute of Chartered Accountants of India
 
 
a
    
 6.3 
REGISTRATION OF CHARGES 
 
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. 
 
Whenever a company borrows money by way of loans including term loans or 
working capital loans from financial institutions or banks or any other person by 
offering its property or assets as security or any of its undertakings, then 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.    
  
an interest or lien
•of a company or
•any of its undertakings or
•both 
created on the property or assets
It is created as Security for repayment of loan
Charge includes Mortgage
© The Institute of Chartered Accountants of India
a
 
 
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, machinery, office premises, 
etc. Further, these assets are identified at the time of creation of charge. A fixed 
charge is usually created by way of mortgage or by 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 during the period of 
charge 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. 
Example 1: Pearl Electronics Limited raised a term loan 
` 
10 lakh from Everest 
Commercial Bank Limited, against the security of its office building. In this case, 
the company shall create a charge on specific asset i.e. its office building and such 
charge shall be a fixed charge. The company can sell this particular office building 
either by repaying the borrowed amount in full or after seeking permission from 
the charge-holder i.e. lender bank. 
Floating Charge  
A ‘Floating Charge’ is created on assets or a class of assets which are of 
fluctuating or changing in nature- like raw material, stock-in-trade, debtors, etc. It 
is a charge upon assets both present and future. The assets under floating charge 
keep on changing because the borrowing company is permitted to use them for 
Types of Charge
Fixed Charge Floating Charge
© The Institute of Chartered Accountants of India
 
 
a
    
 6.5 
REGISTRATION OF CHARGES 
 
trading or producing final goods for sale. Thus, a floating charge is a charge that 
floats above ever-changing assets. 
Example 2: A retail showroom in Lajpat Nagar, New Delhi contains numerous 
articles like clothes, apparels, footwears, kitchen items, cosmetics, etc. kept for 
sale. The owner of the showroom might have borrowed against the security of all 
these goods; but he may still sell or otherwise deal with them in the ordinary 
course of business. The buyer i.e. customer will get the items purchased by him 
free of charge.  
Example 3: Smart Shoes Limited manufactures leather goods. The raw material in 
the form of leather, which is subject matter of floating charge, may be used by 
the company 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 it in the ordinary course of business. The buyer of the asset will get 
it free of charge. 
Crystallization of a Floating Charge 
When the creditor enforces the security due to the breach of terms and 
conditions of floating charge or the company goes into liquidation, the floating 
charge will become a fixed charge on all the assets available on that date. This is 
called crystallization of a floating charge. 
A floating charge remains dormant until it becomes fixed or crystallizes. On 
crystallization of charge, the security (i.e. raw material, stock-in-trade, etc.) 
becomes fixed and is available for realization by the lender so that borrowed 
money is repaid. Crystallization 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. 
Example 4: Prism Limited had taken a loan from ABC Bank, on the security of it 
stock. Now, in the event of Prism Limited failing to repay the security interest or 
entering liquidation, the floating charge will change to a fixed charge. Once a 
floating charge gets converted to a fixed charge, the stock can neither be sold nor 
used by the company in its business operations. 
© The Institute of Chartered Accountants of India