CA > Inter > Paper 2 – Skim Notes

Chapter 6 : Registration of Charges

Overview

  • 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.

Key Topics

Definition of Charge

  • A charge is defined under Sec 2 (16) of the Companies Act, 2013 as an interest or lien created on the property or assets of a company.
  • It is essentially a form of security for the repayment of loans, including mortgages.
  • Charges can be created on tangible and intangible assets, located domestically or internationally.
  • The obligation to register charges is mandatory for all companies as per the Act.
  • A charge becomes publicly registered and serves as a notice to third parties regarding the legitimacy of the claim on the asset.

Deep Dive

  • The potential implications of not registering a charge include losing rights to the asset in case of liquidation or insolvency.
  • Various types of financial instruments can create charges, including term loans and debentures.
  • Understanding the general principle that charges restrict a company from selling or transferring assets without permission from the lender.

Types of Charges: Fixed and Floating

  • A fixed charge is imposed on specific assets, recognized at the time of creation, such as land, buildings, or machinery.
  • In contrast, a floating charge applies to a category of assets that change over time, like stock or raw materials.
  • A fixed charge does not allow the borrower to sell the asset without lender consent until the loan obligation is fulfilled.
  • A floating charge may crystallize into a fixed charge upon default or liquidation, effectively locking the assets for creditor recovery.
  • Examples illustrate the fixed charge scenario with a specific property and a floating charge with stock that may be sold in the ordinary course.

Deep Dive

  • Fixed charges are often linked with large asset financing and provide borrowers with less flexibility.
  • Floating charges are advantageous for businesses with fluctuating inventories but pose a risk of losing asset claims if the borrower defaults and liquidation occurs.

Registration Steps for Charges

  • Under Sec 77, it is a requirement for companies to register newly created charges with the Registrar within 30 days.
  • Companies submit particulars of charges, along with a copy of the instrument creating the charge.
  • The registration must occur regardless of whether the charge is created in India or abroad.
  • In cases of delay, lenders or charge-holders have the right to register after the company fails to do so within 30 days (Sec 78).
  • Registration can involve filing in specific prescribed forms (Form CHG-1 or CHG-9 for debentures).

Deep Dive

  • The process includes a verification step where the instrument must be signed and certified by designated authorities in the company or lender’s organization.
  • Extensions for registration are available under specific conditions, which vary based on the registration date (before or after Nov 2, 2018).

Consequences of Non-Registration

  • If a charge is not registered, it becomes void against the liquidator and other creditors during winding up under Sec 77 (3).
  • Unregistered charges rank lower than unsecured claims, meaning the creditor loses priority in asset recovery.
  • Failure to register does not negate the underlying debt; however, the secured status of the asset is forfeited.
  • Secondary creditors gaining a prior registered claim can undermine subsequent unregistered charges, as illustrated in a bank loan example.
  • Not complying can also lead to penalties for the company and involved officers.

Deep Dive

  • Potential legal ramifications for failure to register charges can escalate to bankruptcy litigation.
  • The significance of constructive notice means parties should always verify the status of charges before transactions.

Satisfaction of Charges

  • Companies are required to inform the Registrar of the payment or satisfaction of a charge within 30 days as dictated by Sec 82.
  • There is provision for an extended reporting timeframe under specific circumstances.
  • The Registrar has authority to act on satisfaction even without the company’s notification, ensuring proper records reflect the company’s financial standing.
  • Proper documentation upon satisfaction must be preserved for verification and to maintain compliance with corporate laws.
  • Certificates of satisfaction are issued as definitive proof that a charge has been fully settled.

Deep Dive

  • Understanding when to notify and how records must be maintained to avoid discrepancies in the register.
  • Legal intricacies can arise due to omitted notifications impacting third-parties or creditors seeking claims.

Register of Charges

  • The Registrar maintains a register that records all company charges and modifications according to Sec 81.
  • Access to this register is permitted for stakeholders, with provisions for public inspection to aid transparency.
  • Companies must maintain a similar register at their registered offices per Sec 85.
  • Modifications, satisfactions, and new charge filings must be duly recorded to reflect current states of borrowing.
  • The requirement for preservation of records serves to protect creditor rights and ensure compliance.

Deep Dive

  • The complexity of managing a register of charges highlights why companies must invest in robust compliance mechanisms to avoid legal pitfalls.
  • Trends in charge registration reveal shifts in how companies manage asset-liability relationships in responses to market conditions.

Penal Provisions and Rectification of Charges

  • Violating charge registration rules can result in penalties, including fines imposed on the company and responsible officers (Sec 86).
  • Serious violations involving fraudulent reporting can escalate to harsher penalties under Section 447, which deals with fraud.
  • The Central Government can rectify the register to amend previous errors or missed notifications, ensuring the register is a true reflection of secured claims (Sec 87).
  • Procedural adherence in rectification applications is essential for upholding creditor claims and company integrity.
  • Any defaults must not prejudice the position of other creditors, which is an essential consideration in rectification.

Deep Dive

  • Investigating the implications of not remedying register discrepancies may lead to severe limitations on a company’s borrowing capability.
  • The necessity for companies to cultivate proactive compliance approaches to mitigate the risk of penalties and financial discrepancies.

Summary

Chapter 6 of the Companies Act, 2013 delivers an in-depth understanding of how charges over assets are created, registered, and managed within corporate structures. The chapter underscores the legal definitions and types of charges (fixed and floating), their registration processes with strict timelines, and the consequences of non-registration, chiefly the risk of becoming unsecured in liquidation scenarios. Legislation mandates that companies keep accurate registers of charges, allowing for public inspection, while also ensuring timely notifications of charge satisfaction. Penal provisions exist to enforce compliance and rectify discrepancies, again stressing the importance of meticulous corporate governance in financial transactions.