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Charge

Definition:
Section 2(16) of CA 2013 defines charge. A charge is a claim established by any individual, including a corporation, known as "the borrower", on its current and future property and assets in favour of a banking/financial institution, known to as "the lender" who has promised to offer monetary support.

The essential features of charge:

The charge maker and the charge holder should both be involved in the transaction. The subject-matter, which could include the borrower's present or future assets and other holdings. A contract entered into by the borrower in favour of the lender should express the desire of borrower to offer one/more of its specified assets or properties as collateral for payback of the borrowed money plus interest that must be paid at the agreed rate.

Types of charges:

A charge may be fixed or floating. Fixed charge, a charge that is associated with a definite and distinct item or property at the moment of its establishment. The Company will not be able to transfer such specified and defined property until the charge holder (creditor) has been paid in full. Floating charge, it refers to the floatable and circulating character of a company's assets, such as various debtors, stock in trade, and so on. The nature of the charged item may alter over time. If the Company crystallises or the enterprise ceases to be a going concern, the floating charge becomes a fixed charge. Crystallisation of floating charge is the process of converting a floating charge into a fixed charge.

Mortgage and charge:

A mortgage is a legal procedure in which a person borrows money from another person and then creates a right or charge in favour of the lender on his moveable and/or immovable property to guarantee repayment of the borrowed money as well as the interest paid at the agreed rate. A mortgage and a charge are distinct in that the former is a transfer of an interest in immoveable property as security for a loan, whilst the latter is not a transfer but is nevertheless a security for the payment of an amount.

A mortgage deed is any instrument in which one person conveys or creates a claim over a particular property in lieu of another for the purpose of safeguarding money provided, or to be provided, by way of loan, or a current or future obligation.

There is a need for creating a charge on company's assets irrespective of the nature and size of the company. Banks don't lend money to the corporations until and unless the corporations backs it by some collateral. The banks will have charge on assets of the company after it has borrowed the money. First, an application must be filed for registration or modification of charge.

Then the certificate of registration or the certificate of modification of charge, will be issued as the case may be. As per s. 77 of CA 2013, there is a duty to register charge (either within/outside India, tangible/intangible etc) within thirty days of its inception. The Registrar has the authority to extend the grace period on the application of the company up to 300 days after charging some additional fee. The central government as per s. 87 of CA 2013 has the authority to extend the grace period for beyond 300 days after satisfying that such extensions is just and expedient. The company after the charge is registered, shall intimate to the ROC upon which he shall issue a "certificate of registration of charge" after satisfaction.

The certificate will be issued to the company as well as to the person in whose favour the charge is created. If at all the company fails to intimate, the ROC has the power to make entries after receiving the satisfactory evidences as per s. 83 of CA 2013. The company as per s. 81 of CA 2013 must maintain a register which contains all the particulars of charge will be entered and it can be viewed by any creditor of the company without any fee payment. CA 2013 has the provisions on to which charges are required be to filed with ROC. s. 125(4) talks about the list of transactions upon which the registration of charge is obligatory.

According to Section 77 of CA 2013, all kinds of charges made by a company must be registered with the ROC, and if they are not complying and not filing with the ROC for registration, they will be void but against the liquidator and any other creditor of the company. One, against liquidator, if a charge is void against the liquidator, the liquidation can ignore it and treat the creditor as an unsecured creditor when the business is wound up. The property will be considered as free of charge, which means that the creditor will not be able to sell it to recoup its debts.

Two, against creditor, charge is established on the same asset and the previous charge is not registered, the previous charge has no effect, while the latter charge, if registered, has precedence. To put it another way, the latter charge holder can have the asset liquidated to recoup its funds. The charge cannot be void against a company held as in the case of "Independent Automtaic Sales Ltd v. Knowles and Foster".

In "ONGC Ltd v. Official Liquidators of Ambica Mills Co Ltd" the ONGC had been unable to determine whether or not the so-called charge, on which it was demanding priority as a secured creditor, was registered. ONCG could not be considered as a secured creditor as a result of this failure, according to the court, because of the particular requirements of section 125 and the statutory obligation under that section.

This does not, however, imply that the charge is null and void, or that the debt is uncollectible. The charge is valid and may be executed as long as the firm does not fall into dissolution. The charge must contain some particulars such as the amount secured by the charge, description of the property charged, date and description of instrument, list of terms and conditions of the loan, name and residence of the charge holder and so on as prescribed under CA 2013.

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