DUTY OF THE COMPANY TO REGISTER CHARGES
A company often raises capital to finance its mega projects and to meet the plan for business expansion. It resorts to borrowing of funds to raise capital. This corporate borrowing or obtaining loans is against creation of charge on its assets as security against the borrowings to the lender. A charge has been defined under the Section 2 (16) of the Companies Act, 2013 as (i) a lien or an interest or (ii) charges created on the assets or property of a company, or,(iii) identified undertakings or both as security and includes a mortgage
From Section 77 to 87 of the chapter VI of the Companies Act, 2013 provides concerning the registration of charges besides being governed by the Companies (Registration of Charges) Rules, 2014. In Dublin City Distillery Co v Degrey ( 1914 AC 823), it was held that charge includes a lien and equitable charge.
Types of charge
They are principally two types of charges –
Fixed charge: An exact and unencumbered asset is identified for the charge at the time of creation of such charge. The company is not supposed to transfer this nature of charge except when all the dues are paid off to the charge-holder.
Fixed charge would typically be charges on land, buildings or plants and machinery. The registering of a fixed charge has definite advantage in that if the company is wound up the debenture holder who is secured by a specific charge will be placed highest in the rank among the creditors.
Floating charge: Here the nature of assets/properties are those that are mostly in circulation, like stock-in-trade, sundry debtors and the charge on these types of assets are reckoned as floating charges. These are dynamic in nature and keep changing with times. In the event of crystallization of the company or the enterprise ceasing to exist, the floating charge can be converted into fixed charges.
Unlike fixed charge, floating charge doesn’t create a charge on any particular property. On the contrary, it is a charge on a revolving asset like stock-in-trade.
The exciting point about the floating charge is that companies can transact with the asset in any mode. For instance, if explicitly provided in the memorandum of association, it may even sell the mortgage or lease the property in the regular course of commerce. In Maturi U. Rao v. Pendyala (A.I.R 1970 A.P 225) , it was held that when floating charge crystallizes, it converts into fixed charge and the same restrictions as applicable to fixed charge shall apply on it as well.
Every company is duty bound under the provisions of Section 77(1) of the Act for creating a charge. Further, all types of charges together with the instruments duly signed by the company/charge-holder needs to be filed with the Registrar of Companies within 30 days of the creation of that particular charge. The charge can be created-
(i) inside or outside India
(ii) On its assets/properties or its undertakings
(iii) could be tangible or intangible
(iv) located in or outside India.
A special resolution is required to be passed authorising the Board of Directors to borrow funds for the company, under Section 180(2), before creating a charge. The Board of Directors, under Section 180(1), is authorised to create a charge on the company’s assets in order to offer security for repayment of loan. Form MGT-14 is to be filed in line with the Companies (Management and Administration) Rules 2014 with the registrar post having passed the special resolution.
Registration of charges necessarily applies to acquiring any property subject to a charge within the meaning of the provisions under Section 77 of the Act. Any modification made will also be the in its ambit when in terms and conditions or the extent or operation of any charge is registered under this section. Upon registration of a charge with the Registrar of Companies, a certificate of registration of such type of charge is issued to the company and in favour of the individual against whom the charge has been created.
The method of registration of charges is to file the particulars of the charge together with the instruments creating a charge, by the Registrar of Companies under Section 77(1) of the Act. However, the process of ‘rectification of the register of charges’ can be resorted to by a company in case of failure to file the charge within the stated period. It can represent to the Central Government for condonation of the delay but the representation has to be accompanied with payment of the required fees as quantified under the Companies (Registration of Charge) Rules, 2014.
Section 80 of Companies Act 2013 states as and when a charge is created on any of its assets or any of its instruments/undertakings it is to be presumed that the succeeding person obtaining any of its assets or undertakings has full knowledge of charge registered. The registrar shall preserve a register containing the particulars of the charge registered for every company as required under Section 81 of Companies Act 2013.
Prior to the amendment of Section 77(1) of the Act, the original provisions were as under:
It was impending upon every company creating a charge with the Registrar inside 30 days of its creation, to record the details of the charge signed by the company and the charge-holder along with the instruments, if any.
On an application by the company, the Registrar may permit such registration to be done within a window of 300 days of such creation on disbursement of extra fees as may be prescribed.
Companies (Registration of Charges) Amendment Rules, 2019 was issued by MCA with a notification dated 30th April, 2019 and Companies (Registration Offices and Fees) Third Amendment Rules, 2019.
The Ministry of Corporate affairs (MCA) circulated a regulation (the Ordinance) inter alia modifying a few provisions of the Companies Act, 2013 (the Act). The Ordinance seeks to decrease the timeline of three hundred days. Significant changes have been brought in by the aforesaid amendments:
The Ordinance modifies registration of charges to allow the following:
- The charge must be registered within 300 days of such creation, where a charge is created prior to the origination of the Companies (Amendment) Ordinance, .
- The provisions under Section 77(1) of the Act is w.r.t the extension of time for filing details for registration of charges. Registrar of Companies can permit such registration within a period 300 days post creation of charge duly accompanied with payment of additional fees as stipulated. The particulars of the charge are required to be filed with the registrar within thirty days from the date of creation of charge in the Form No. CHG-l (besides debentures) or Form No. CHG-9 (for debentures comprising rectification). Form No.CHG-1 under Rule 4 provides that the declaration form is to be signed by company’s secretary or director clarifying that such deferred filing will not unfavourably affect the rights of creditors of the company from the intervening period.
- However, if registration of charges is not made within 300 days, the company is required to entreat for extra time for filing of the particulars or for the registration of the charge from the Central Government (in Form CHG-8) in accordance with Rule 12 and Section 87 of the Companies. Registration of charges in form CHG-1 will only be processed by the office of the Registrar of Companies on receipt of the order of Central Government condoning the delay (in Form INC 28). If the Central Government is convinced that the default or omission to file registration of charges or the particulars of charge were bona-fide and inadvertent and that it will not prejudice the position of creditors or shareholders of the company, it can grant extension of time for relief.
- Reference https://www.indiafilings.com/learn/duties-of-director-of-a-company/#:~:text=Duty%20to%20act%20in%20the%20best%20interests%20of%20the%20Company&text=So%20the%20Director%20must%20exercise,case%2C%20above%20their%20personal%20interest.
- Company Law Book by Dr. S. C Tripati
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