The company, which is a business, will always be in need of funds for expansion, buying assets, or even financing various projects. For these fund requirements, they would be depending on share capital, borrowed funds from various banks or financial institutions, or might be by the issue of debentures also. The debentures can be both secured or unsecured, which would depend on the decision or discretion of the company, along with the application of the provisions of the Companies Act pertaining to the issue of debentures.
The funds raised by companies through such sources will be substantial, and as a result, banks, financial institutions, and even debenture holders will expect to secure their investments to avoid losses. They want a surety with respect to the repayment of the same with principal and interest amount. And for this, they turn towards creating a charge on the assets of the company, and this is known as the creation of charge on the assets.
What is a Charge?
A charge is a right which is created by a person or a company who has borrowed, on its assets and properties, which may be current or future, in favor of a financial institution, or a bank referred to as the lender, which has lent the amount or had promised to provide the financial assistance required by the company.
Referring to Section 2(16) of the Companies Act, the word ‘charge’ has been defined specifically to include an interest or lien created on the property or assets of a company or any of its associated or subsidiary undertakings, or both, as security, and also includes a mortgage.
The following features are also held by Charge:
- There should 2 parties to the transaction which are the creator of the charge and the charge holder.
- The central matter of charge should be current or future assets and other properties, which are borrowed funds or taking credit here.
- The intention of the borrower should be to offer one or more of its specific assets or properties as security for the repayment of the borrowed money, together with the payment of interest at the agreed-upon rate. And this should be manifested by an agreement entered into by the borrower in favour of the lender, written or otherwise.
Types of Charge Creation
The following are the types of charges that are created:
– Within or outside India,
– On property or assets of the company or any of its undertakings or units,
– Whether tangible or intangible.
Form for Creation of Charge
The Form CHG-1 is required to be filed for the creation of a charge with the Registrar of Companies (ROC) within 30 days from the day of its creation. The form shall be signed by the company (the borrower) and the charge holder.
Certificate of Creation of Charge
Once a charge has been created and filed with the ROC via Form CHG-1, a certificate of registration for the created charge will be issued in CHG-2 by the ROC. And this shall serve as conclusive evidence that the company has complied duly with all the requirements of Chapter VI of the Act and the Rules made thereunder.
Process of Creation of Charge
When a company has passed a special resolution empowering the Board of Directors to borrow funds in relation to funding or financing its various requirements and also authorising the Board to create a charge on its assets or properties in favour of the lending bank or financial institutions, then the following process should be followed:
- Firstly, hold a Board meeting and pass a resolution to avail the funds from banks or financial institutions, along with the security of Charges. While the authority to avail of such funds has been granted, the authority to execute the necessary documents is also required.
- The extracts of the resolution passed by the company should be filed with the ROC in Form MGT 14 within 30 days of passing such resolution.
iii. Then the execution of necessary documents for availing the facility including the security being given should be done with.
- Now, the company should make entries in the register of Charges, which is maintained in the form CHG-7, after the creation, modification, or satisfaction of the charge, and have them authenticated by the Director, Secretary of the company, or any person authorised by the board for this purpose.
- Along with a specified amount of fees, the Form, namely CHG-1, must be filed within 30 days from the date of creation or modification of the charge on the company’s assets or properties.
- The following documents should now be attached along with the e-form CHG-1:
iv. For the instruments that provide evidence on the creation or any modification of the charge, a certified true copy shall be attached.
v. In the case there is a joint charge and consortium finance, particulars of other charge holders shall also be provided.
vi. The document that evidences the creation or modification of a charge when the company acquires a property that is already subject to a charge, together with the instrument evidencing such acquisitions made by the company.
vii. ROC will issue a certificate of registration in form CHG-2. And it shall be done only after proper verification of all the documents filed or submitted by the company, i.e., the borrower, regarding such borrowing and the charge created.
viii. If the form namely, CHG-1 is not submitted within a period of 30 days but is filed within a period of 300 days, along with an application for condonation in form CHG-10, and also supported by a declaration from the Company Secretary or director of the company stating that the delay will not be affecting any of the rights which are held by the creditors shall be made by the company. After due compliance with the required procedure, the ROC shall issue a certificate of registration in the form needed, namely CHG-2.
- Where a charge registered with the ROC is required to be modified, Form CHG-3, along with the particulars of the modification of the charge, shall be filed with the Registrar.
- If the form, namely CHG-1, is filed after 300 days, an additional application for condonation of delay in form CHG-8 must be filed with the Regional Director in the territorial jurisdiction where the registered office of the company is located or falls.
- A penalty imposed by the Regional Director shall be paid here, for which a period of 15 days is normally allowed for payment of the penalty.
xii. Once the penalty as required is paid, the payment challans are to be submitted to the Regional Director. This will be done to obtain the covering letter, which contains an order allowing the condonation of delay to the company.
xiii. Now, submit the order issued by the Regional Director to the Registrar of Companies within the stipulated time, in Form INC 28.
xiv. On approval of Form INC 28, get Form CHG-1 approved. The certificate of registration shall be issued by the Registrar in from CHG-2.
Satisfaction of Charge
In the event of full payment or satisfaction of a charge, the company shall notify the ROC within 30 days by filing Form CHG-4. And in the event of failure to file such a satisfaction of charge, the company will have to apply for condonation of delay for the satisfaction of the charge.
The effect caused by the Non-Registration of the Charge
If the charge created by the company in favour of the lender is not registered with the ROC in form CHG-1, the same shall not be taken into account by the liquidator or other creditor. And this shall only arise in the event that the company goes into liquidation. However, in another case, the non-creation of a charge will not discharge the company from repayment of the borrowed funds, along with interest, and it shall still fall on them.
The punishment for such non-filing shall be:
A fine which shall not be less than INR 1 Lakh and may extend to INR 10 Lakhs, and every officer in default shall be punishable with a fine which shall not be less than INR 25,000, which may extend to INR 1 Lakh, or with imprisonment for a term which may extend to 6 months, or both.
