Charge Creation in ROC – Details about Forms and Process
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 which are raised by companies through such sources will be huge due to which the banks or financial institutions and even the debenture holders would also expect to make their funds safe for not being ended up making a loss. 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) which belong to Companies Act, the word charge has been definedspecifically to include, 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.
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 is borrowing fund or taking the credit here.
- The intention of the borrower should be to offer 1 or more of its specific assets or properties as security for repayment of the borrowed money together with, payment of the interest at the agreed rate. And this should be manifested by an agreement entered into by the borrower in favor of the lender, written or otherwise.
Types of Charge Creation
The following are the types of charges which 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 creation of 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 such charge creation has been made and filed with the ROC via Form CHG-1, then a certificate of registration of charge created 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 authorizing the Board to create the charge on its assets or properties in favor of the lending bank or financial institutions, then the following process should be followed:
- Firstly, hold a Board meeting and pass a resolution to availing the fund from the banks or financial institutions along with the security of Charges. While the authority for availing such funds has been given, an authority to execute necessary documents is also required to be given.
- 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 being maintained in form namely, CHG-7, after there is a creation or modification or satisfaction of the charge and get the same authenticated by the Director or Secretary of the company or any such person authorized by the board for the same.
- Along with a specified amount of fees the Form namely, CHG-1 is required to be filed within a period of 30 days from the date of creation or modification of the charge on the assets or properties of the company.
- The following documents should now be attached along with the e-form CHG-1:
iv. For the instruments which are providing evidence on the creation or even 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 which is evidencing that there is a creation or modification of charge when the company has acquired a property, which is already subject to charge together with the instrument evidencing such acquisitions made by the company.
vii. A certificate of registration in form CHG-2 will be issued by ROC. 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 required form namely CHG-2.
- Where a charge registered with the ROC is required to be modified, Form CHG-3 along with the particulars of modification of charge shall be filed with the Registrar.
- If the form namely, CHG-1 is filed after 300 days, an additional filing of application for condonation of delay in form CHG-8 is required to be done with the Regional Director in territorial jurisdiction registered office of company is located or falling under.
- A penalty imposed by the Regional Director shall be paid here, for which normally, a time of 15 days is given for payment of the penalty.
xii. Once the penalty as required is paid, the payment challans are to be submitted to Regional Director. This shall be done for obtaining the covering letter which is containing an order allowing the condonation of delay to the company.
xiii. Now, submit the order issued by the Regional Director with 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 case of the full payment or satisfaction of a charge, the company shall intimate the same with the ROC within a period of 30 days by filing form CHG-4. And on failure to file such satisfaction of charge, the company will have to go for condonation of delay for the satisfaction of charge.
The effect caused on Non-Registration of Charge
If the charge created by the company in favor 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 arise only in case when the company goes into winding up. But in another case also the non-creation of charge will not discharge the company from repayment of the borrowed fund along with interest and shall still be falling 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 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.