Form CHG 1 – Creation/Modification of Charge

Firms usually use their assets to obtain financing or credit from a lender. A charge is a right conferred on a creditor over the property of a company, and it is capable of being used as security for an obligation or loan. This assures the lender that, upon default by the company in repayment, they can realise the amount due by assuming possession of, or selling, the charged property. Charges may be fixed, in relation to identifiable, specific assets, or floating, with regard to a series of assets that will shift in character over time, such as inventory or accounts receivable.

Creating a charge allows organisations to raise funds without selling assets directly or diluting ownership through issuing shares. The practice is especially prevalent in businesses seeking expansion, covering working capital requirements, or managing cash flow. Lenders are also more likely to lend or grant good terms if a charge exists, as this reduces the risk of loss. Furthermore, charges must be registered with the respective authorities upon creation, promoting transparency and increasing the financial prudence of the lending entity. Lastly, charges are essential in corporate finance, minimising risk while supporting expansion through secured lending.

What is Charge?

In India, a charge, as specified under the Companies Act of 2013, means an interest or a lien over the assets of a company, its property, or any of its undertakings to secure the repayment of a loan or performance of an obligation. By definition of Section 2(16) of the Act, a “charge” would mean an interest or a lien created as security upon a property or asset of a corporation or any undertaking, or that corporation’s enterprise involving a mortgage.

Translating simply, a charge means a lawful tool by means of which an offer of collateralising a company’s assets in favour of its lender or creditor, and still claiming right over these assets, is made by the company. This type of arrangement secures the lender by ensuring that, if the borrower defaults, they can legally claim the stipulated asset. Charges may be either fixed, which relates to a defined, identifiable asset, or floating, which is applied to a collection of assets whose value will fluctuate over time.

Section 77 of the Companies Act of 2013 provides for the registration by the Registrar of Companies (RoC) within a prescribed timeline of specific charges. The said provision serves the purpose of creating transparency and publishing public notice regarding encumbrances, thereby protecting the interests of lenders and others concerned with respect to the company.

Section 77 of the Companies Act 2013

Section 77 is a vital provision that requires the timely registration of charges to maintain corporate accountability and transparency.

This section applies to all kinds of charges, which include:

• Floating and fixed charges.
• Legal and equitable mortgages.
• Pledges or hypothecations.

The intent behind Section 77 is to secure public notice about the obligations of the company to:

1. Protect the interests of creditors and investors.
2. Prevent disputes about business assets.
3. Promote due diligence during mergers, acquisitions, and investment activities.

Section 77 of the Companies Act 2013 deals with the essential requirement for companies to register charges. Such provisions are necessary for the proper reporting and registration of all company charges with the Registrar of Companies (RoC) so that creditors and stakeholders can be made aware and their interests can be safeguarded.

As per Section 77(1), the particulars of a charge on properties, assets, or any of its undertakings created by a company in India or abroad should be furnished to the RoC by that company. Such particulars are to be signed by the charge holder and by the company and be accompanied by encumbrances of any kind created for the raising of loans or debentures.

Charges need to be registered within 30 days of their creation. In case of delays in the registration of charges created before the Companies (Amendment) Ordinance, 2019, the Registrar may condone such late registrations for up to 300 days, while for those created after the Amendment, the period shall be 60 days with additional amenity charges.

In the event of charge registration failure by the company, the charge holder-lender or financial institution may apply to the RoC for registration of the charge.

An unregistered charge will be void against the company liquidator and other creditors. However, the debt shall continue to exist and can be claimed against the borrower, but the lender will lose its security rights on the charged asset.

When charges are duly registered, the Registrar issues a Certificate of Registration of Charge, which is conclusive evidence that all requirements have been fulfilled.

What is Form CHG-1?

Form CHG-1 is a statutory form introduced by the Companies Act of 2013 for the registration of charges other than debentures. Form CHG-1 is crucial for maintaining transparency in corporate finance and serves as a formal notice to the Registrar of Companies (RoC) regarding the creation, modification, or discharge of a charge by a company. It is regulated by Section 77 and Rule 3 of the Companies (Registration of Charges) Rules, 2014.

Meaning and Purpose of Form CHG-1

Form CHG-1 is required when a company creates a charge (other than debentures), varies a previously created charge (like altering terms or augmenting the secured amount), or releases a charge.

The primary objective of CHG-1 is to file charges with the RoC, thereby protecting the interests of lenders and creditors, making these charges legally enforceable, providing public notice of encumbrances on company assets, and preventing disputes over company property in the event of liquidation or insolvency proceedings.

Who Files Form CHG-1?

The form can be filed by the company issuing the charge or the charge holder (lender/creditor) if the company fails to do so.

Details to be Filled in Form CHG-1

This form requires detailed information, which includes:

1. Nature of charge: fixed, floating, mortgage, hypothecation, etc.
2. The date when the charge was created or modified.
3. Name and address of the charge holder (e.g., a bank, non-banking financial company, or financial institution).
4. The charge covers the quantum.
5. A detailed description of the property or assets subject to the charge.
6. Conditions and terms such as the interest rate, repayment terms, and margin.
7. A copy of the document or deed under which the charge was created or altered.
8. The CIN of the company and details regarding its directors.

Additionally, it is necessary to attach supporting documents, which must include the instrument of charge (for example, a loan agreement or a deed of hypothecation) and the board resolution sanctioning the creation or alteration of the charge. A sanction letter from the financial institution is also necessary.

Due Date for Form CHG-1

The company is required to file Form CHG-1 within 30 days from the creation or alteration of the charge. In case this period is not complied with, the Registrar of Companies (RoC) may allow:

1. Filing within 60 days of creation or modification incurs an additional cost.
2. The Companies (Amendment) Ordinance, 2019 allows for a period of extension of up to 120 days with the sanction of the Central Government.

Late payments will be subject to a surcharge. Once the period expires, the surcharge may become unenforceable against third parties or upon liquidation.

Fees for submitting Form CHG-1

The amount filed by a signer of Form CHG-1 before the Registrar of Companies (RoC) is related to the authorised share capital of the company. The fees so charged would be as follows:

1. A company with an authorized capital of not more than Rs 1 lakh will have a filing fee of Rs 200.
2. Authorised capital exceeding Rs 1 lakh but not exceeding Rs 5 lakhs shall attract a filing fee of Rs 300.
3. The same applies to organisations having authorised capital exceeding ₹5 lakhs but not exceeding ₹25 lakhs, wherein they’ll remit ₹400.
4. For an authorized capital of ₹25 lakhs to ₹ one crore, the charges will be ₹500.
5. ₹600 is the filing fee to be submitted by organizations whose authorized capital exceeds ₹1 crore.

These charges represent the standard rates for filing Form CHG-1 promptly. In the event of a delayed filing, additional charges and penalties will be imposed as per the Companies Act of 2013.

Procedure for Filing CHG-1

1. Hold a Board Meeting and in the same, either sanction or modify the charge and authorise a director or officer to submit the required papers.
2. Prepare the Charge Documents: Collect all the necessary papers, i.e., the loan agreement, the charge instrument, the sanction letter, and the board resolution.
3. Log in to the MCA Portal through the relevant credentials.
4. Download and complete Form CHG-1. Ensure that all relevant information is provided in Form CHG-1, including the corporation’s information, the charge holder, the secured amount, and the concerned property.
5. Append the required documents: Attach supporting documents such as the charge instrument, board resolution, and any other agreements as applicable.
6. Use the Digital Signature Certificate (DSC) of the authorized director and charge holder to sign the form electronically.
7. Pay the filing charges: Determine and pay fees in accordance with the authorized capital of the company.
8. File the Form: Upload the filled-in form and the payment receipt into the MCA portal.
9. Receive SRN and Acknowledgement: Upon filing, a Service Request Number (SRN) will be auto-generated for tracking purposes.
10. Certificate of Registration: Upon successful verification, the Registrar of Companies (RoC) will issue a Certificate of Registration of Charge (form CHG-2).

Consequences of Non-Filing Form CHG-1

Failure to file Form CHG-1 can have profound legal, financial, and reputational implications for the company and its officers.

1. Loss of security and enforceability: Non-registration of a charge by the Registrar of Companies renders the same unenforceable towards creditors or liquidators in liquidation proceedings. This means a charge is rendered unsecured to the lender, as the lender’s position would remain with respect to the charge being secured. Such an event can cause lenders to potentially lose their security interest in the asset, regardless of the legal validity of the loan, resulting in substantial losses for the lender.
2. Penal Consequences: Penalties specified under Section 86 consist of fines of up to ₹5 lakh to the company and ₹1 lakh to every individual officer, together with a penalty of daily reckoning for continued defaults.
3. Harmful impact on a company’s credit rating: Failure to file a charge may indicate non-compliance, potentially inhibiting future borrowing or investment opportunities.
4. Legal problems: Unregistered charges can cause potential issues concerning ownership or claims to assets, particularly in the event of bankruptcy.
5. Additional delays and expenses: Although there is provision to file late within a tolerance period, the government charges an extra cost, and a lengthened approval procedure may be required, which could even necessitate Central Government authorization.
6. Deteriorating transparency: Neglecting registration can impact a company’s public filings, thereby diminishing transparency and lowering investor confidence.

Conclusion

Filing Form CHG-1 is a compulsory requirement under the Companies Act of 2013 for the registration of any charge formed or varied on the assets of a company. This form serves as notice to the Registrar of Companies, ensuring that all rights and claims against the company’s property are legally and rightfully accounted for. Filing this form on time is vital in protecting the lender’s interests through the assertion of their rights on the charged property, and as such, it helps significantly in maintaining the company’s reputation and legal status. Failure to comply with the requirement invites dire consequences, including loss of security interest, penalties, and possible litigation against the company. Thus, strict adherence to the intricacies of the procedural law, documentation, and deadlines for the Form CHG-1 is essential for corporations. This term, registration, represents the very essence of corporate governance and, as such, contributes to enhancing the company’s credibility in the eyes of investors, financial institutions, and other stakeholders. Lastly, the CHG-1 form maintains fiscal discipline and trust in corporate affairs.

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