COMPANY LAW (PART 22) (UNIT V) CAPITAL MANAGEMENT BORROWING POWERS, MORTGAGES AND CHARGES, DEBENTURES PART I (B) 1. INTRODUCTION Hello viewers, Today we shall be taking up section 124 to section 127 and we shall be discussing about the mortgages and charges. This is again in the same chapter of borrowing powers which is unit V of company law portion. Now let us discuss the definition of charge which is given under section 124. The expression charge includes a mortgage; the term charge generally means making available property as a security for the payment of debt simply it means creation of security in favour of a creditor. The term charge shall cover mortgage, hypothecation and pledge; however pledge does not require registration with the registrar. Now whenever a company requires funds it can either go issuing of debenture or it can take up a loan or it can create a charge over the assets and give its assets as a security. So the term charge shall include mortgage also which means given a property as a security. So charge is a wider term and it includes mortgage, hypothecation and pledge. However the pledge is not require to be registered with the registrar. 2. CHARGES REQUIRING REGISTRATION Now in section 125 there are certain charges which require the registration. Let us see what kinds of charges are there which require this registration with the registrar. The first one is the charge for the purpose of securing any issue of debenture i.e. the charge created by
way issue of secure debentures. This means that whenever the debenture are to be issued and these are the secure debentures then an asset will be offered as a security to the debenture holder and such a charge when created over the asset will require the registration. The second one is a charge on uncalled share capital of the company. The reserve capital or the uncalled share capital of the company can only be called in certain circumstances which exist during the life time of a company. Hence this is a grip security with the company whenever there are certain circumstances to get money the company can get money by calling up the shares capital from the shareholders. Hence this is also an asset and when it is offered as security it requires registration. The third one is a charge on calls made but not paid. There could instances when the charges when the calls have been made but they have not been paid and are pending at the end of the shareholder. Hence the company can call up this amount whenever it requires this also again is a security with the company and charge over this can be created. The forth one is the charge on any immovable property wherever situated. Hence there is no bios regarding to whether the property situated in India or abroad. If the immovable property is present or the company has such an immovable property then it can offer it as a security to the debenture holder or to the loan providers etc. and charge could be created over them this requires registration. Then the fifth one is charge not being a pledge on any movable property of the company early also in the section 125 we discussed that a pledge dose not required to be registered with the registrar. Hence if there is a pledge, which has been created on any kind of movable property it does not require a registration. A charge on any book debts of the company, book debts means the debtors of the company, the debtors are those people who owe money to the company and again it is a form of a security with the company. A charge over them could be created and it requires registration.
Then is the floating charge on the undertaking of any property of the company including the stock in trade. There are certain assets in the company who keep on changing like a stock in trade. The appearance of these assets dose not remain even same for even one hour in the company because the stock comes and the stock could be sold off, so there is a blanket charge over which is called as floating charge. That can be created over it. The company have got all the rights to deal with such assets and whenever such a floating charge is created it require registration. A charge on a ship or any share in a ship, ship neither is a movable nor it is immovable because it is present in the sea. So such kind of charge also requires registration. There is a charge on goodwill, patent, trademark or a copyright these are intangible assets which are there with the company and whenever security over them is given for the loan then it requires registration. If a company acquires any property which is already a subject matter of charge the company shall be required to register such charge within the next 30 days. There could be an instance where a company purchases a property which has been already under a charge so if such a property is acquired then it requires registration within 30 days of acquisition of the property already under a charge. 3. DOCUMENT TO BE FILED FOR REGISTRATION Now what are the documents which need to be filed for the registration? Now it has to be re-emphasised here that whenever a charges created a Form 8 has to be signed and it is to be registered with the ROC. These days there is E-Filing which is done for all company forms. Hence Form 8 will be e-filed to the ROC but what are the various documents which require registration and what are the other formalities we will just see. First one the prescribed particulars of the charge, secondly the instrument creating the charge that is the charge deed or a verified copy thereof. Whenever a charge is created there is an agreement between the person who has provided funds and the company itself. This agreement is called as deed that is the charge deed, so this
document needs to be registered with the ROC along with the particulars of the assets which has been put to charge. Now what is a time limit for such a registration, a thirty days time period from the date of creation of charge has been given. A charge has to be compulsorily with the ROC within thirty days of its creation. further an additional time period of thirty days could be given if the company pays an additional fees and secondly the registrar is satisfied that there was sufficient reason for the dealing. Who has to register the charge? It is the duty of the company to register the charge because the company has created the charge over the assets for the security of the loan the charge could also be registered by the person interested in the charge i.e. the charge holder so a person who has provided funds and who has got the security over the assets he can also get the charge registered with the ROC. What happens when the charge is not registered within the time span which has been prescribed under the act i.e. 30 days? If there is nonregistration then the following consequences will follow. The charge shall be void as against the liquidator or any creditor of the company thus in case of liquidation the unregistered charge holder becomes an unsecured creditor. The company may also create a subsequent charge having priority over the unregistered charge so these are very grave consequences in which if the charge is not registered within the time span of 30 days the charge becomes void and does not have any legal consequences which means that the person who has provided fund does not get any security for which he had given the loan also the company can do many manipulation in this regard. It can create a super winning charge i.e. a charge which will have a priority over the charge which was unregistered. Now we will discuss the deem notice of creation of charge. What will happen when, if any charge of any property of a company is required to be registered under section 125 and it has got so registered then any person acquiring such property shall be deemed to have notice of the charge as from the date of such registration. This means once the
charges registered with the ROC then another person who is being given the security of that asset it will be deemed that he has the knowledge of the charge also it will be worthwhile to note over here that whenever a person is providing fund to the company and he gets the security over an asset it is worthwhile for him to obtain a search report regarding the company and see how many properties have already being charged under the ROC. In case he is getting a second or a third charge then he shall not rank pari-pasu until unless there has been agreement in the deed of charge. Now let us know about the few technicalities of the certificate of the registration. The certificate of registration is called as Form 8 which is filed with the ROC while creation of a charge. Who will issue this charge? It is the registrar who will be issuing such a certificate. The content shall be the amount which has been secured by the charge, certificate to be the conclusive evidence i.e. requirements of the act relating to the registrations of the charges have been duly complied with so after the certificate of creation of charge has been filed with the ROC it will be deemed that all the requirements of the act have been complied which relate to the registration of charge and it will give a fair view of how many assets and the amount and degree to what the charge has been created. Now what happens if there is subsequent modification in the charge or in the agreement which has already been agreed with the loan provider or the person who is providing funds this can be done by the modification of charge under section 135? The legal requirement is: - if any modification is made in the terms or conditions or extent or operation of a charge register the modification of the charges. The provisions applicable in such case shall be the same provision as are applicable to registration of charge. This means that the modification of terms of charges will also require the filing of the Form 8 in this regard. It is the same form which is done for the creation of charge and for the modification also.
4. PARTICULARS OF REGISTER Now what are the particulars which need to be registered with the ROC? The short description of the property which is being given as a security for the lender shall be given which requires the place of the asset the description of the asset the amount which it could fetch i.e. is the marketable value and the charge holders name i.e. the person who has provided the fund his name shall be given for the security which is now being charged under his name. Now let us discuss about the section 143 and section 144 which is the companies register for charges. It is worthwhile to notice over here that it is not only ROC who has to maintain the various record regarding the charge of the company but the company also who has to create a register for charges which is done under section 143 and 144. Now this register shall be located at the registered office of the company and this register shall have all the details of the assets which are under the charge the date it was created, the date it was satisfied and amount of the charge. So every company shall a register of charge the register shall be kept at the registered office of the company after this register has been created. It can be inspected by the following persons the scope of inspection shall be that the copies of the instrument which has created the charge that is the charge deed shall also be available and also the register of the charges. So these two things can be inspected. Now let us discussed who can inspect such a register. The inspection of the register can be done by any creditor without a fee because the creditor are the people to whom the company owe s money hence they can inspect the register of charge without payment of nay fees. If any other person wants to inspect such a register of charges then he has to pay a certain prescribed fees which will be determined by the ROC according to the rule made under the company act 1956. What are the other provision regarding the inspection of the register. The time of inspection shall be that it can be made only under the business hours. Secondly if their refusal regarding the inspection of
register by the company then CLB may make an order that the company shall allow immediate inspection. It is to be re-emphasised over here that every day the register of charges shall be available for inspection and it shall not be closed it can only be closed during the non-business hours, so in the normal business hours it shall be available for any person to see. If the creditors want to see it then it is available without any fees and any other person wants to see it he shall be paying the prescribed fees. Secondly if any person is refused to inspect the register of charges than on a complaint made by that person the CLB has got the power to immediately allow inspection by the company. Then is register of charges to be kept by the registrar the ROC who is keeping a register of charges under section 130 he shall maintain the following details. The firstly is the date of creation of charge where the charge has been created by the company second is the date of acquisition of property where a property subject to the charge is acquired by the company, thirdly the short description regarding the property which means it will require that the assets be defined in such terms i.e. the place in which that asset is there whether the name of the asset, the description of the asset. Fourthly is the amount that has been put under charge and then the charge holders name. Now let s discuss the inspection of the register. The inspection of the register can be done by any person as we have already discussed if he pays the prescribe fees fixed by the ROC he can check the register of charges which is present with the ROC also. Signing and the numbering all the pages of the register shall be consecutively numbered and every page of the register shall be initialled. Now this is mandatory on the part of the ROC that he has to consecutively number all the pages of the register of charges pertaining to a company and see that they are also initialled. 5. EXTENSION OF TIME AND RECTIFICATION OF REGISTER OF CHARGES SEC. 141 Now if there has been any modification in the register of charges there has been any change in the terms and conditions of the changes then
the register of charges could be modified and an extension of time could be given for the rectification of register of charges. Now this is given under section 141 the CLB may extent the time limit for registration of charges or registration of modification of charge or intimation of payment or satisfaction of charge. The CLB may also order rectification of any mis-statement of any particulars contained in the register of charges, there could be a human element which could give rise to errors in recording the charges may be because amount is incorrect or name is incorrect so if there is any rectification that needs to be done in the register of charges then for the recording of the same and extension could be granted by the CLB to modify and rectify the register of charges. Now what should be the conditions of granting relief that is extension of time period? The CLB may grant relief if it is satisfied that, the delay or mis- statement was accidental or due to inadvertence or shall not prejudise the position of creditors or shareholder or any other ground it is just an equitable to grant relief. So a deliberate mistake on part of the company to record charges will not be exempted and will not be given relief under the section. Only inadvertent, innocent and honest mistakes shall be qualifying for the granting of relief and such other terms and conditions wherever it feels just and equitable the CLB could grant relief. Under section 141 applications for the relief can be given by the company itself or by any other by interested person. Over here the interested person could be a creditor or the person who has got the security over the assets. The terms of order of the CLB shall be the CLB could impose such terms and conditions as it thinks fit. The CLB may make such order as to the costs as it may think fit. So it can impose certain fines or cost the cost over the company for committing such mistake and then grant the relief. Then is the satisfaction of the charges. Whatever we have done in the whole procedure it requires that whenever the lender has given the loan he gets security in form of charge over the assets. After the loan has been paid off then the charge does not remains and it becomes satisfied. So another form has to be filed by the company for the
satisfaction of charge and now the asset is not any more as a security to the lender. Now this intimation shall be given by the company to the ROC regarding to satisfaction of charge under section 138. When the intimation is required, when the charge is paid or satisfied in full, secondly intimation to whom it shall be given to the registrar and the time limit for the intimation is within 30 days of the satisfaction of charge. As a general rule a 30 days time limit is provided for intimating to the ROC either for a creation of charge or for the satisfaction of charge or for the modification of charge. 6. PROCEDURE BY THE REGISTRAR ON RECEIVING INTIMATION Now what shall be procedure by the registrar on receiving such intimation? If there is any objection by the charge holder it has to be given by the charge holder to the registrar within such time as may be allowed by the registrar which shall not be less than 14 days there could be an instance where the charge holder objects to the satisfaction of charge intimation which has been received by the ROC. So he has been given the time period of 14 days where he can put up an objection that such a charge has not been satisfied and the payment has not been made full and final. The entry of satisfaction shall be done by the ROC if there are no objections, secondly the entry of satisfaction shall be made by the registrar in the register of charges if the charge holder does not object. What will happen if there is an objection? The registrar shall record the objection in the register of charges and the registrar shall inform the company about the same. Now let us discuss the types of charges. There are only two kinds of charges that is fixed or specific charge and secondly a floating charge. Fixed or specific charges gains the asset which is already specified or ascertain but a floating charges again those assets who keep on changing in their appearance like the stock. We had earlier discussed
that the stock in trade does not remain the same even during one day so there is a floating charge over there. Now what are the legal consequences regarding the same. The fixed charge it is created on some identifiable or specific property of the company without obtaining the consent of the charge holder. Charge holder company cannot deal with such an assets whereas floating charge it is created on the class of asset present as well as future without obtaining the consent of the charge holder the company can deal with such an asset. For a fixed charge the company cannot sell such an asset or crate a subsequent charge having priority over such a charge. The fixed charges generally created on the fixed asset like land, building, plant & machinery but there are such no restrictions over the floating charge. A floating charge is generally created on such assets as always circulating. Example - the stock, debtors etc. A floating change can also become crystallise i.e. crystallisation means becoming concrete or specific or fixed. So crystallisation means that the right of the company to deal in the assets which are subject of floating charge comes to an end. Now let us discuss the cases in which the crystallisation could take place. Where the company ceases to carry on business i.e. company does not remain a going concern then all the assets which have been given as a security will have a fixed charge and there shall not be any floating charge over them. Secondly where the companies order to be windup, when the company all the assets to be realised during the winding up period, thirdly when the company is in an insolvency state and the receiver is appointed to realise all the assets. Fourthly where the company make a default in payment of interest or repayment of principle to the charge holder in accordance with the terms of charge and the charge holder brings an action enforce security. So if the charge deed or the agreement that has been entered into with the charge holder the clauses are not respected and the agreement is not complied with then the charge holder gets a right to enforce security and the floating charge hence shall become fixed.
7. SUMMARY With this we are concluding today s session. In this session we discussed various aspects of creation of charge, we also discussed sections 124, we discussed the definition of charge the types of charge that is floating and fixed charge conditions in which the charge becomes crystallised. What are the various aspects of filing of satisfaction of charge, creation of charge, we discussed about the form 8 and modification of charge. I hope you enjoyed this session. Thank you.