Tuesday, March 2, 2010

Charge on Assets - Effect of Non-Registration

The term “Charge” is not defined in the Companies Act, 1956 save and to the extent that it includes a mortgage. So, its meaning must be construed in the ordinary sense. Section 100 of the Transfer of Property Act, 1882 defines that where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount a mortgage, the latter person is said to have a charge on the property, and that all the provisions which apply to a simple mortgage shall, so far as may be, apply to such charge.

In Fisher and Lightwood’s Law of Mortgage, 8th Ed., p.156, ‘Charge’ has been defined thus, ---

“A charge is a security whereby real or personal property is apportioned for the discharge of a debt or other obligation, but which does not pass either an absolute of a special property in the subject of the security to the creditor, nor any of right to possession, but only a right of realization by judicial process in case of non-payment of the debt.”

Thus charge means a security created on the property of the company in favour of its creditor to secure payment of a loan or debt or any other obligation. In order to create a charge it is not necessary to employ any technical or particular form of expression. All that is required is that there should be clear intention to make a particular property a security for the payment of money. Creation of enforceable security is of the essence of a charge either in respect of immovable property or in respect of moveables.

Under Section 124 of the Companies Act, 1956, a charge includes a mortgage and every mortgage or a charge created by a company is required to be lodged with a copy of the instrument creating the encumbrance and got registered with the Registrar of Companies of the State concerned under Section 125 of the said Act, failing which the charge would be void against the liquidator and any creditor of the company. The provision for registration of such charge amounts to a notice of the charge as from the date of registration to all concerned who are likely to deal with the said company. The object of registration of charges is Public Notice to prospective creditors of the company and those who deal with a company of certain matters which vitally affect the company’s credit i.e., the degree of credit-worthiness of the company in so far as their position might be affected by the existence of certain debts entitled to be paid in priority. The idea is to prevent people to deal with the specified assets in oblivion. It is provided, therefore, that the register shall ‘be open to inspection by any person’. Also that, the registration serves the purpose of preventing fraudulent and belated claims on charge in the event of liquidation of a company. Only those charges that are specified in the Companies Act, 1956 requires compulsory registration.

Under Section 125(4) of the Companies Act, 1956, the following are the assets of a company, if any charge or mortgage created, must be registered with the Registrar of Companies:

1. a charge for the purpose of securing any issue of debentures;

2. a charge on uncalled share capital of the company;

3. a charge on any immovable property, wherever situate or any interest therein;

4. a charge on any book debts of the company;

5. a charge, not being a pledge, on any moveable property of the company;

6. a floating charge on the undertaking or any property of the company including stock in trade;

7. a charge on calls made, but not paid;

8. a charge on a ship or any share in a ship;

9. a charge on goodwill, or a patent or a licence under a patent, on a trademark, or on a copyright or a licence under a copyright.

A charge which is not created by a company does not require registration. Instances being that of a charge created by operation of law, a charge created by a decree based upon award made on an agreement out of court or otherwise, vendor’s charge for unpaid purchase money under Section 55(4) of the Transfer of Property Act, 1882 etcetera. A charge by operation of law results not by volition of parties, but as the result of a legal obligation.

Under Section 127(1) of the Companies Act, 1956, where a company acquires any property which is subject to a charge of any such kind as would, if it had been created by the company after the acquisition of the property, have been required to be registered under Part V of the said Act, the company shall cause the prescribed particulars of the charge, together with a certified copy of the instrument by which the charge was created, to be delivered to the Registrar for Registration within 30 days after the date on which the acquisition is completed, failing which the company and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees. However, the Registrar may extend the time up to the next thirty days, if he is convinced of the sufficiency of the cause for the default.

Understandably, the stipulation of a time limit within which registration must be effected (or otherwise the consequence of invalidation of the security) is meant to ensure that such information be provided promptly on the register, so that inspection by a person about to become a creditor of the company might induce him to extend credit to the company on the grounds that such inspection might show that no charge or encumbrance had been given.

The effect of non-registration of a charge created on the property of a company requiring registration is that it is void and as such affects the security against the liquidator and creditor(s) of the company. It damages the interest of creditor in whose favour the charge is created. The effect being that, if a subsequent charge is created on the same property and the earlier charge has not been registered, the earlier charge would become void and the latter charge, if registered, would enjoy priority in case the latter charge-holder intervenes to get the charge enforced and have the property sold so as to enable him to satisfy his debt. Also that, it becomes unenforceable against the liquidator in the event of winding-up of the company or any other company’s creditor(s) in case the company is a going concern.

However, failure to register a charge avoids only the security but not the debt concerned. The charge is not at all void against the company as the company may not repudiate the charge failed to have registered, provided it is a going concern.
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  1. So this is one way of simplifying this and putting it in a manner that is very easy to comprehend. Nice job here.
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