Risks of Ignoring Timely Registration of Charges
Knowing your financial needs and making the necessary arrangements is one of the keys to running a successful business. Every transaction a corporation engages in requires money, which it can obtain either through equity investments or borrowings. The borrowings may include debentures, either secured or unsecured, or taking up loans from external sources such as banks, public financial institutions etc.,
No financial institution would lend their money without an assurance of repayment. Therefore, they resort to creating right on the assets and properties of the borrower to secure their loan, which is known as charge on assets. Now let us try to understand the requirements of the Companies Act, 2013 (hereinafter referred to as “the Act”) relating to registration, modification, satisfaction of Charges and consequences of non-registration inclusive of delay in registration.
What is a Charge and its types?
Section 2(16) of the Companies Act, 2013 defines a Charge as an interest or lien created on the property or assets of a company or any of its undertakings, or both, as security and includes a mortgage.
To put it another way, charge is a financial security created by any person or company i.e., “borrower” over their current or future assets and properties against the loan taken from financial institutions or banks or any other lender i.e., “creditor”. The company/borrower creating the charge is called the “creator of the charge” and the creditor in whose favor the charge is created is called the “charge holder”.
Types of Charges
The charge can be either a fixed charge or a floating charge.
Fixed or Specific Charge – When a charge is created on a fixed property or asset which is identifiable and certain over the period of loan, it is termed as fixed charge. Fixed assets include land, buildings, or anything static. Apart from tangible assets, it also includes intangible assets like trademarks, copyrights, patents etc.
Floating Charge – If a Charge is not created on a specific property i.e., unidentifiable, and uncertain, such charge is called floating charge. Floating charge covers property of a fluctuating type which generally includes stock-in-trade etc.
Pursuant to the provisions of the Act, charge created on any of the following can be registered with the Registrar of Companies:
- Charge created in India or outside India
- On any properties or assets or any of the company’s undertakings, situated within or outside India.
- Whether tangible or intangible.
When and Who can register a Charge?
The Act makes it mandatory to register the particulars of charge with the Registrar of Companies under the following circumstances:
- At the time of Creation of charge
- Modification to the terms and conditions or to the extent or operation of the registered charge, if any
- At the time of repayment of loan or Satisfaction of charge
1.Creator of the Charge/ borrower
Whenever a company creates or modifies a charge on its assets or properties, it must register the particulars of charge along with a copy of the instrument thereof duly signed by the company and its charge holder with the Registrar in Form CHG-1 (other than debentures) or Form CHG-9 (for debentures) within thirty days from the date of creation or modification of charge along with fees. [Section 77(1)]
Similarly, if the loan is fully repaid or the charge is satisfied, the company shall inform the Registrar of the same in Form CHG-4 along with necessary fees within a period of 30 days from the date of satisfaction. [Section 82]
2.Charge holder/ Lender
If a company fails to register the charge within the above specified period, the charge holder can file Form CHG-1/ CHG-9 with the Registrar for registration of the same, along with a duly signed copy of the charge instrument and fees. The Registrar may allow the registration of charge within fourteen days after giving notice to the company about such application. The charge holder has the right to recover the amount of fees paid by him for registering the charge from the company later. [Section 78]
3.Transferee – Company
When a company is amalgamated with another company pursuant to an NCLT order under Section 232 of the Act, the transferee-company is required to file Form CHG-1 with the Registrar if any property of the transferor-company that it has acquired is subject to charge.
Need for registration of Charge
The charge will not be regarded as secured in the eyes of the law unless it is registered with the Registrar of Companies. The certificate of registration of charge acts as conclusive proof to the public that a charge has been created over the property and the charge holder holds good interest in the same. Although this does not prejudice any contract or obligation for the repayment of the money secured by a charge.
Companies may approach the same institutions/banks or new institutions whenever they need additional funding and provide the same assets as collateral for fresh loans. When the same assets are charged for a second time and beyond, a crucial question regarding the priority of the charges in favor of various institutions arises. In such circumstances, the earlier lending institutions could enjoy leverage over the subsequent lenders only if the charge made on the same assets is already registered with the Registrar.
Register of Charges
Section 85 of the Companies Act, 2013 mandates every company to maintain a register of charges in Form CHG-7 along with a copy of instrument of charge at its registered office and make necessary entries forthwith after the creation, modification, or satisfaction of charge. Members, creditors, and other parties may inspect the register of charges and the instrument of charges during regular business hours, subject to any reasonable restrictions imposed by the company’s articles.
Time limits for registration
- Creation/ Modification of charge –
The company shall register the creation or modifications of a charge in Form CHG-1 (other than debentures) or Form CHG-9 (for debentures) within 30 days from the date of creation or modification of the charge. However, the Registrar may allow such registration after expiry of 30 days if he is satisfied that the company had sufficient cause for not filing the same within the specified period and on payment of additional fees and ad valorem fees as follows:
Time period (from the date of creation)
Small Companies and OPC
More than 30 days and upto 60 days
3 times the normal fee
6 times the normal fee
More than 60 days and upto 120 days.
3 times the normal fee + Ad valorem Fee of 0.025% of the amount secured by the Charge, subject to a maximum of 1 Lakh Rupees.
6 Times the Normal Fees + Ad valorem Fee of 0.05% of the amount secured by the Charge, subject to maximum of 5 Lakh Rupees.
However, if a charge is created outside India and consists solely of property situated outside India, then the charge must be registered within 30 days from the date on which the instrument creating or evidencing the charge, or a copy thereof, is received in India in due course of receipt of post.
- Satisfaction of Charge
The company shall register the satisfaction of charge in Form CHG-4 within 30 days from the date of repayment of the loan or satisfaction of charge in full. The Registrar may allow such application after expiry of 30 days but within a period of 300 days from the date satisfaction on payment of additional fees as follows:
Period of Delay
Upto 30 days
2 times of normal fees
More than 30 days and up to 60 days
4 times of normal fees
More than 60 days and up to 90 days
6 times of normal fees
More than 90 days and up to 180 days
10 times of normal fees
More than 180 days
12 times of normal fees
What if a company or charge holder fails to register the charge on time?
- Application for Condonation of Delay: The Company or charge holder must make an application to the Central Government i.e., Regional Director, in Form CHG-8, for condonation of delay if they fail to register the instrument creating or modifying a charge or file an intimation for satisfaction of charge within the above stipulated timeframe. The Registrar cannot register the same as long as the Central Government does not condone the delay.
- The charge acts as void against the liquidator: At the time of winding up, the charge can be disregarded by the liquidator, and the creditor may be treated as unsecured. Hence, the charge holder cannot sell the attached properties to recover the due amount upon winding up.
- The charge acts as void against the Creditor : If any subsequent charge is created on the same property and the earlier charge is not registered, the earlier charge will have no effect, and the later charge will have priority if it is registered. It means the latter charge holder can sell the property and recover their dues.
- Levy of Penalty: The company shall be liable to a penalty of Rs. 5 Lakhs and the officer in default of Rs. 50,000 in case of non-compliance with the provisions of the Act related to the registration of charges.
It is now evident that the company must pay additional fees imposed upon it in the event of a delay in registration of a charge and hefty penalties for contravening the provisions of the Act related to registration of charges, which will be an extra burden on businesses already required to pay interest on debt. Therefore, it is advisable to make sure that charges are registered on time in order to prevent penalties.
If you are looking for compliance support or would like to have more details on Registration of Charges, please reach out to SimplyCorp or our product head at firstname.lastname@example.org or email@example.com We will be happy to help you.