Application to Central Government [Form CHG-8]

Introduction:

Every financial institution requires assets and liabilities for its smooth functioning. Business requires capital for everyday transactions. A business requires a lot of financial inputs to run and stand out in the market efficiently. The company should try to build up assets more than the liabilities to curb maximum profit and maintain healthy financial stability. The company can borrow loans from the banks, attract shareholders, and borrow money from other external sources. The company being an institution, can’t simply rely on the profits for the efficient running of their business. It has to borrow some capital for the functioning.

The banks do not lend their money unless they are sure about the borrower’s financial capability. They want to ensure that their funds are safe and are repaid timely with the interest amount. The bank tries to avail himself of the right in the assets and the property of the borrower, known as a charge on investment.

Charge as defined in Section 2(16) of Companies Act, 2013 defines charge as an interest or lien created on the assets or property of a company or any of its undertakings as securities and includes a mortgage. The purpose of the charge is to provide security in favor of the lender. As per Section 100 of Transfer of Property Act, 1882, when an immovable property of one person by the act of the parties itself or by the operation of law is made as security for the payment of money to another, it doesn’t amount to mortgage, instead is called charge.

According to the Companies Act, charge and mortgage are the same concepts. The charge includes a mortgage. The charge also includes hypothecation, pledge. The interest or lien is created on the property, assets, or undertakings not transferred. For general understanding, charge and mortgage are two different concepts. Mortgage includes specific immovable property and can only be created by the parties. The interest can be transferred through a mortgage, whereas charge refers to the right to retain another person’s property unless claims related to the property are satisfied. It does not include the transfer of interest; instead, it is a security for paying an amount. A mortgage deed has to be attested by two witnesses. Whereas a charge is not necessary to be writing, and if reduced to writing, need not be attested or registered. There are two different kinds of charges:

Fixed or Specific Charge

This type of charge is imposed on the fixed assets, which are specific. It includes tangible assets as well as trademarks, patents, copyrights. Such a type of charge is solid and assuring. The permission of the creditor is required for the sale, purchase of such charged asset.

Floating Charge

This type of charge is imposed on dynamic assets. The permission of the creditor is not required for the disposal of such investments. Such kind of charge is created on fluctuating property and is not specific. Once such a charge is made on the fluctuating assets and the charge keeps on changing from time to time, the creditor owes the remaining good left after the company’s transaction. The creditor cannot lay restrictions on the company’s business transactions if he wants his debt to be paid off by the debtor.

In Maturi U Rao. v. Pendyala[1], it was held that the fluctuating assets, when frozen, become fixed and compromise all the obligations of the fixed assets.

Registration of Charges

No financial institution will lend their money for free. Some security has to be submitted in the form of a mortgage. In the case of companies, one who holds the right to borrow holds power to mortgage its property, subject to the limitations of Article of Association or Memorandum of Association. If the company’s Articles permit and nothing in contravention to the same is mentioned in Memorandum, the uncalled capital may then be charged for.

Section 77 of the Companies Act talks about the Registration of Charges. If a company is creating a charge, within or outside India, over its assets, whether tangible or intangible, it has to register the particulars of the charge. If there are any instruments involved in that charge, it has to be mentioned there as well. The attributes have to be signed by the company and the charge-holder. It says whoever creates a charge will have to register the particulars of that charge in the prescribed form, manner, and fees, with the Registrar of charge within 30 days.

The time limit of registration of charge has been changed in certain circumstances with the Companies (Amendment) Act, 2019. The registrar with the payment of additional fees may allow:

1. In an instance where the charge is created before 2 November 2018, the registration of the charge can be made within 300 days of its creation. If the charge is not registered within these 300 days, it must be registered within 6 months from 2 November 2018, i.e., the Commencement of Ordinance. 
2. When the charge is created after 2 November 2018, the charge must be registered within 60 days of its creation. If failed to do so, then an application has to be filed with the registrar of the charge, allowing the registration of charge even after 60 days with the ad valorem fees.

If failed to register within 300 days, the company can file an application with the Central Government for the extension of time under Section 87.

The application for the extension can be refused in the cases where the liquidation of the company is imminent, as held in Karnataka Telecom Ltd. v. Ravi Constructions, Engineers and Contractors[2].

The Amendment Act of 2017 excludes some assets for creating charges as prescribed by R.B.I. This restricts the application of Section 77 over certain assets. The charge is necessary for the company; else, it will not be taken into account by the liquidator or creditor.

The vested right of an individual is not affected by the subsequent registration on the asset, which was acquired before registration. Under Section 77(2), the registrar has to issue a certificate in the name of whose charge is created with the prescribed form and manner signed by both the charge holder and the company.

Section 78 states that when the company failed to register the charge within 30 days, the person in whose name the charge is to be created can file an application to the registrar for the registration of the charge along with the instrument created for the charge within the prescribed time and manner. The registrar will issue a notice to the company and, within 14 days of issuing, will register the charge on the payment of the prescribed fees. If the company states the reason as to why the charge is not to be registered, the registrar can suspend the registration. The person whose name charge will be created will recover the prescribed fees or additional fees from the company.

Under Section 77(3), if the certificate for the registration of charge is not granted, or the chargeable charge is not registered, it will be considered void against the liquidator and the company’s creditor. However, the debt on which the charge was created remains valid and can be recovered as an unsecured debt under Section 77(4).

In the case of A.P. State Financial Corpn. V. Guruvayurappan Swamy Oils, Foods and Fats Lt. (In Liquidation)[3], the High Court of A.P. held that there is no need for the filing of a new charge in respect of the interest due on the term loans for which charge had already been prepared.

In the case of ONGC Ltd. v. Official Liquidator of Ambica Mills Co. Ltd.[4], it was held that even if the company fails to be registered as a secured creditor, this does not amount to the charge being void or debt is not recoverable. The charge remains enforceable until the company goes into liquidation.[5]

Rectification by the Central Government

Section 77 is read with Section 87. Section 141 of the Companies Act amended by the Companies (Amendment) Act, 2019 now as Section 87 talks about the Rectification by the Central Government in the Register of Charges.

Rule 12 of Companies (Registration of Charges) Rule 2014 talks about rectifying charges on account of omission or misstatement of particulars in charge previously recorded and extension of time in the filing of satisfaction of charge.

Rule 12 consists of Section 87, which says the registrar shall not register a charge, including the failure to file an instrument modifying or creating a charge within 300 days from the date of its creation or modification. The satisfaction of charge is not filed within 30days from the date on which such payment of satisfaction is not made. The registrar can register the charge in the case when the Regional Directors condone the delay. The Regional Director can condone the registration when he is satisfied that the creation, modification, satisfaction of charge was not filed within the prescribed time due to the accidents, inadvertent circumstances, or any other sufficient cause which is of such a nature that can do justice to the position of the creditors or shareholders.

The Regional Director can also condone the registration in cases where there is omission or misstatement of any particular in respect of creation or modification due to the above-described circumstances. These circumstances also include grounds when it is equitable to grant relief, when the company files the application, or whenever the director feels so. The Regional Director can thus extend the time or rectify the omission or misstatement. The extension shall not prejudice any right acquired in respect of the property.[6]

In the case of Times Bank Ltd. v. Sri Sharada Textiles Ltd.[7], it was held that the central Government holds no power to challenge the charge based on its validity. Suppose the court passes an order for the winding-up of a company. In that case, an application regarding the charge registration will not be entertained, as held in ICICI Ltd. v. Official Liquidator of Usha Automobiles of Engg. Co. Ltd. (In Liquidation).[8]

Register of Charge

Section 81 empowers the registrar to prepare a register containing the information of every company’s registered charges. Section 85 talks about the Register of Charge. It says, every company has to keep a register in its registered office in the prescribed manner. The register should include all the charges and floating charges affecting the property or assets of the company or any of its undertakings, the name of the charge holder. It should also include a copy of the instrument of the charge.

The register and instrument of charge can be inspected at any business hours by any member or creditor without any payment of fees; or by any person on the payment of fees. Companies in their articles can restrict to inspect. Thus, the companies are bound to register the charge to avail the legal benefits.

Procedure

The application for condonation of delay for registration has to be filed with the Regional Directors in e-Form CHG-8 along with the fees, including some other attachments. These attachments include:

1. Instrument creating/modifying/satisfying of charge;
2. Filing of the application through a true certified copy of the Board Resolution and appointing an authorized representative for the same;
3. Petition filed by the directors of the company;
4. The authorized person then verifies the application sent by the directors through affidavit;
5. The authorized person then prepares a memorandum of appearance;
6. A certified copy of CHG-1/CHG-9/CHG-4 with the challan has to be submitted;
7. In case when the authorized person is from a foreign country, a letter of authorization has to present,
8. Any documents required so. [9]

The petition, along with the documents mentioned above and certified copy CHG-8 with the challan, can also be filed. The petition has to be filed with the concerned Regional Director. The Regional Director will then issue an order, and that order has to be filed with the Registrar in the e-Form INC-28 with the prescribed fees and manner stated.

Penalty

If any company fails to comply with the provisions of the Registration of charge, it will be punished under Section 86. Upon the failure to register the charge, the company can be punished with a fine of 1 lakh, extending up to 10 lakhs.

Any officer of the company who is at default will be punished with imprisonment of 6 months or a fine of Rs. 25,000, which may extend up to Rs. one lakh or with both.

Conclusion

A charge is related to the borrowing of the company. The lender needs to take extra care while rendering his money. The rights of the lender and borrower are protected to maintain the healthy functioning of the company. It’s better to register the charge on time to prevent the hassle of the condonation process. The process becomes tireless, and penalties are imposed. The timely registration enables benefits to the creditor and borrower.

---

References:

[1](A.I.R.) 1970 A.P. 225

[2](2000) 28 SCL 289 (C.L.B.) Chennai

[3][2011] 16 taxman.com 102 (A.P.)

[4]2006 132 CompCas 579 Guj, 2005 57 SCL 184 Guj

[5]Dr. G.K. Kapoor, Dr. Sanjay Dhamija, Company Law and Practice, Page: 398

[6]Avtar Singh, Company Law, 17^th Edition, Page: 459

[7][2000] 27 SCL 381 (C.L.B.- Chennai)

[8][2009] 89 SCL 55 (Cal.).

[9]Form CHG 8 Condonation of Delay for creation Modification of Charge (anbca.com)