Application for Registration of Creation, Modification of Charge (Other than those Related to Debentures) [Form CHG-1]

Introduction:

A charge refers to interest or claim, created on the property of an entity or its undertaking when it takes a loan from a financial institution. In simple words, when a company takes a loan from a bank it provides security of its assets, against the loan. It includes a mortgage as under Section 2(16) of the Companies Act, 2014^[1]. Assets covered under the Act include all the assets which are situated in India and abroad, Patents and Goodwill. In the case of Dublin City Distillery Co v. Degrey^[2], It was held that a charge includes an equitable charge and a lien.

The Companies Act, 2013 governs the provisions related to registration of creation and modification of charges. Whenever a charge is created, the entity must register with the Registrar of Companies within a time limit. This is done through an electronic form called Form CHG-1.It is available online on the Ministry of Corporate Affairs portal.

The registration of creation or modification of charge with the Registrar is important because it informs the prospective lenders about the charge already created on the property of the entity. The lender who wants to provide financial assistance to the company can scrutinize the forms on the MCA portal.

Classification of Charges

Based on Nature of Charge

Charges can be classified based on the nature of charges into Fixed/Specific Charges, and Floating Charges.

1. Fixed/Specific Charges: Examples of assets on which Fixed/Specific Charges are created include land, building, and machinery. Thus, these charges cover those assets which are capable of being defined and are definite.

2. Floating Charges: Floating Charges are created on assets of fluctuating type, like stock in trade, which is not capable of being attached to a specific property^[3].

Based on Conditions of Charge

Charges can be classified based on conditions of a charge into Exclusive Charge, Parri-Passu Charge, and Further Charge^[4].

1. Exclusive Charge: Exclusive Charge is a charge given to the specific lender only under the security provided.

2. Parri-Passu Charge: Parri-Passu is a Latin term which means to be on an equal footing. In this, the charge is divided amongst more than one lender in the proportion of their outstanding sum.

3. Further Charge: A further charge can be created with the consent of the previous charge holder.

Purpose of Creating Charge

Every company, whether a start-up or a big company, needs financial assistance for the purpose of financing its projects and diversifying its business. For this motive, they count on assistance provided by banks or funds raised through debentures. When an entity borrows money from financial institutions, the borrowing is backed by securities. This is a bank’s way of ensuring that the money extended by them would be in safe hands and be repaid as per the conditions agreed upon. Thus, a bank secures its loan by establishing an interest in the assets of the borrower entity called a charge. Therefore, the purpose of creating a charge is to ensure the safety of funds and timely repayment of the bank’s money. A particular resolution has to be passed under Section 180(2) that authorizes the concerned authorities to create a charge. Section 180(1) authorizes the Board of Directors of a Company to create a charge on the property of the company.

Registration of Charge: Laws Governing Form CHG-1

It is essential to register a charge with the Registrar of Companies within a period, so that prospective lenders have accurate information about charges created on the property which a company extends as security. Registration of charges, thus makes it a very transparent and efficient experience for the financial institutions. The rules governing the registration of charges are stated from Section 77 to Section 87, in Chapter VI of the Companies Act, 2013. These are:

Section 77(1)^[5]

According to this section whichever company, takes a secured loan for which it extends its property situated anywhere in the world, as a security, has to register such a charge with the Registrar of Companies. The details of the charge and the entity holding the charge, along with appropriate instruments, must be registered. The provisions of this Section are applicable in the case of “creation” or “modification of charge” as defined under the Companies Act.

Therefore, a charge can be:

• Created in India or Outside,

• On assets or any type of undertakings,

• Can be either tangible or intangible,

• Placed in India or Outside.

Time Limit

For Charge created before the Companies (Amendment) Ordinance, 2019-  300 Days:

Prior to the recent amendment if a company failed to register within 30 days of creation or modification of charge, then an additional window of 270 days with an additional fee was given for registration. In case of lapse of 300 days from creation or modification of charge also a provision with the consent of Regional Director was available.

For Charge created after the Companies (Amendment) Ordinance, 2019^[6]–  60 Days:

After the amendment, the charge must be registered within 30 days of its creation.

However, there are some relaxations available to the company if it fails to abide by this time limit of 30 days. These relaxations were introduced on 17th June 2020^[7] in light of the Covid-19 pandemic to provide relief to companies. The Central Government utilized the powers conferred to it by Section 460 along with Section 463 of the Companies (Registration Offices and Fees) Rules, 2014 and introduced a scheme called as “Scheme for relaxation of time for filing forms related to creation or modification of charges under the Companies Act, 2013”. This was introduced to condone the gap in filing important forms which were related to modification or creation of charge.

According to an analysis of the Companies (Amendment) Ordinance, 2019: Section 77 after the Amendment states that:

1. Registration within 30 days of the creation of Charge (0+30 days):

A normal fee, as stated for this purpose, is charged.

2. Registration within 60 days of the creation of Charge (0+30+30 days):

If the company fails to file for registration within 30 days an additional period of 30 days is provided for this purpose. An additional fee along with the normal fee is charged for this purpose.

3. Registration within 120 days of the creation of Charge (0+30+30+60 days):

If a period of 60 days since creation or modification of charge has lapsed, the registrar may on an application allow the registration to be made within an extended period of 60 days. An additional fee and an ad valorem fee^[8] are charged along with the normal fee. This applies only to charges created after 2nd November 2018.

Ad valorem fees:

For OPC/Small Companies: 0.025% of loan fee.

Other than OPC/Small Companies: 0.05% of loan fee.

4. Failure to register within 120 days of the creation of Charge:

If a period of 120 days has lapsed and a company has failed to register creation of charge then there is no further provision to file for it.

For a charge registered with the registrar under Section 77(1), the registrar issues a certificate that authenticates such registration. No charge which is not registered or certified should be taken into consideration by the liquidator.

Section 78

According to this section, if a company failed to abide by the rule stated under Section 77, the charge holder must apply to the registrar of companies for registration along with supporting documents, within a prescribed time limit and manner. The registrar then, within 14 days allows for registration of the charge along with the lawful fees.

Section 79

According to this section, the provisions of Section 77 should apply to companies taking a property, which is subject to a charge and also to any modification in the terms and conditions of the charge under this section.

Section 384

Section 384 of The Companies Act, 2013 lays down provisions related to the registration of charges of companies incorporated outside India^[9].

Rule 3(1) of Companies Rules, 2014

According to this rule, for a charge created according to Section 77, Section 78, or Section 79 of the Act, the basic important information related to the charge, along with a copy of the instrument, modifying the charge in e-form CHG-1, duly signed and authorized by the charge holder and the company must be filed within a period of thirty days from the creation of charge with the appropriate fee.

Purpose of Form CHG-1 (Form 8: Companies Act, 1956)

All the charges that are created on property/assets or modified are to be filed with the Registrar of Companies in form CHG-1. In the case of an Indian Company, form CHG-1 is to be filed with the concerned Registrar of Companies, and in the case of a foreign company, it has to be filed with the Registrar of Companies, Delhi^[10].

Effects of Non-Registration of Charge

According to Section 86, if any company contravenes the rules stated in Section 77, it shall be punishable with a fine of not less than One Lakh Rupees and not more than Ten Lakh Rupees.

In addition to this, every defaulter official will be punished with imprisonment for a term of up to Six Months or a Fine of a minimum of Twenty-Five Thousand Rupees and a maximum of One Lakh Rupees or both.

Therefore, in order to escape the liability or punishment in case of non-compliance with provisions of Section 77, a company must fulfill the requirements of filing Form CHG-1 in the prescribed manner.

Instructions to Fill Form CHG-1^[11]

• CIN (Corporate Identity Number) is required to be filled for an Indian Company. A provision to find this number is also available on the MCA Website.

• FCRN (Foreign Company Registration Number) is to be filled for a foreign Company.

• A Pre-fill button is available which automatically fills in the data.

• The purpose of filing the CHG-1 Form has to be filed. The purpose could be the creation of a charge or modification of charge.

• In case of the purpose being a modification, a Charge ID has to be filled.

• An option asking whether the applicant of registration is a company or a charge holder is also available. One has to click on the correct option.

• Information as to whether the charge is modified in favor of ARC or assignee has to be filled. It also asks if the holder of charge is authorized to assign it.

• The Date of creation or modification of the charge has to be correctly filled in the form.

• Information about the instrument including a brief description of the same is to be written in the form.

• Type of charge and data about the charge holder is also required to be filled.

• Location of creation or modification, whether in India or outside has to be mentioned.

• Amount secured has to be stated in the form, along with some information about the essential terms and conditions governing it.

• The form CHG-1 has to be digitally signed by both parties. A drop-down list containing designations of prospective signatories is available. It has to be signed by the same person who gives the declaration.

• A valid PAN is required for the successful submission of the form.

Important Points about Successful Submission of the Form

1. SRN GENERATION: When form CHG-1 is successfully submitted, SRN is generated. This can be used for future references.

2. GENERATION OF CHALLAN: A challan showing fees paid is generated. It is an acknowledgment from the Ministry of Corporate Affairs that the form has been successfully submitted.

3. ACKNOWLEDGMENT ON EMAIL: Another acknowledgment of submission of form is sent on the registered email id.

4. CERTIFICATE: After approval of registration or modification a certificate is sent as an attachment through email.

Conclusion

It can be concluded that filing form CHG-1 which is concerned with the application of registration of creation and modification of charge is extremely important. It aids the prospective lenders by letting them gather information about previous charges created on the property. It helps maintain a record and ensure transparency. The law previously was very lenient with time limits related to the filing of the form. However, it has made some progress to make it an efficient process. The Amendment Ordinance, 2019, and the recent Rules enacted in light of the Covid-19 pandemic were essential and have only strengthened the procedure. The form is made available online on the portal of the Ministry of Corporate Affairs. Along with the form an instruction kit containing important instructions about filing the form at all levels is available.

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References:

^[1]Lesson 15 Charges, Institute of Company Secretaries of India 2 (Aug. 01, 2021, 9.31 AM), https://www.icsi.edu/media/webmodules/publications/Lesson%2015.pdf.

^[2] 1914 AC 823.

^[3]India, Creating “Charges” under The Companies Act, 2013, Mondaq (Aug. 01, 2021, 10:01 AM), https://www.mondaq.com/india/securities/955030/creating-charges-under-the-companies-act-2013.

^[4]Ibid.

^[5] Section 77(1) Companies Act, 2013.

^[6] The Companies (Amendment) Act, 2019, Ministry of Law and Justice, 31st July, 2019 4 (Aug. 01, 2021, 11:45 AM), https://www.mca.gov.in/Ministry/pdf/AMENDMENTACT_01082019.pdf.

^[7] General Circular No. 23/2020, Ministry of Corporate Affairs, 17th June 2020 (Aug. 01, 2021, 12 PM), https://mca.gov.in/Ministry/pdf/Circular23_17062020.pdf .

^[8]Ashima Obhan and Akanksha Dua, “The companies (Amendment) Ordinance, 2019: Key Highlights”, Mondaq (Aug. 01, 2021, 11.55 AM), https://www.mondaq.com/india/corporate-and-company-law/783128/the-companies-amendment-ordinance-2019-key-highlights.

^[9] IBC Laws Editor, “Section 384 of the Companies Act, 2013: Debentures, Annual Return, Registration of Charges, Books of Account and their inspection”, IBC LAWS, 25th November, 2013 (Aug. 01, 2021, 2:08 PM), https://ibclaw.in/section-384-of-the-companies-act-2013-debentures-annual-return-registration-of-charges-books-of-account-and-their-inspection/ .

^[10] Instruction kit e-form CHG-1, Ministry of Corporate Affairs, 4 (Aug. 01, 2021, 3:00 pm),  https://www.mca.gov.in/MCA21/dca/help/instructionkit/NCA/Form_CHG-1_help.pdf .

^[11] Ibid.