Overview (July 2001) - International Law Office

International Law Office

Asset Finance - India

Overview (July 2001)

July 11 2001

Companies Act
Charges
Registration of Charges
Modification of Charges
Satisfaction of Charges
Company Law Board
Penalties
Company Registers


In India's rapidly growing economy the requirement for both long-term and short-term funds has become acute. Other than shares or debentures, loans from financial institutions (where assets are offered as security to the lenders) are the preferred way for companies to raise finance. A 'charge' is created over the assets brought on the balance sheet of the company. All charges must be registered with the Registrar of Companies.

Companies Act

Part 5 of the Companies Act 1956 (Sections 124 - 145) contains comprehensive provisions for the creation, registration, modification and satisfaction of a charge on the assets of a company. The objective is to reveal the position of company assets to prospective lenders. The registration of charges serves as a notice of encumbrances on a company's assets and prevents fraudulent claims, especially if a company goes into liquidation. Companies must maintain a register of charges that is available for public inspection at their registered office. In addition, the registrar of companies is also required to maintain a company index of charges, also available for public inspection.

Charges

Section 124 merely states that the expression 'charge' includes a mortgage. However, other sections of the act illustrate that the term 'charge' refers to the giving of security over assets of a company to secure a loan. A charge includes a lien and is evidenced by an instrument in writing. Thus the term 'charge' includes the following:

  • a charge for the purpose of securing debentures;
  • a charge on any immovable property, wherever situated;
  • a charge on uncalled share capital;
  • a charge on book debts;
  • a charge, not being a pledge, on movable property;
  • a floating charge on the undertaking or property of the company, including stock-in-trade;
  • a charge on calls made, but not paid;
  • a charge on a ship; and
  • a charge on goodwill, patent, licence, trademark or copyright.

Therefore, all kinds of securitizations that are created and/or executed by a borrower in favour of the lender to secure a particular borrowing fall within the purview of the term 'charge'.

Types of charge
There are two types of charge. The first is a fixed charge. This is a specific charge that fastens on specific or ascertained and defined property. A 'fixed charge' can be created not only on the fixed assets of the company but also on all tangible and intangible, present and future assets, including goods in transit, situated at any location and owned by the company. A charge can be either a first or second charge depending on the quantum of borrowings and the requirement(s) of the lender(s). The first charge can also be created on a pari passu basis where all lenders have equal rights over the assets.

The second type of charge is a floating charge (popularly known as a banker's charge). This is a charge on the current and/or movable assets of a company (eg, stock in trade, work in progress, book debts, bills and receivables) both present and future, wherever situated. This charge is shifting in nature. A floating charge is converted or crystallizes into a fixed charge upon (i) the occurrence of a specified event that is stipulated in the instrument that created the charge or (ii) the winding-up of the company (or when receivers are appointed).

Filing particulars of charge
A charge must be filed with the registrar of companies in Form 8 and Form 13, along with the instrument creating and/or evidencing the creation of the charge. If an instrument is executed by way of deposit of title deeds, then brief particulars of the title deeds must be given in these forms. If a charge is created, for example, to secure an issue of debentures, then Form 10 is filed. Both Form 8 and Form 10 must be filed with Form 13. Charge(s) that are created out of India on assets acquired outside India must be registered within 30 days of the date on which the instrument creating the charge has been received through the post in India.

Creation of further encumbrances
Creation of any further encumbrances on the assets of the borrower dilutes the earlier charge. In order to create a second charge or pari passu charge, the prior approval of the existing lenders is required.

Registration of Charges

Section 127 of the act deals with the registration of charges. If a company acquires property that is already subject to a charge, then it is required to file the particulars of those charges after acquisition of the property within 30 days of the acquisition, with a certified copy of the document/instrument creating or evidencing the charge. After creating the charge, particulars must be filed with the registrar of companies within 30 days on the prescribed Form 8 with a certified copy of the instrument creating the charge. In accordance with the simplified procedures in place, the charge is registered immediately either over the counter or the following day at the office of the registrar of companies. If the charge is not filed, the company and every officer in default are liable to be fined up to Rs500.

The creation of a charge over immovable property of a company invariably requires registration under the Indian Registration Act 1908 (Section 17(1)). It also requires certain procedural formalities like stamping, filing of the document with the sub-registrar and entry in the relevant registers.

According to Section 30 companies must forward Form 13 to the registrar of companies with the prescribed fee. The registrar of companies maintains a register of charges wherein all particulars of charges are entered. The register must be open for inspection to the public or any person on payment of the prescribed fee for inspection. Section 131 provides that the registrar of companies must keep a chronological index of charges filed by every company in the prescribed form with prescribed particulars.

Certificate of registration
According to Section 132 the registrar of companies must issue a certificate of registration in respect of every charge. This constitutes conclusive evidence that all registration requirements have been fulfilled.

Delay in registration of charges
The prescribed time limit for filing the particulars of a charge with the registrar of companies is 30 days. Lack of registration or delay in registration of the charge by the registrar of companies does not render the charge void. The onus of registration lies with the registrar and the charge holder cannot be held responsible for non-registration.

Modification of Charges

Section 135 of the Companies Act provides that whenever the terms and conditions (or the extent or operation) of any charge registered are modified, it is the duty of the company to file the particulars with the registrar of companies in Form 8 within 30 days, with a certified copy of the relevant instrument. Examples of modifications requiring registration include:

  • any increase in the amount of the loan (with or without additional security);
  • any further charge by way of additional security;
  • release of particular asset(s) from operation of the charge;
  • addition of another creditor as charge holder;
  • any change in the allocation of different kinds of credit not provided for in the instrument;
  • any change, whether upward or downward, in the rate of interest, if not covered by the instrument;
  • any change in the repayment period;
  • every change in the nature of the security (eg, from legal to equitable mortgage);
  • any revision of the list of assets forming part of the new charges on the property already charged;
  • every release and re-deposit of title deeds; and
  • any new charges created to rank pari passu with an earlier charge.

Satisfaction of Charges

The borrowing company must inform the registrar of companies about the repayment of loan in full and/or satisfaction of the charge by filing Forms 13 and 17 within 30 days of repayment, providing relevant evidence and payment of the requisite filing fees. A notice must be sent to the charge-holder to show cause within 14 days why satisfaction as intimated should not be recorded. If no cause is shown within the stipulated period, the registrar records satisfaction of the charge and the memorandum of satisfaction is recorded. The current practice in connection with the satisfaction of charges is to obtain the lender's signature on Forms 13 and 17, and this is taken as conclusive evidence of satisfaction of the credit facility by the registrar. No further notice is required.

Recording satisfaction
Where a company fails to inform the registrar about the satisfaction of a registered charge (whether partly or wholly) the registrar may, in light of proper evidence, enter in the register of charges a memorandum of satisfaction of charge in respect of property.

Company Law Board

The Company Law Board has been empowered to allow rectification of the register of charges by passing an order in respect of:

  • omission to file the particulars of any charge created by a company, modification of an earlier charge, issue of series of debentures or particulars of any charge subject to which property is acquired;
  • omission to register any charge created within the stipulated time;
  • omission to give indication to the registrar of companies of payment or satisfaction of any charge within the prescribed time; and
  • omission or misstatement of any particular(s) with respect to any charge, modification, issue of debenture or satisfaction of charge.

On the application of the company or any other interested person, the Company Law Board will pass an appropriate order for rectification when it is satisfied that (i) the omission was accidental or due to inadvertence or some other sufficient cause, or is not of such a nature as to prejudice the position of shareholders or creditors of the company, and (ii) there are just and equitable grounds to grant relief. If the board extends the time for registration, the order shall not prejudice any rights acquired in respect of property before the charge is actually registered.

Penalties

In cases of default in filing any relevant information with the registrar of companies, the company and every officer in default is liable for a fine of up to Rs500 for every day that the default continues. If any company makes default in complying with any other requirements of the act as to registration or any other facts connected with registration, the company and every officer in default is liable for a fine of up to Rs1,000.

Company Registers

Every company should maintain a register of charges, entering all particulars that affect the property of the company and all floating charges on the undertaking or any property of the company. If any officer of the company knowingly omits or wilfully authorizes omission of any entry, he or she shall be liable for a fine of up to Rs500.

Inspection
The company's register of charges and copies of instrument(s) creating the charge must be available for inspection by any creditor or member of the company without fee at the registered office of the company during business hours. Any other person can inspect the register of charges on payment of the prescribed fees. If the company refuses to allow inspection of the register of charges or copies of the instrument of charges, the company and every officer in default shall be liable for a fine of up to Rs50, with a further fine of Rs20 for each day that the default continues. The Company Law Board may order an inspection of the copies of the instrument or register.


For further information on this topic please contact Ravi Nath at Rajinder Narain & Co by telephone (+91 11 506 5000) or by fax (+91 11 506 3580) or by e-mail (rnc@del2.vsnl.net.in).


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