Charge Creation and Registration

Charge creation is a crucial process for companies seeking to borrow funds from banks or financial institutions. It involves using the company’s assets or properties as collateral to secure loans, assuring lenders that their funds are protected. Once a charge is created, it must be registered with the Registrar of Companies (RoC) to ensure it is legally binding and enforceable, thereby establishing the lender’s rights over the assets.

Proper registration of charges ensures that financial agreements are legally documented, making it easier for businesses to access funding. At IndiaFilings, we offer expert assistance in creating, modifying, and registering charges to help businesses stay compliant and maintain strong financial standing. Whether it’s a new charge creation or a modification to an existing one, our team ensures a hassle-free process that safeguards your company’s interests and facilitates smooth borrowing arrangements.

What is a Charge?

A charge is a legal right created by a company over its assets or properties to secure a loan or financial assistance from a bank or financial institution. It acts as a form of collateral, ensuring that if the company (borrower) cannot repay the loan, the lender has the right to use the charged assets to recover the owed amount. This act of charge creation helps safeguard the interests of the lender while allowing the company to access necessary funding for its business operations.

Types of Charges

A charge can be classified into two types based on its nature:

• Fixed Charge: A charge that is secured on specific assets or properties of the company.
• Floating Charge: A charge that covers general assets or properties of the company, which may change over time.

Charge Creation on the Company’s Assets

Every company, whether large or small, requires funds to finance its business operations and growth. These funds can be raised through share capital or by borrowing capital from financial institutions or banks. When a company opts to raise funds through loans, it typically offers its assets or properties as security for the borrowed money. This process is known as charge creation on the company’s assets.

Need for Charge Creation 

Financial institutions and banks lend money only when assured that their funds are secure and will be repaid as per the agreed repayment schedule and the interest payment. To guarantee this security, lenders require companies to charge their assets and properties, ensuring that they have legal rights over the company’s assets in case of non-repayment of the loan. This is typically done through loan agreements, hypothecation agreements, mortgage deeds, and other documents.

Additionally, when a company needs more funds and offers the same assets as security for new loans, the concept of charge priority arises. In such cases, companies must obtain consent from earlier lenders to create subsequent charges. This ensures that all lenders have equal rights over the company’s assets, a situation known as “pari passu” or equal footing. However, earlier lenders may refuse to consent if they believe that the assets' value is insufficient to cover multiple loans.

Therefore, creation a charge on the company’s assets is crucial for securing borrowed funds and maintaining the confidence of financial institutions and banks, ensuring that companies have access to the capital needed to support their operations and growth.

Registration of Charge with ROC

As per the Companies Act, 2013, every company is required to register the ROC charge creations on its assets or properties with the Registrar of Companies (RoC). The following types of charges must be registered by the company:

• Charge on Property or Assets: Any charge created on the company’s properties, assets, or any other undertaking must be registered.
• Charge Created Within or Outside India: Charges created on assets located within India or outside India must be registered, regardless of their geographical location.
• Tangible or Intangible Property: Charges can be created on both tangible assets (e.g., buildings, machinery) and intangible assets (e.g., patents, trademarks), and these must be registered accordingly.
• Assets Situated in or Outside India: Charges on properties or assets, whether situated in India or overseas, are required to be registered with the RoC.

Minimum Requirements for a Charge Creation

A valid charge creation must meet the following essential criteria:

• Two Parties Involved: There must be two parties in the transaction—one is the creator of the charge (the borrower), and the other is the charge holder (the lender).
• Intention to Secure Loan: The borrower must have a clear intention to offer its assets or properties as security against the loan or financial assistance received.
• Defined Subject Matter: The charge must specify the subject matter, i.e., the assets or properties being offered as collateral, which can include both tangible and intangible assets.

E-Forms Required for Charge Registration

The following e-forms are required for the registration and certification of ROC charge creation:

• CHG-1: Application by the company for registration of a charge on its assets or properties (used for all charges other than debentures).
• CHG-2: Issued by the Registrar as the Certificate of Registration of Charge, confirming successful registration.
• CHG-9: Application for registration of a charge specifically for debentures issued by the company.

These are the charge creation forms registered with ROC for legal compliance.

Time Limit for Charge Registration 

A company must register a charge creation or any modification to an existing charge within 30 days from the date of its creation or modification with the Registrar of Companies (RoC). If the company fails to do so within this period, it must follow the below guidelines:

Application for Extension (Charges Created/Modified Before the Companies (Amendment) Act, 2019):

• If the charge was created or modified before the commencement of the Companies (Amendment) Act, 2019, the company can apply for an extension of time using Form CHG-1, along with additional fees.
• The Registrar can extend the time for a maximum period of 300 days from the date of modification.
• If the company still fails to register the charge within 300 days, the Registrar may allow an additional period of 6 months from the date of commencement of the Companies (Amendment) Act, 2019.

Application for Extension (Charges Created/Modified After the Companies (Amendment) Act, 2019):

• For charges creations or modifications on or after the commencement of the Companies (Amendment) Act, 2019, the company can apply for an extension using Form CHG-1 within 60 days from the date of modification.
• If the company fails to register the charge within 60 days, the Registrar may allow an additional period of 60 days upon payment of the prescribed fees.
• Timely registration of charges is crucial to ensure compliance and maintain a transparent financial structure.

Who Can Apply for Registration of a Charge?

The application or registration of a charge can be made by:

• The Company (Creator of the Charge): Typically, the company that creates the charge is responsible for registering it with the Registrar of Companies (RoC).
• The Charge Holder (Lender): If the company fails to register the charge, the charge holder (e.g., bank or financial institution) can make the application to ensure the charge is properly registered and their interests are protected.

Details Required for Registration of a Charge

The following details must be filed with the Registrar when registering an ROC charge creation:

• Total Amount Secured by the Charge: The overall value of the loan or financial assistance secured by the charge.
• Date and Details of Instrument Creating Charge: The date and specifics of the legal instrument (e.g., loan agreement or mortgage deed) used to create the charge.
• Name and Address of the Charge Holder: The name and address of the financial institution, bank, or lender in whose favour the charge has been created.
• General Description of the Property Charged: A description of the assets or properties offered as security for the charge.
• Date of Resolution Authorising Creation of Charge: The date of the board or shareholders’ resolution that approved the creation of the charge.
• Terms and Conditions of the Loan: The agreed-upon terms and conditions of the loan, including repayment schedule, interest rates, and other covenants.

Documents Required for Filing Form CHG-1

The following documents must be attached when filing Form CHG-1 for the creation or modification of a charge:

• Instrument of Creation or Modification of Charge: The legal document that establishes or modifies the charge on the company’s assets or properties.
• Instrument Evidencing Charge and Acquisition (If Applicable): If the company is acquiring property subject to a charge, attach the instrument showing both the creation of the charge and the acquisition of the property.
• Particulars of Joint Charge Holders (In Case of Consortium Finance): If the company has undertaken consortium financing, provide details of all joint charge holders involved.
• Optional Attachments: Any additional information or documents relevant to the charge can be included as optional attachments.

Procedure for ROC Charge Creation and Registration

The following outlines the step-by-step process for the creation and registration of a charge by a company, ensuring compliance with statutory requirements and safeguarding the interests of lenders.

Step 1: Conduct Board Meeting

 A board meeting should be held after providing notice to the directors to pass a resolution for:

• Deciding on the creation or modification of a charge.
• Authorising a person to execute necessary documents and file an application with the Registrar for charge registration.
• If Section 180(3)(c) of the Companies Act 2013 is applicable for borrowing funds, a special resolution must be passed in a general meeting authorising the board to borrow funds.

Step 2: Filing Special Resolution (If Applicable)

If a special resolution is passed under Section 180, file Form MGT-14 with the Registrar within 30 days of passing the resolution, along with a copy of the special resolution.

Step 3: Execute Loan Agreements

Execute the necessary documents for availing the loan and create an instrument evidencing the charge creation between the company and the bank or financial institution.

Step 4: Application for Registration of Charge

 The company must file an application for charge registration within 30 days of creating the charge using:

• Form CHG-1 (for charges other than debentures), or
• Form CHG-9 (for debentures).

The application must include the prescribed fees and required documents attached to the form.

Step 5: Application for Condonation of Delay (If Applicable)

If the company fails to register the charge within 30 days, it must apply to the RoC for condonation of delay in Form CHG-1.

Upon satisfaction, the Registrar may allow registration within 300 days (for charges created before the 2019 Amendment) or 60 days (for charges created after the 2019 Amendment), on payment of additional fees.

Step 6: Issuance of Certificate of Registration

Once the ROC charge creation is registered, the Registrar will issue a Certificate of Registration of Charge in Form CHG-2 to both the company and the charge holder, confirming that the charge has been successfully registered.

Consequences of Non-Registration of Charge

If a company fails to register a charge creation on its assets or properties, it can face the following consequences:

• Loss of Security in Case of Liquidation: During the winding up of the company, the liquidator will treat the assets or properties as free of charge, and the creditor associated with the unregistered charge will be considered an unsecured creditor, losing the priority rights over those assets.
• Priority Issues with Subsequent Charges: If a subsequent charge is created on the same property and it is registered, the new charge holder will have priority over the unregistered charge. This means the latter charge holder can sell the property to recover their dues, leaving the initial creditor disadvantaged.

How IndiaFilings Can Assist with Charge Registration?

IndiaFilings provides comprehensive support for ROC charge creation and charge registration, ensuring that your company meets all compliance requirements as mandated by the Companies Act 2013. Our expert team assists in preparing and filing necessary forms, such as CHG-1 and CHG-9, along with the required documents. We guide you through each step, from creating and registering charges to ensuring timely submission to avoid penalties. With IndiaFilings, you can be confident that your charges are registered correctly, safeguarding your company’s assets and maintaining compliance with statutory norms. 

Contact us today to streamline your charge registration process!