What is a charge? State its kinds, registration and penalty for default.

Question: What is a charge? State its kinds, registration and penalty for default.

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Answer

Charge means a right created over an asset in order to secure repayment of the loan. 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.” In simpler words, a charge is a financial security created by a company on its assets in order to secure repayment of loans.

Kinds of charge

There are broadly two kinds of charge. These are:

• Fixed Charge: These are those charges which are created over a specific and certain property in the sense that the property does not lose its identity through the period of the loan.

• Floating Charge: These are those charges which are not created over a specific and certain property in the sense that the property is not easily identifiable.

Registration of Charges

The Registration of charge is compulsory. Section 77 of the Companies Act, 2013 mandates registration of charge by the company with the registrar of companies within thirty (30) days of its creation. Every company is duty-bound to register a charge whether created within or outside India, whether on the tangible property or otherwise, in a prescribed manner and on the payment of such fees as may be prescribed.

The application for registration on charge must be made by the lender in whose favour the charge is created. The registrar of companies issues a certificate of registration of charge once he is satisfied that the charges created are legit. This certificate acts as proof that a charge is created over an asset and that the charge holder holds a good interest in the charged asset.

Consequences for non-registration

If a charge which is created over assets is not registered, then the following consequences may take place. These consequences are:

• The charge shall be declared void.
• The creditors will be left with no remedy and thus they cannot claim any benefit over the charged asset but could be eligible to recover their dues.
• The penalty in the nature of a fine may be imposed under the act and might also be imprisoned.

Penalty for Default

Section 86 of the Companies Act, 2013 imposes a penalty on the company for a fine of not less than one lakh rupees which is extendable up to ten lakh rupees and every officer of the company who is in default shall be liable to a penalty of not less than twenty-five thousands of rupees extendable up to ten lakhs rupees or imprisonment which may extend up to six months or both.

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