This article is written by Preet Waghela, Thakur Ramnarayan College of Law, LL.B. (3 Years), Final Year, during his internship at LeDroit India.
Abstractc
Registration of charge plays a vital role in the Indian Companies Act, 2013. Companies raise funds through different channels. The cperson who lends money needs some security for repayment. Registration of charges with ROC makes them the secured creditors. The Registrar of Companies registers the charge after the prescribed form with the prescribed fees. ROC issues a certification of registration. If the company fails to register the charge, the person in whose favor the charge is created can register it with the registrar.
If there is any modification in charge, it has to be registered with ROC. The date of registration of charge is considered a public notice to everyone. The registrar in respect of every company keeps a register that is open to inspection by any person on payment of prescribed fees for inspection.
After repaying the debt of any charge, the company shall give intimation to the registrar. The registrar sends a notice to the charge holder about such repayment. If no cause is shown by the chargeholder, then the registrar prepares a memorandum of satisfaction, which is entered in the register of charges. The registrar can make entries of satisfaction and release in the absence of intimation from the company.
Intimation of the appointment of a receiver or manager over charged property of a company is to be recorded with the registrar of companies. On cessation of appointment, notice must be given to the registrar, and the registrar shall register such notice.
The company is required to keep a register of charges in their registered office. Inspection can be done by a member or creditor without any payment, but the other person has to pay fees for inspection.
The consequences of non-registration, furnishing false information, or suppressing information: the company and default officer are liable for punishment.
Judicial interpretation has further refined the legal position. In Home Kraft Avenues v. Jayesh Sanghrajka, the NCLAT clarified that non-registration of a charge under Section 77 does not automatically deprive a creditor of secured status during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016, provided a valid security interest exists through a written agreement. This decision highlights the distinction between company law requirements and insolvency law principles.
Keywords
Charge under Companies Act, 2013; Registration of Charge; Section 2(16) Companies Act; Section 77 Companies Act; Registrar of Companies (ROC); Secured Creditor; Unsecured Creditor; Non-registration of Charge; Insolvency Proceedings; Corporate Insolvency Resolution Process (CIRP); Register of Charges; Satisfaction of Charge; Penalties and Fraud under Section 447
Charge Registration and Consequences of Non-Registration
Introduction:
Every company needs funds to run their company. The company borrows money from the lender and gives assurance to pay them back in the future. The lender also wants the security of repayment of his money in case of default or non-payment of money. The company gives its property or assets as security. This security is called the charge. The charge acts as a security in non-payment of debt by the company. Under the Indian Companies Act 2013, the charge has to be registered with the registrar of companies. This registration works as a protective provision for the charge holder or creditor. It is the duty of the ROC to register the charge. Registered charge work as a priority for the charge holder in a situation where the company becomes insolvent. The charge holder is given priority in repaying the debts. The non-registration of charge and the company become insolvent. The creditor is treated as equal among the other creditors. So, registration of charge becomes paramount for the chargeholder.
Charge
Section 2(16) of the Indian Companies Act 2013 defines “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 mortgage. The charge gives a legal right to the lender over the property or assets of a company. The lender does not get the right to take over the property or assets of a company but gets a right to recover money from that property or assets in non-payment of debt. Property or assets of a company can be land, buildings, machinery, stock, vehicles, bank balances, or even future assets. Undertaking refers to the whole business or part of the business of the company that can be kept as security. It includes mortgage as well. Every mortgage is a charge, but every charge cannot be considered as a charge. The mortgage only covers the immovable property, but the charge covers stock, vehicles, future assets, etc.
Registration of charges
Duty to Register Charges
It shall be the duty of every company creating a charge within or outside India on its property or assets or any of its undertakings, whether tangible or otherwise and situated in or outside India, to register the particulars of the charge. The charge should be signed by the company and the charge holder together within the instruments. It should be in prescribed form with payment of prescribed fees. It should be registered with the registrar within thirty days of its creation. The subsequent registration of charge does not affect the earlier rights. If someone already has a legal right over the company’s property before a new charge is registered, those rights will not be canceled because the new charge is registered. Some charges are exempted in consultation with RBI.
Certification of registration
when a charge gets registered with the registrar. ROC issues a certification of registration of such charge. It is given to the company and the charge holder. If the charge is not registered, the charge holder does not get priority during the insolvency proceedings of a company. The charge holder is considered an unsecured creditor. The loan remains valid, but the security becomes ineffective. The creditor becomes an unsecured creditor and is treated like other creditors.
Application of the Registration of Charge:
If the company fails to register the charge within 30 days, the lender can itself register it with the registrar. The person in whose favor the charge is created may apply to the Registrar. The registration of charge should be in the prescribed form along with the instrument created for the charge with prescribed fees. The registrar on the application sends notice to the company again if the company again fails to register or does not show sufficient cause why such a charge cannot be registered. The registrar gives 14 days after the notice; if the company fails to act, the registrar allows registration of the charge. Additional fees paid by the person in whose favor it is created can recover money from the company.
Registration to apply in certain matters.
A) Acquisition of Property Subject to a Charge
when a company purchases or acquires property that is already charged.
The company needs to register it with ROC.
For example, if ABC Company purchases or acquires a part of an undertaking that is already mortgaged with a bank,
ABC company must register the existing charge with ROC.
B) Modification of terms and conditions of a registered charge
If there is any charge in connection with the registered charge, such modification must also be registered with ROC
Notice of Charge
Where any charge of any property or assets of a company or any of its undertakings is registered. The person acquiring such property assets, undertakings, or part. It is considered as if that person has knowledge although the person has no knowledge. The date of registration of charge is considered as a public notice to everyone. A person cannot claim ignorance about such a registered charge. The purchaser takes the property subject to the existing charge. The secured creditors of the existing charge are given priority.
Register of Charges to be kept by Registrar
The Registrar, in respect of every company, keeps a register. In which it contains particulars of the charges registered The register is open for inspection to any person on payment of prescribed fees for each inspection. A person can be a shareholder, creditor, buyer, or member of the general public. It helps the investor and creditors with the liabilities. It provides transparency about the company. Company report on satisfaction of charge. The company, after repaying the debt of any charge within 30 days from such payment, shall give intimation to the registrar in the prescribed form. A charge is satisfied when the entire debt is paid. Partial payment is not considered as a satisfaction charge. On receipt of intimation, the Registrar shall cause a notice to be sent to the charge holder about such satisfaction of charge. With the 14 days of notice, the charge holder needs to specify why such payment or satisfaction should not be recorded as intimation to the registrar. If no cause is shown, The registrar shall prepare a memorandum of satisfaction. The Memorandum of Satisfaction shall be entered in the register of charges and shall inform the company. The register records a note if any cause is shown by the charge holder, and it shall inform the company. Even without intimation from the company, the register has the power to make entries in the register. To ensure records reflect the position. Power of Registrar to make entries of satisfaction and release in absence of intimation from company. The registrar of companies can update the register of charges on his own even if the company does not inform
The Registrar acts on sufficient evidence.
A) Debt paid or satisfied
The loan has been fully paid or partly paid.
B) Release of charged property
Party of the property or undertaking charged has been released or charged or
has ceased to form part of the company’s property or undertaking
The Registrar prepares the Memorandum of Satisfaction.
The Register informs the affected parties within 30 days of making an entry in the register of charges.
Intimation of Appointment of Receiver or Manager
Whenever a receiver or manager is appointed over charged property of a company. It is to be recorded with the Registrar of Companies.
Appointments can be done two ways.
1) Appointment by court order
2) Appointment under Instrument – Which is in terms of a mortgage deed or charge document
The person who obtains the order or the person who appoints the receiver/manager must give notice to the company and the ROC within 30 days from the date of the order or the date of the appointment under the instrument. Copy of court order or copy of instrument under which appointment is made with prescribed fees. The registrar registers particulars of the receiver person or instrument in the register of charge.
Cessation of Appointment
A person appointed on ceasing to hold such appointment must give notice to the company and ROC. The registrar registers such notice.
Company’s Register of Charges
The company shall keep a register of charges in their registered office. Which include all charges and floating charges affecting any property or asset of the company or any of its undertakings. A copy of the instrument creating the change must also be kept along with the register of charges at the registered office.
Inspection
The register of charges and instrument of charge shall be open for inspection during business hours for
a) Any member or creditor without any payment of fees
b) Any other person on payment of such fees
Reasonable Restriction
The company may impose reasonable restrictions.
Restrictions must be provided in the Articles of Association.
Consequences of Non-registration of charges
Punishment for Contravention
If a company fails to comply with any provision relating to charges. The company shall be liable to pay a penalty of 500,000. Every officer in default shall be liable to pay a penalty of 50,000.
Furnishing false or suppressing information
If any person wilfully furnishes any false or incorrect information or knowingly suppresses any material information, they shall be liable for action under section 447.
Punishment for fraud under 447
Fraud includes – Any act or omission, Concealment of facts, Abuse of position, Done intentionally
If the fraud is of 10 lakh or more or 1% of the turnover of the company
Punishment: Imprisonment
Minimum – 6 months
Maximum – 10 years
Fine: Minimum – amount involved in fraud
Maximum – 3 times the amount of fraud
Rectification by the Central Government in the register of charges
The Central Government, on being satisfied that
a) Omission to give intimation to the registrar
When the company
Has fully or partly paid a loan but failed to inform the registrar within the prescribed time
b) Omission or misstatement in filing
- Charge
- Modification of charge
- Memorandum of satisfaction
- Entries made under section 82 or section 83
The central government can act only if it is satisfied that the mistake Was accidental, Happened due to inadvertence, happened due to some other sufficient cause, but does not prejudice creditors or shareholders.
Case Law
Home Kraft Avenues v. Jayesh Sanghrajka (RP of Ornate Spaces Pvt. Ltd.)
Background of the Case
- Home Kraft Avenues gave a loan of ₹11 crore to Ornate Spaces Pvt. Ltd. on 29 October 2015.
- The loan agreement clearly mentioned:
- Interest could be paid either in cash or by giving 4 flats.
- If the principal amount (₹11 crore) was not repaid, another 4 flats would be transferred to Home Kraft as security.
- Ornate Spaces:
- Failed to repay the loan
- Issued cheques that were dishonoured due to insufficient funds
What is CIRP?
CIRP (Corporate Insolvency Resolution Process) is a legal process started when a company cannot pay its debts.
CIRP in this Case
- On 29 June 2020, CIRP was started against Ornate Spaces Pvt. Ltd.
- This means the company entered a resolution stage, not liquidation.
What is an RP (Resolution Professional)?
An RP is a neutral officer appointed by the insolvency court during CIRP.
RP in this Case
- Jayesh Sanghrajka was appointed as the Resolution Professional (RP).
- Home Kraft filed:
- One claim as a secured financial creditor for ₹11 crore
- Another claim as a home buyer for 4 flats given as interest
- Resolution Professional
- Accepted the home-buyer claim
- Rejected secured status for ₹11 crore
- Treated Home Kraft as an unsecured creditor
Resolution Professional stated that the charge over the flats was not registered with the Registrar of Companies so Home Kraft is an unsecured creditor.
Main Legal Issue Before NCLAT
Can a creditor be treated as unsecured during CIRP only because the charge was not registered under Section 77 of the Companies Act?
Court’s Observation
Section 77 applies mainly to a “Liquidator” not to a Resolution Professional. In this case the company was under CIRP and hence no liquidation had started. Therefore RP had wrongly applied Section 77
Under the Insolvency and Bankruptcy Code (IBC):
A creditor is secured if there is a written agreement and Property is clearly given as security
- Registration of charge is NOT mandatory under IBC definitions
Court’s Final Decision
The NCLAT held that:
- The RP committed an error
- Non-registration of charge does NOT make a creditor unsecured during CIRP
- Home Kraft Avenues must be treated as a secured financial creditor
