Borrowing funds is an important source for a company to raise capital for financing large-scale projects and expanding its business. Corporate borrowings involve loans obtained by a company by way of creating a charge on its assets as security to the lender company. As defined in the Companies Act, 2013, ("Act") "charge" means 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. The Act prescribes for registration of charges with the Registrar of Companies.
According to Section 77(1) of the Act, it is 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 signed by the company and the charge-holder together with the instruments, if any, creating such charge, with the Registrar of Companies within thirty days of its creation. The provisions of Section 77 of the Act relating to registration of charges shall, so far as may be, apply to a company acquiring any property subject to a charge within the meaning of that section; or any modification in the terms or conditions or the extent or operation of any charge registered under that section. Where a charge is registered with the Registrar of Companies, he shall issue a certificate of registration of such charge to the company and/ or to the person in whose favor the charge is created.
Form and manner of Registration
The method of registration of a charge is the filing of particulars of charge along with the instrument creating charge, with the Registrar of Companies within the period prescribed in Section 77(1) of the Act. However, in the event of failure to file the particulars within the prescribed period, the company can get the charge registered by seeking condonation from the Central Government. This is also known as "rectification of the register of charges".1
The application for registration of charge is to be submitted to the Registrar of Companies in such form, on payment of such fees and in such manner as prescribed in the Companies (Registration of Charge) Rules, 2014.
For registration of charge as provided in Section 77(1), Section 78 and Section 79 of the Act, the particulars of the charge (together with a copy of the instrument, if any, creating or modifying the charge) shall be filed with the Registrar of Companies within a period of thirty days of the date of creation or modification of charge along with the fee, in Form No.CHG-1 (for other than Debentures) or Form No.CHG-9 (for debentures including rectification), as the case may be, duly signed by the company and the charge holder.
Extension of time for Registration
The proviso to Section 77(1) of the Act provides for extension of time for filing particulars for registration of charge. It is stated therein, that the Registrar of Companies may allow such registration to be made within a period of three hundred days of such creation on payment of additional fees. Rule 4 provides that the application for delay shall be made in Form No.CHG-1 and supported by a declaration from the company signed by its secretary or director that such belated filing shall not adversely affect the rights of any other intervening creditors of the company.
However, if registration is not made within a period of three hundred days of such creation, the company shall seek extension of time for filing of the particulars or for the registration of the charge from the Central Government (in eForm CHG-8) in accordance with Rule 12 and Section 87 of the Act. The eForm CHG-1 for registration of charge, will be processed by the Registrar of Companies office after the order of Central Government for approval for condonation of delay (in eForm INC 28) has been filed with the Registrar of Companies. The Central Government can provide for extension of time on the ground that the omission to file with the Registrar of Companies, the particulars of any charge or, the omission to register such charge, was accidental or due to inadvertence or some other sufficient cause or it is not of a nature to prejudice the position of creditors or shareholders of the company, or any other grounds, it is just and equitable to grant relief.
In the case of Tristar Container Service (Asia) P. Ltd. v. WW Shipping Agencies P. Ltd.2, an application for extension of time was filed by a creditor. The petitioners were under the impression that respondents have filed the particulars of charges, but on a search conducted into records of the Registrar of Companies, it was found that the particulars of charges were not filed. However, in spite of the petitioners requesting the respondents to cause registration of the charges, the respondents did not effect the registration of the charges and therefore, the petitioners filed the said petition, which, if allowed would not cause prejudice to any stakeholder or the respondents, including the creditors. It was held that, in these circumstances the delay in filing of the particulars of the charges be condoned and time be extended for filing such particulars, with direction to the respondents to sign Form No. 8 as well for its registration. In the said case the petitioners showed that the delay was due to a sufficient cause and therefore, extension of time was granted for filing particulars of the charge.
Effect of non-registration of charge
Section 77(3) of the Act states that, in case no charge is created by a company, i.e. a charge is not registered, and a certificate of registration is not issued by the Registrar of Companies, then the charge shall not be taken into account by the liquidator or any other creditor. However, nothing provided in Section 77(3) of the Act shall prejudice any contract or obligation for the repayment of the money secured by a charge.
Section 86 of the Act, provides for punishment for contraventions of Section 77 of the Act. It is provided that, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term. which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
Therefore, an application must be made for registration of charges to the Registrar of Companies in the prescribed format so that the Registrar of Companies after being satisfied with the application, may issue a certificate of registration of charge and entitle the company and its creditors to rights at the time of liquidation
1 Section 87 of the Companies Act, 2013
2 (2008) 141 Com Cases 944
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