Charge Creation

Every Company needs funds to operate, diversify and expand. The borrowed capital can be raised by the issue of debentures or by obtaining financial assistance from the Bank or even other Financial Institutions, To securitize these loans, some assets of the company are mortgaged with the bank. This way the financial institutions get a surety that their funds are safe and would be repaid along with the principal amount & interest. For securing their funds they resort to creating rights on the assets of the borrowing companies, which is known charge creation on assets. The borrower companies are required to file the requisite particulars with the Registrar of Companies (ROC) for all such securities created over its assets. This process of creating security over assets of the company is identified as registration of charges or the creation of charges.

Charge Creation:

For Charge Creation, Form CHG-1 is required to be filed with the ROC within 30 days. The Form must be signed by the Company and the Charge-holder. It has to be filed along with the instrument creating the charge.

Modification of Charge:

Provisions for Modification of charge are exactly the same as the provisions for Creation of Charge. Once the form for Modification of Charge has been filed, the ROC will issue a certificate for Modification of Charge in Form CHG-3. Any change in the terms, conditions, the extent or operation of any charge pre-registered under also requires registration.

Satisfaction of Charge:

A Charge is created as a security for loan or debentures or as a security for some other purpose. When the amount has been fully paid and other purposes have been fulfilled, there remains no necessity of the charge. This is termed as Satisfaction of Charge.

Process of Charge Creation/Modification:

  • Organize a Board meeting, concluding in a decision, to avail the loan and securitize the Charges or assets. During the meeting, the authority to execute necessary documents must also be given.
  • File Form MGT-14, accompanied by the said resolution with the ROC, within 30 days of its passing.
  • Execution of the necessary documents for availing the funds on loan and the security being provided.
  • Once the charge has been created or any modification has been completed. File Form CHG-7, to make entries in the register of Charges maintained. It must be authenticated by the Director or Secretary of the company or a person as authorized by the board.
  • Either Form CHG-1 (for other than debentures) or Form CHG-9 (for debentures including rectification) is to be submitted. Pay the fee, as applicable. This step must be completed within 30 days from the date of charge creation/modification.
  • Attach the following documents:
  • A certified true copy of every instrument evidencing all charge creation or modification.
  • If a Joint Charge or Consortium Finance has been undertaken, then the particulars of other charge holders or lenders.
  • The Instrument that evidences creation or modification of charge, in case of acquiring property which is already a subject to some other charge. And the Instrument evidencing such acquisitions.
  • After a proper examination has been conducted, the ROC shall issue a Certificate of Registration. Form CHG-2, if the charge has been registered under section 77(1) or 78. Form CHG-3, if the charge is registered under section 79.
  • In case of a modification of charge, Form CHG-3 is to be obtained from the ROC.
  • When the Form CHG-1 or Form CHG-9 has not been submitted within the period of 30 days. They can be submitted within the period of 300 days, with an Application for Condonation in Form CHG-8 or Form CHG-10, respectively. They are to be submitted with the Regional Director having territorial jurisdiction over the registered office of the company under The Companies Act, 2013.
  • Form CHG-8 or Form CHG-10 are to be enclosed with a Declaration by the Secretary or Director of the company that delays shall not affect the rights of the creditors.
  • Pay the penalty as imposed by the Regional Director. Generally, a period of 15 days time is given to pay this penalty.
  • After the payment of the imposed penalty, submit the Challan with the Regional Director’s office. It must be enclosed with a letter requesting issue an Order allowing Condonation of delay.
  • Submit the Order of Condonation with the ROC within the stipulated time given in the order itself with Form INC-28.
  • Once the ROC has approved the Form INC-28, get approval for the Form CHG-1 or CHG-9, whichever is applicable.
  • Once due compliance has been met with, the ROC shall issue Certificate of Registration in Form CHG-2, if the charge has been registered under section 77(1) or 78. Or Form CHG-3, if the charge has been registered under section 79.

Effect of Non-Registration of Charge:

As per Section 77(3), when the charge has not been created or registered with the ROC. Such charge shall not be taken into account by the liquidator or any other Creditor. And that mere filing of the charge with the ROC is not sufficient. Due process has to be maintained and it has to be registered by the ROC and a Certificate of Registration must be received