Professional Documents
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The word “charge” has not been defined in the Companies Act, 1956. Section
124 merely states that a charge includes a mortgage. However, Section 100 of
the Transfer of Property Act 1882, defines a charge as “When immovable
property of one person is by act of parties or operation of law made security for
the payment of money to another, and the transaction does not amount to a
mortgage, the latter person is said to have a charge on the property and all
provisions herein before contained which apply to a simple mortgage shall, so far
as maybe, apply to such charge”.
Types of charges
From the wording of Section 125, it can be clearly inferred that a charge is a
security offered to the creditor with a view to secure his lending, by a lien on the
company’s property in the creditor’s favour.
a. Fixed charge
b. Floating charge
Creation of a charge is an act of the parties, viz., the company and the creditor,
by which a security on the company’s property or undertaking is conferred. A
charge is generally created by an instrument in writing. The document may be
described as a mortgage deed, hypothecation agreement etc. It is the substance
of the document and not its nomenclature or title which is important to determine
the registration of the charge.
Section 135 of The Companies Act, 1956 states that whenever there is
modification in the terms and conditions or the extent or operation of any charge
registered under Part V, it shall be the duty of the company to send to the
Registrar the particulars of such modifications. The particulars of such
modifications to be filed shall be accompanied with the original document
modifying the charge or a duly verified copy thereof. All other provisions with
respect to the creation of charge are also applicable to modification of a charge.
Section 138(1) of the Companies Act, 1956 requires a company to give intimation
to the Registrar of Companies of the payment or satisfaction, in full or part, of any
charge relating to the company and requiring registration under Part V of the
Act. The intimation is to be given within thirty days from the date of payment or
satisfaction of the charge. In Form No.17 full description of the instrument
creating the original charge; amount of charge and the name of the chargee shall
be mentioned. It is the duty of the company alone, to give an intimation of
satisfaction of charge. However it is required to give the charge holder an
opportunity of being heard. Only then should an order be passed.
(b) On the occurrence of an event which would result into the crystallization
of a charge as specified in the deed of the floating charge.
(c) When the winding up of the company commences.
Section 601 of the Companies Act states that provision of Part-V (Sections 124
to 145) shall apply mutates mutandis to charges on properties in India which are
created by a foreign company after 15th January, 1937 and charges on property
in India which is acquired by any foreign company after 15-1-1937. Where a
charge is created on completion of the acquisition of the property takes place
outside India, Sub-section (5) of section 125 and the proviso to Sub-section(1) of
section 127 shall have effect as if the property, wherever situated, were situated
outside India.
As per the provisions of section 600 read with section 597(2), a foreign company
has to file the documents relating to particulars of charge within 30 days of the
date of creation with the Registrar of Companies, New Delhi as well as with the
Registrar of Companies of the state in which the principal place of business of
the company is situated. Hence, in case, where the documents concerned are
not filed within the prescribed time with any of the Registrars, the company
should apply to the Company Law Board u/s 141 for condonation of delay.
Since, provisions of sections 124 to 145 shall apply mutatis mutandis to foreign
companies, the provisions of section 135 regarding filing of particulars of
modification of charge shall apply also to foreign companies. The particulars of
charge is required to be filed with Registrar of Companies within 30 days from
the date of modification of the charge
- Book debts are debts arising in business, which ought to be entered in the
books. In other words, book debts are those debts which accrue in the ordinary
course of business and may be created not only on the book debts which are
actually in existence on the date of creation of the charge but also on future
debts as and when they come into existence. However, where the company
charges the security for a book debt this is not registrable, commercial practice
being to discount the bill and not to charge it.
(5) A charge ‘not being a pledge’ on any movable property of the company
- It is based upon the analogy that the pledgee has actual possession and is
vested with the power of sale on default of payment on due date or, if no date is
fixed, after due notice. (If a company pledges goods and the lender releases the
goods so that the company can sell the goods and discharge the loan out of sale
proceeds, the release is not a charge.)
- Floating charge may be on all assets both existing as well as future of the
company or on a particular class of assets; i.e., book debts, stock-in-trade etc. A
floating charge created on immovable property of the company also requires
registration under the Registration Act. Further, where a floating charge covers
foreign assets also, it will have effect as an agreement to charge those assets
and will be valid and enforceable as an equitable security.
(7) A charge on calls made but not paid
Since now we know the meaning of registration and the types of charges to
which it is applicable, let us evaluate its significance from the point of view of
several groups of people.
· Registration of charges is all the more important for the banks intending to
lend funds to companies because various companies may otherwise try to cheat
the banks by obtaining funds from various sources at a time thereby diluting the
bank’s interest in the properties mortgaged.
3.1 Penalties
(1) In case any default is made in filing the particulars required to be filed with
the Registrar, then, the company and every officer of the company or any other
person who is in default, shall be punishable with fine which may extend to
Rupees Five Thousand for every day during which the default continues.
a. By the Registrar
According to the provision section 125(1) of the Companies Act, 1956 the
Registrar can condone delay up to 30 days after the period of initial 30 days if the
company satisfies the Registrar that the delay was caused due to genuine
reasons. For the condonation of delay the company should make an application
to the Registrar giving the details for the delay. No form has been mentioned for
this application hence a proper letter would suffice the requirement.
The Registrar however cannot condone a delay beyond sixty days, unless there
is an order issued by the Company Law Board condoning the delay. The
Company Law Board may condone delay beyond sixty days on a petition being
made to it under section 141 for condonation of delay.
IV. PROCEDURE
PROCEDURE
IV.2 Procedure for filing for Registration of Charges
Other documents :
Fees : The fees payable on the form shall be as per
Schedule X of the Companies Act.
Procedure for filing a petition with the Company Law Board under
section 141
A petition can be filed with the Regional bench of the Company Law Board either
by the company concerned or by any person interested in the charge such as,
the charge-holder.
Such a petition shall be in writing and shall be drafted in the manner prescribed
by Regulations 11 & 12 of The Company Law Board Regulations, 1991. The
Regulations do not prescribe a particular form for filing the petition. It just states
that the petition should clearly state the facts and make out a case justifying the
relief sought for.
(b) The name of the person who is to appear before the Bench in case
personal hearing is required. In case the company has in employment full time
company secretary, he maybe authorized, otherwise it would be best to appoint
any Practising Company Secretary or Chartered Accountant or Cost and Work
Accountant or an Advocate, who are under the law authorized to be appointed as
representatives.
(b) In para 3 of the petition, the main objects as given in the Memorandum, are
to be stated. In para 6, the details of loan documents for which particulars were
not filed in time or for which incorrect particulars were filed and registered are to
be given. In para 7 and in the subsequent paras to be added, the background
details of the case leading to the final submissions are to be given. The last para
should only contain prayers; i.e., relief sought from the Board and empowering
CLB to make such further of other orders as the Bench may seem fit. It is
necessary because if the Bench maybe pleased to vary the order as against the
prayers made by the company, it may do so there and then.
The Bench of the Company Law Board can dispense with the requirement of
giving the general notice on such conditions as the Bench may specify. If
dispensation is sought an application for that purpose should be made to the
Bench.
Such a presentation should be done within a month from the date on which the
general notice was published.
Order
The Bench will state in its order the points which areas for decision and the
conclusions thereon giving reasons in support of such conclusions. The order of
the Bench shall be in writing and shall be signed and dated by the member(s)
constituting it.
Within 15 days of the last date of hearing, the Bench officer shall forward to the
parties by post the operative portion of the order passed by the Bench.
The petitioner or any party to the proceedings is entitled to get one or more
copies of the Board’s order. To obtain copy (ies) the party concerned or his
authorized representative is to submit an application on plain paper requesting
for one or more copies of the order.
Review of order
Any person considering himself aggrieved by an order made by the Bench, may
submit an application for the review of the order to the concerned Bench on all or
any of the following grounds:
(ii) Evidence which, after the exercise of due diligence, was not within
his knowledge or which could not be produced by him at the time when the error
was made; or
Rectification of order
At any time, after the order is made, it maybe corrected by the Bench Officer
either of its own or on an application of any of the parties concerned on the
following grounds:
Prescribed Form is Form No.55 (pursuant to section 600 read with section 125)
Prescribed Form No.57 (pursuant to section 600 read with section 128)
Prescribed Form No.58 (pursuant to section 600 read with sections 128 and 129)
Prescribed Form No.59 (pursuant to section 600(1) read with section 135)
a) Prescribed Form No.60 (pursuant to section 600 read with section 138)
The forms are to be filed particularly Form No.17 after obtaining the signature of
the lender company and the banks financial institutions. These forms are to be
filed in triplicate into the Registrar who will return two copies of the form after
endorsing the fact that the same has been registered.
The original documents creating the charge are not executed on stamp paper
of the appropriate value and not duly sealed, signed and dated.
The name and designation of the person(s) who have executed the
documents and signed the forms are not written legibly.
The registration number and the amount of nominal capital of the company
are not correctly mentioned in the documents being filed.
The amount secured by the charge mentioned in the form does not tally with the
documents.
The Registrar shall also keep a chronological index, in the prescribed form of the
charges registered with him. Just as the Registrar of Companies is under an
obligation to maintain a register of charges and its index, the company is also
required to keep a Register of Charges at its registered office. Thus facilitates
cross-reference. All the particulars relating to fixed and floating charges should
be maintained.
For example
In case of any omission of any entry, the officer in charge can be penalized to the
extent of Rupees Five Thousand.
Other documents
Each company shall keep copies of all documents and forms filed with the
Registrar of Companies.
(3) If inspection of the said copies or register is refused, the company, and
every officer of the company who is in default, shall be punishable with fine which
may extend to five hundred rupees and with a further fine which may extend to
two hundred rupees for every day during which the refusal continues.
The Company Law Board may also by order compel an immediate inspection of
the said documents.
A suggestive checklist of the important points which one should look into, before
certifying the correctness of such forms; i.e., Form Nos. 8, 10, 13, 17 and 21
relating to registration, modification and satisfaction of charges, is given
hereunder.
General
(i) The original documents creating the charge have been executed on the
stamp paper of the appropriate value as required by the Indian Stamp Act, 1899
and are duly sealed, signed and dated.
(ii) The name of the company is correctly mentioned in the return as on the
original document creating the charge and the memorandum of association of the
company.
(iii) The return of charges to be filed with the Registrar, is dated after the
date of creation, modification or satisfaction of charge, as the case may be.
(iv) The name and designation of the person(s) who has/have executed the
document and signed the Form are written legibly on the copy of the document.
(v) The copy of the instrument enclosed with the return discloses the value
of stamp paper used for the execution of the document.
(vii) The registration number and the amount of nominal capital of the
company is correctly mentioned in the documents being filed.
(viii) The column for name of the director/manager/secretary who is filing the
document, has been properly filled up.
Registration of charges
(i) The property charged and the amount of the charge has been clearly
stated in the documents creating the charge. In case the amount of charge is
stated in terms of foreign currency, its equivalent of Indian rupee should also be
stated.
(iii) The document contains the terms relating to mode of repayment, rate of
interest, margin and the type of charge; i.e. first, second, joint or inter se, pari
passu, etc.
(iv) The date of creation of the charge and the description of the instrument
creating the charge has been correctly mentioned in the return and is in
conformity with the original document creating the charge.
(v) The amount secured by the charge as mentioned in the return, tallies
with the amount mentioned in the document creating the charge. In case the
charge extends to cover interest, costs, damages, etc., this fact should also be
clearly indicated in the Form.
(vi) The particulars of property mentioned in the return tallies with what is
stated in the documents.
(viii) The gist of the terms like schedule of repayment, rate of interest, margin
and the property charged, mentioned in the return tallies with what is stated in
the documents creating the charge.
(ix) The name, address and designation of the person in whose favour the
charge is to be registered as mentioned in the return tallies with the name
mentioned in the document.
Modification in charges
(i) Either the document modifying the charge refers to the original charge
under modification and indicates the extent of modification, or a letter has been
obtained from the bank/financial institution stating that the fresh document(s)
executed is/are in modification of the original charge.
(ii) The details of the modification mentioned in the form tally with the
details mentioned in the document modifying the charge.
(iii) The particulars of all past modifications and latest modifications are
complied indicating the date and description of the instrument(s), effect of
modification, the date of registration by the Registrar or in case the modification
has not been taken on record by the Registrar, the date of filing of Form No.8,
(from receipt of filing fees, issued by office of the Registrar) and are mentioned
correctly in the return. These facts should be verified from the company/copy of
the certificates of registration of charge obtained by the company.
Satisfaction of charge
Objectives
Further, after the sanction and disbursement of the loan, the bank should verify
whether the charge filed with ROC have been duly registered by ROC office. This
can be verified only by obtaining a post-sanction search report.
Generally, it is a practice to obtain up-to-date charge search report at the end of
the every financial year of the bank to verify the charges subsisting on the
properties of the company in respect of the bank finance.
Banks insist that search should be taken by professionals in the field such as,
practicing, Company Secretaries, Chartered Accountants and Cost and Works
Accountants etc. to bring authenticity to the search taken at ROC office.
As per Rule 21A of the Companies (Central Government’s) and General Rules
and Forms, 1956 the fees for conducting search at ROC office shall be Rs.50/-
only for each inspection.
This report is normally intended to verify the charges existing on the properties of
the company to which the bank intends to finance and charges existing on any
other company to know whether the company is borrowing from other banks or
institutions against the same property, which it intends to charge to the bank. It
will also enable the bank to know the total charges on the properties of the
company for the amounts borrowed by the company till the date of report.
This report is normally obtained after the sanction, disbursement, filing of charge
of the bank with ROC and getting registration certificate from ROC. This report is
intended to verify whether the charges mentioned in ROC certificate regarding
the charge registered in respect of the bank have been duly recorded in the ROC
office records, such reports is obtained at the end of every financial year to
confirm the charges subsisting on the properties of the company.
Since the banks are heavily relying on the search reports submitted by the
professionals before sanctioning/disturbing the loans involving heavy stake of the
Bank finance, the professionals have immense responsibility in framing the
charge search report. Therefore, it is necessary that utmost care should be
exercised while drafting the charge search report out-listing the documents
verified and documents not made available while preparing the report to
safeguard themselves from any probable professional misconduct. The
professionals should maintain a working file of the notes made at ROC office for
the purpose of preparing the report along with the receipt for fees paid for
inspection as a proof of inspection. A specimen of letters to be sent to the client
bank/financial institutions for NIL charge search report is given in Annexure 9.3.
In case, the professional finds that the filing of Form Nos.8 and 13 at ROC office
is not up-to-date, it is advisable that he can approach the concerned company
and verify records available with them to verify the charged registered on the
properties of the company. He can include the said charge in his report to make it
comprehensive and complete to the maximum extent possible and put a remark
to that effect in his report.
The following points are to be kept in mind while conducting charge search
at ROC:
c) Records to be inspected.
2) After collecting the form, from the person intending to conduct inspection,
ROC staff will verify whether the concerned file is available for inspection.
3) In case the file is available, prescribed fee of Rs.50 per company for each
inspection are to be paid at the fees counter along with the prescribed form.
Normally, at crowded ROC offices, there is no queue for paying fees for
inspection as ROC offices give this service on priority basis.
4) The person conducting inspection should use pencil for noting down the
main points as given in the documents verified. It is expected that person
conducting inspection is not supposed to alter the documents inspected and
should not copy the documents in toto. Gist only is to be noted.
i) “D” file (Document file relating to charges) such as duly certified copies
of Form Nos. 8/10/17 and 13 along with charge certificates in respect of charges
registered earlier.