Charges – Company Law Important Questions

Question 1.
Distinguish Between: ‘Mortgage’ and ‘Charge’. (June 2013, December 2016) (4 marks)
Answer:

S. No. MortgageCharge
1. A mortgage is created by the act of the parties.1. A charge may be created either through the act of parties or by the operation of law.
2. A mortgage requires registration under the Transfer of Property Act, 1882.2. A charge created by the operation of law does not require registration. But a charge created by an act of parties requires registration.
3. A mortgage is for a fixed term.3. The charge may be in perpetuity.
4. A mortgage is a transfer of an interest in specific immovable property.4. A charge only gives a right to receive payment out of a particular property.
5. A mortgage is good against subsequent transfers mortgage is good against subsequent transferees.5. A charge is good against subsequent transferees with notice
6. A simple mortgage carries personal liability unless excluded by express contract.6. In case of a charge, no personal liability is created. However, where a charge is the result of a contract, there may be a personal remedy

Question 2.
Distinguish between: ‘Notice of a Charge’ and ‘satisfaction of a charge’. (June 2016) (4 marks)
Answer:

PointsNotice of a ChargeSatisfaction of a Charge
MeaningWhen a company took a loan against some of the property of the Company, giving it as security then Company is required to notify the ROC, known as a notice of charge.When a company repays a loan and relives the security against which the loan was raised then the company is required to notify the ROC, known as Notice of satisfaction of charge.
Certificate of RegistrationWhere a charge is registered with the ROC, he shall issue a certificate of registration of such charge in Form No. CHG.2.Where particulars of the modification of charge are registered with the ROC, he shall issue a certificate of modification of charge in Form No. CHG. 3.Where a satisfaction of charge is filed and the registrar enters a memorandum of satisfaction, he shall issue a certificate of registration of satisfaction of charge in Form No. CHG 5.
Form For Notice to Registrar of Companies (ROC)For Other than Debenture:
In case of registration of charge, the particulars of the charge together with a copy of the instrument, if any, creating or modifying the charge in Form No CHG. 1 duly signed by the Company and Charge-holder with prescribed fees; orFor Debentures:
In case of registration of charge, the particulars of the charge together with a copy of the instrument, if any, creating or modifying the charge in Form No CHG. 9 duly signed by the Company and charge-holder with prescribed fees.
The company shall give intimation to the registrar of the payment or satisfaction in full of any charge within a period of 30 days from the date of such payment or satisfaction in Form No. CHG. 4 with prescribed fees.

Question 3.
Write a short note On Essentials of Mortgage. (December 2011) (4 Marks)
Answer:
When some immovable property is offered as security for repayment of the loan, the transaction is called a mortgage.

Mortgages are advance against immovable property Mortgage has the following essentials:

  • Transfer of an interest in specific immovable property
  • Property must be specific and mentioned in the mortgage deed.
  • The transaction is for the purpose of security of payment of the loan or for the performance of an obligation, which may give rise to a pecuniary liability.

Question 4.
Write a short note on Consequences of Non-registration of a Charge (June 2014) (4 Marks)
Or
What are the consequences of non-registration of a charge which requires registration under Section 77? (December 2010) (5 Marks)
Or
Daisy Ltd. a company registered under the Companies Act, 2013, has failed to register a charge which requires registration under Section 77 and the charge is not registered as per Section 77. What will be the consequences of such non-registration? (June 2011) (4 Marks)
Answer:
Following are the consequences in case of Non-Registration of Charges:
1. Charge becomes Void.

  • A charge which is compulsorily required to be registered but which is not registered is void.
  • This does not mean that the creditors cannot recover their dues. It only means that the benefit of security charged is not available to them.

2. Repayment of Money.

  • Although the security becomes void by non-registration, it does not affect the contract or obligation of the Company to repay the money thereby secured.

3. Punishment Under Section 86

  • Non-registration of particulars of the charge is punishable with a fine.
  • If any company is in default in complying with any of the provisions, the company shall be liable to a penalty of INR 5,00,000.
  • Every officer of the company who is in default shall be liable to a penalty of INR 50,000.

Question 5.
What is the effect of crystallization of a floating charge? (June 2010) (8 Marks)
Or
What is meant by “floating charge” and how it would be crystallized? (June 2014)(4 marks)
Or
Explain whether a Floating Charge attached to the company’s property generally remains dormant till it crystallizes or becomes fixed. (June 2019) (3 Marks)
Answer:
1. Floating Charges:

  • Floating Charge does not attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc.
  • It attaches to the property charged in the varying conditions which happen from time to time.
  • Such a charge remains dormant until the person in whose favor charge is created takes steps to crystallize the floating charge.

2. A floating charge crystallizes or becomes fixed in the following situations:

  • Where the Company ceases to carry on the business, whether the principal money has become payable or not unless the debenture or trust deed contains the stipulation to the contrary.
  • On commencement of winding up of the Company.
  • If a debenture holder, having become entitled to realize the securities by reason of the fact that the principal money has become payable, intervenes for the purpose by appointing a receiver or by making an application to the Court for appointment of a receiver.
  • On the happening of the event specified in the deed.

3. Effect of Crystallisation:

  • On crystallization, the floating charge converts itself into a fixed charge.
  • It acquires priority over any subsequent equitable charge and other unsecured creditors.
  • However, preferential creditors having priority for payment over secured creditors in the winding-up get priority over the claims of the debentures holders having floating charge.

Question 6.
Explain clearly the meaning of the terms “fixed charge” and “floating charge”. State circumstances under which a “floating charge” automatically becomes ‘fixed’? (December 2015) (4 marks)
Answer:
1. Meaning of Fixed Charge:

  • Fixed Charge is a charge against a specific identifiable and defined property.
  • Fixed Charge is also known as a specific charge.
  • The property under charge is identified at the time of the creation of the charge.

2. Meaning of Floating Charge:

  • A Floating Charge does not attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade debtors, etc.
  • A Floating Charge is available only to companies as borrowers.
  • It attaches to the property charged in the varying conditions which happen from time to time.

3. Circumstances: A Floating charge crystallizes or become fixed in the following situations:

  • Where the Company ceases to carry on the business, whether the principal money has become payable or not unless the debenture or trust deed contains the stipulation to the contrary.
  • On commencement of winding up of the Company.
  • If a debenture holder, having become entitled to realize the securities by reason of the fact that the principal money has become payable, intervenes for the purpose by appointing a receiver or by making an application to the Court for appointment of a receiver.
  • On the happening of the event specified in the deed.

Question 7.
A charge created orally shall also require registration. Comment (June 2010) (1 Mark)
Answer:
The statement is correct. All types of charges created by a company on its assets or property require registration.

Question 8.
A company may create a mortgage or a charge, including a floating charge, on any of its book debts. Comment (December 2011) (1 Mark)
Answer:
The statement is correct. The Company can create a mortgage or charge, including a floating charge on any of its book debts.

Question 9.
A charge created always requires registration under line Transfer of Property Act, 1882. Comment (June 2012) (1 Mark)
Answer:
The statement is incorrect. A charge created does not require registration under the Transfer of Property Act, 1882 but it is required to be registered under the Companies Act, 2013.

Question 10.
Rose Ltd. raised a loan from a State Financial Institution by creating hypothecation of book debts and also future debts of the Company. Incidentally, the charge was not registered with the Registrar of Companies concerned. State Financial Institution demanded a certificate of registration of charge for the amount of loan so granted by it. The directors of the Company replied to the State Financial institution that the charge need not be registered for hypothecation of book debts. Is the action of the directors valid? Give reasons. (December 2014) (4 Marks)
Answer:
1. According to Section 2(16) of the 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.

2. Registration of Charges- Section 77(1): Any charge created
(a) within or outside India,
(b) on its property or assets or any of its undertakings,
(c) whether tangible or otherwise, and situated in or outside India shall be registered in Form No. CHG.l.

3. In light of the above-discussed provisions of Section 2(16) and Section 77(1) of the Companies Act, 2013, the raising of a loan from a State Financial Institution by creating hypothecation of book debts and also future debts of the company amount to charge within the definition of Charge under Section 2(16) and needed to be registered under section 77.

4. Thus, the contention of directors of Rose Ltd. is incorrect and not tenable.

5. If Rose Ltd. fails to register the charge under Section 77 then the State Financial Institution can get it registered as per section 78 of the Companies Act, 2013. The State Financial Institution shall be entitled to recover from the company the amount of any fees or additional fees paid by him to the Registrar for the purpose of registration of charge.

Question 11.
XYZ Limited has an office building in London. The Company has been granted a term loan of INR 15 Crore from a Bank. The Company wants to mortgage office building of London. Examining the provisions of the Com¬panies Act, 2013, Answer the following:
(i) Whether the Company can mortgage the above office building?
(ii) Whether a charge can be created for property situated outside India? (June 2017) (4 Marks)
Answer:
1. As per the provisions of Section 77(1):
Any charge created
(a) within or outside India,
(b) on its property or assets or any of its undertakings,
(c) whether tangible or otherwise, and situated in or outside India shall be registered in Form No. CHG.l.

2. As per the provisions of Section 179(3), the Board of Directors of the Company can exercise borrowing power.

3. In light of the above-discussed provisions of the Companies Act, 2013:

  1. XYZ Ltd. can mortgage its office building in London and can avail borrowings as per Section 179(3).
  2. All types of charges tire required to be registered under the Companies Act, 2013, whether created within or outside India under Section 77(1).

Question 12.
KAJ Limited, a company incorporated under the Companies Act, 2013 wants to go for the issue of secured debentures. Referring to relevant provisions and Rules, state the conditions to be satisfied before the company course for such issue of debentures. Will you answer with different in case search issue of debenture is by a government company where the Central Government has given a guarantee? (December 2017) (4 marks)
Answer:

  • As per Section 71, the company issue secured debentures subject to prescribed terms and conditions.
  • Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, make the following provision in this regard.

The company shall not issue secured debenture, unless it complies with the following conditions, namely:
1. An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue. Provided that the following classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years:

  1. Companies engaged in setting up of infrastructure projects;
  2. Infrastructure Finance Companies;
  3. Infrastructure Debt Fund Non-Banking Financial Companies.
  4. Companies permitted by a Ministry or Department of the Central Government or by Reserve Bank of India or by the National Hous¬ing Bank or by any other statutory authority to issue debentures for a period exceeding ten years

2. Such an issue of debentures shall be secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associate’s companies, having a value which is sufficient for the due repayment of the number of debentures and interest thereon.

3. The company shall appoint the debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest thereon.

4. The security for the debentures by way of a charge or mortgage shall be created in favor of the debenture trustee on:

  1. any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise;
  2. any specific immovable property wherever situate, or any interest therein.

However, in the case of a non-banking financial company, the charge or mortgage may be created on any movable property.

Yes, the answer will be different if the issue of debentures is by a Government Companies which is fully secured by a guarantee given by the Central Government or one or more State Government or by both, the requirement for the creation of charge shall not apply. Further, in case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage may also be created on the properties or assets of the holding company.

Question 13.
The authorized share capital of Shine Ltd. is INR 50 Lakh. The paid-up capital of the Company is INR 20 Lakh. The Board of Directors at its 100th Meeting held in the residence of the Managing Director of the Company resolved to create a charge on the uncalled share capital of INR 30 Lakh. With ref¬erence to the provisions of the Companies Act, 2013 ascertain if the resolution is valid. (June 2018) (4 marks)
Answer:
1. A company does not have the implied power of charging its uncalled share capital. If the Memorandum of Association or Article of Association au¬thorize it to charge then the Company may charge its uncalled capital. The Memorandum may give an express power to charge uncalled capital, or the power may be so wide that it can be inferred by implication.

2. In the decided case of Newton v. Debenture Holders of Anglo-Australian Investment Co. (1895) A.C. 224, the MOA authorized the Company to borrow upon any security of the Company. It was held that the power was wide enough to include a charge on uncalled capital.

3. As per the decided case referred above, the Board of Shine Ltd. cannot create a charge on its uncalled capital unless there are provisions in the Articles of Associations of the Shine Ltd. to create a charge on uncalled capital. The Company not having any implied power to do so.

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