Charge means a security created on the property of the company in favour of its creditor to secure payment of a loan or debt or any other obligation. In order to create a charge it is not necessary to employ any technical or particular form of expression. All that is required is that there should be clear intention to make a particular property a security for the payment of money. Creation of enforceable security is of the essence of a charge either in respect of immovable property or in respect of moveable’s.
Under Section 124 of the Companies Act, 1956, a charge includes a mortgage and every mortgage or a charge created by a company is required to be lodged with a copy of the instrument creating the encumbrance and got registered with the Registrar of Companies of the State concerned under Section 125 of the said Act, failing which the charge would be void against the liquidator and any creditor of the company.
Object or Purpose of registration of charges
1. The object or purpose of registration of charges with the Registrar of Companies is public notice; to ensure the means of notice to those who contemplate giving credit to the company.
2. The object of registration is to prevent people advancing money or purchasing in the dark.
3. The registration is provided so that creditors may have some notion of how far the property of the company is unencumbered. This purpose is sought to be achieved by requiring the companies and the Registrars to register the charges in their registers, and make them available to the public for inspection.
4. The registration also has the object of preventing a fraudulent and belated claim of a charge in the event of a company's liquidation.
Thus, the object of registration is mainly to give information to future creditors as to the extent of the company's indebtedness and the consequent amount of credit that they can safely give to the company.
Types of Charge
The charge may be divided into two types:-
1. Fixed charge
2. Floating charge
A fixed or specific charge is one which attaches to a particular piece of property which is identified when the charge is created, and the identity of the property does not change during the subsistence of the charge. Such a charge is made particularly to cover definite and ascertained assets of fixed nature such as land, building etc. A legal title is passed in the case of fixed charge on the specific assets and the right to dispose of the property is lost by the company.
A floating charge, as a security, is peculiar to companies as borrowers. A floating charge does not attach to any definite property but covers property of a fluctuating type. It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern until the person in whose favour the charge is created, intervenes. The governing idea of a floating security is to allow a going concern to carry on its business in the ordinary course, as if no charge has been created.
Characteristics of floating charges:-
1. Floating charge is a charge on a class of assets of the company, both present and future.
2. The class is one which in the normal course of the business of the company would be changing from time to time.
3. It is found that unless some steps are taken by or on behalf of those interested in the charge, the company may carry on its business in the same way as it carried earlier.
Crystallization of floating charge:
When the charge holder takes steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge. Until a floating charge becomes a fixed charge, the company is free to deal with the property charged in any manner it deems fit.
But once the floating charge crystallizes, the company cannot dispose off the charged assets without paying of the charge holder. Otherwise, the charge holder can recover his dues from the proceeds. A floating charge crystallizes or becomes the fixed in following situations:-
1. 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.
2. Upon the commencement of winding up of the company.
3. If a debenture holder, having become entitled to realise the securities by the reason of the fact that the principal money has become payable, intervenes for the purpose by appointing the receiver or by making an application to the court for appointment of the receiver.