Introduction

Creating charges on a company’s assets is a crucial aspect of securing loans or credit facilities. In India, businesses often create charges on their assets to obtain financial assistance from banks, financial institutions, or other lenders. This legal process helps ensure that creditors have a right to the company’s assets if the company defaults on its obligations.

Whether you’re looking to raise funds for your business or secure a financial loan, understanding how to create and register charges under the Companies Act, 2013 is essential. In this guide, we will walk you through the process, types of charges, and documentation needed to create charges on a company in India.

What is Charge Creation?

Charge creation refers to the process through which a company pledges its assets to secure a loan or other financial obligation. A charge can be created on a company’s tangible or intangible assets, such as property, machinery, or intellectual property. This provides lenders with the legal right to take possession of the company’s assets if the company fails to meet its debt obligations.

Why Create Charges on a Company?

1.    Access to Funds:
o    Creating charges on a company’s assets allows businesses to secure loans or credit facilities from banks or other financial institutions.
2.    Risk Mitigation for Lenders:
o    Charges act as a security for lenders. In case of default, lenders can claim the pledged assets to recover the loan amount.
3.    Enhancing Credibility:
o    A well-structured charge increases the company’s credibility with lenders and investors, providing assurance that the company has a structured way to manage debts.
4.    Business Expansion:
o    Companies can use the funds raised through charge creation for expanding operations, purchasing equipment, or other business needs.

Types of Charges in India

In India, charges can be broadly classified into two types:

1.    Fixed Charges:
o    Fixed charges are charges that are created on specific, identifiable assets of the company. For example, a charge on property, machinery, or vehicles. The company cannot dispose of these assets without the consent of the charge holder.
Example: A bank creates a fixed charge on a company’s property to secure a loan.
2.    Floating Charges:
o    Floating charges are not tied to a specific asset but are applied to the company’s general assets. These charges “float” over the assets, allowing the company to freely deal with its assets in the ordinary course of business.

Example: A company may create a floating charge over its inventory or receivables. The company can sell or use these assets without seeking approval from the charge holder, but in the event of liquidation, the charge holder has a right to claim the assets.

Process of Creating Charges on a Company in India

The creation of charges involves several key steps to ensure compliance with the Companies Act, 2013, and to provide legal protection to the lender or creditor. Here’s a step-by-step guide on how to create a charge:

1. Board Resolution for Charge Creation
•    The company’s Board of Directors must pass a board resolution to approve the creation of the charge. The resolution should clearly define the asset(s) involved and the terms of the loan or credit.
2. Drafting a Charge Agreement
•    A charge agreement must be drafted, outlining the terms of the charge, including the amount of the loan, the assets pledged, and the terms of repayment. This agreement is signed by the company and the lender or creditor.
3. Filing with the Registrar of Companies (RoC)
•    The charge must be registered with the Registrar of Companies (RoC) within 30 days of its creation. The company must file the Form CHG-1 (for single charges) or Form CHG-9 (for a debenture issue) with the RoC.

The following details must be provided:

• A description of the charge.
• The amount secured by the charge.
• A list of assets involved.
• The name of the charge holder (lender/creditor).
• A copy of the charge agreement.

4. Payment of Fees

• The company must pay the applicable registration fee to the RoC when filing the charge creation forms.

  5. Certificate of Registration of Charge

• Once the charge is registered, the RoC will issue a Certificate of Registration of Charge. This confirms that the charge has been legally registered and provides proof of the charge’s existence.

  6. Notification of Charge Creation to Creditors and Debtors

• After the charge is created, the company should inform its creditors and debtors about the new charge on its assets. This ensures that all parties are aware of the charge and its implications.

  Key Documents Required for Creating Charges

  To create and register charges on a company in India, the following documents are required:

  1.    Board Resolution: Approving the creation of the charge.
  2.    Charge Agreement: A legally binding agreement between the company and the lender or creditor.
  3.    Form CHG-1: For registering a single charge.
  4.    Form CHG-9: For registering a charge in case of debentures.
  5.    Proof of Payment: Evidence of the applicable fee payment for charge registration.
  6.    No Objection Certificates (NOCs): If required from third parties, such as mortgage holders or other secured parties.

  
  Legal and Regulatory Requirements for Charge Creation

  1.    Compliance with the Companies Act, 2013:
  o    Companies must ensure that the charge creation process complies with the Companies Act, 2013, and the rules and regulations laid out by the Ministry of Corporate Affairs (MCA).
  2.    Charge Registration Timeline:
  o    The company must file the charge with the RoC within 30 days of its creation. If the company misses this deadline, it may face penalties and the charge may not be enforceable against third parties.
  3.    Priority of Charges:
  o    In cases where multiple charges exist on the same assets, the charge that is registered first with the RoC has priority. This is important for creditors to know which charges take precedence in the event of liquidation or default.