Download Overview of law relating to charges

Overview of law relating to
charges
Presentation at
CA Study Circle, Kandivali West
Prakash K. Pandya
Practising Company Secretary
Mumbai
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Points to discuss
Provisions of various laws
The Companies Act 1956
Highlights of important case laws
2
Charges
Provisions of Various Laws
 The Companies Act, 1956 – including Accounting
Standard 19 – Lease (Financial and Operational)
 The Transfer of Property Act, 1882
 The Contract Act, 1872
 The Indian Stamp Act, 1899
 The Registration Act, 1908
 The Limitation Act, 1963
 The Civil Procedure Code, 1908
 The Recovery of Debts due to Banks and Financial
Institutions Act, 1993 (RDB Act)
 Securitisation
& Reconstruction of Financial
Assets and Enforcement of Security Interest Act,
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2002 (Securitisation Act)
Provisions of various laws
The Companies Act 1956
Highlights of important case laws
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The Companies Act, 1956
SECTION 46 Form of Contract
 SECTION 48 Execution of Deed - Common Seal
 SECTION 51 Service of documents on company
 SECTION 52 Service of documents on Registrar
 SECTION 54 Authentication of documents and
proceedings - by director, manager or secretary and
need not be under common seal
 PART
IX - {Ss.565 to 581} For example,
Partnership firm converted into Company
 Foreign Company - Sec.600(1), (4)
 Winding up

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Borrowing Authority
Main object and purpose of borrowing
 Section 291, Section 292, Section 293(1)(d) - Ultra
vires vis-a-vis Intra vires
 Non compliance of sec.292 - loan document not
binding on company {Hoshiarpur Azad Transport
Co. Ltd v. Sutlej Land Finance Pvt Ltd and another
[2001] 103 Comp Cas 969 (P&H)}


If a company mortgages the whole or substantially the whole of its
undertaking for obtaining loans or other financial assistance, it need
not comply with the provision of section 293(1)(a) of the Act, but if
it is a usufructuary mortgage the said section would be attracted.
[DCA Circular Letter No. 8/19/(293)/64-PR, dated 21 July, 1964]
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Part V of the Act [Sections 124
to 145]
SECTION 124

Charge and Mortgage -distinction between- {J. K.
(Bombay) Pvt Ltd v. New Kaiser-I-Hind Spinning
and Weaving Co. Ltd and Others [1970] 40 Comp
Cas 689 (SC)}
Charge - no transfer of property or interest
therein, but only creation of right of payment out of
the specified property.
Mortgage - transfer of property or interest
therein.
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Section 125
125(1) Provides for filing of particulars of charges.
30 days + ROC may extend for further 30 days
 If not filed, Liquidator and creditors can disregard
the charge created by the company
 125(2) the filing or non-filing shall not prejudice
any contract or obligation for the repayment of the
money secured by the charge.
 125(3) even if a charge is VOID, the money
becomes payable immediately.

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Section 125 applies to
Uncalled capital
Capital - Call made but not paid
Debenture
Movable (except pledge)
Immovable
Goodwill, trade mark, patent, copyright, licence
under patent/copyright
Floating charge on property/undertaking, including
on stock
Book debts
Ship

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Section125
• Charge created by operation of law (ex. decree of
court) does not fall under the categories of charges
requiring registration under this section.
{Praga Tools Limited v. Official Liquidator of
Bengal Engg. Company (P) Limited, [1984] 56
Comp Cas 214 (Cal);
Indian Bank v. Official Liquidator of Chemeen
Exports (P) Limited, [1998] 16 SCL 524 (SC)}.
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Section125
Charge on any interest in immovable properties
such as mortgage of leasehold rights,
 Licence to use immovable properties etc., also
requires registration.
 Creation of charge on any intangibles requires
special attention and proper documentation.
 The section contains special provisions dealing
with charge created on property outside India creation outside/in India{sub-section (5) and (6)}.

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Charge document
Loan / General Agreement – specifies only terms
and conditions and amount of charge.
Charge is created by Hypothecation / Mortgage deed
In mortgage by deposit of title deeds – date of
deposit of title deeds with intention to create
charge, is the date of creation of charge.
When partnership firm is taken over by company
(not part IX case), form 8 shall be filed within 30
days of incorporation/takeover.
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Section 126
Public notice – if charge is registered (not merely
filed)
 Times Bank Limited v. Sri Sharada Parameswari
Textiles (P) Limited [2000] 38 CLA 270 (CLB),
despite inspection at the office of the Registrar of
Companies, Times Bank did not get the benefit of
public notice

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Section 127
Acquisition (in India / abroad) of property subject
to charge – filing with ROC
 30 days from completion of acquisition
 does not give any discretion to the Registrar to
extend the time limit
 Separate penalty clause

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Section 128
Applies only to that charge to the benefit of which,
debenture holders of a series are entitled “pari
passu”.
 The time limit of 30 days for filing the particulars
arises only after creation of such a charge.
 ROC cannot extend the time

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Section 129
Commission, discount or allowance to any person
for subscribing debentures or procuring
subscriptions – specify details in form 8
 This section refers to both Sections 125 and 128.

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Ss.130 and 131
Register of Charge by ROC
Index of charge
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Section 132
Certificate of Registration of a Charge operates as
conclusive evidence.
However, this does not prevent any question as to
the validity of a charge.
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Section 134
Rule 6 of Companies (Central Govt.’s) General
Rules & Forms, 1956
File instrument and forms in triplicate with
ROC
Sign on behalf of company and charge holder
 safe weapon in the armoury of Charge Holders
who may be affected due to non co-operation by
the company or any other circumstances under
which compliance of Rule 6 becomes
impracticable

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Section 135
Modification of charge – company to file
particulars
Provision of Part V to apply – same provision
for creation of charge to apply to modification
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Section 136
companies shall keep copies of instruments creating
charge at registered office
The instruments must be made available for
inspection under Section 144 of the Act.
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Section 137
Whenever there is an appointment of Receiver /
Manager, e-Form 15 must be filed at the office of
the Registrar of Companies, with the prescribed
filing fees.
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Sections 138, 139 AND 140
no need for any letter from the charge holder
regarding satisfaction of charge. {Rule 6}
 Company shall file – only full satisfaction
 The Registrar of Companies has suo moto powers
under Section 139 to make entries of satisfaction –
of full or part satisfaction
 File within 30 days of satisfaction
 ROC cannot extend the time

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Section 141
any person interested in a charge has powers to
move the Company Law Board (CLB)
 CLB
has powers to condone delay in filing
particulars of charges
 CLB has also powers to rectify any omission or
misstatement.
 Whenever CLB extents the time for registration of
a charge, the order of CLB in such a case will not
prejudice the rights acquired in respect of the
property concerned before the charge is actually
registered.

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Section 144
Inspection by creditor and member of co. of:
-instruments creating charges under Section 136 and
- the Register of Charges under Section 143 during
business hours at least 2 hours per day.
If inspection is not allowed by the company, the
affected party can move the CLB for necessary
remedy.
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Section 600 (1), (4)
Foreign Company – Part V applies mutatis
mutandis
ROC New Delhi and ROC at principal place of
business – however registration by ROC New
Delhi only
e-Form 8
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Winding Up

Section 441 - Commencement of winding up

Date of resolution in members’ voluntary winding up
 Date of presentation of petition, in other modes of winding up

Section 446 - Effect of Winding up

RDB Act overrides section 446 (also Ss. 442 and 537) as held by
Supreme Court in Allahabad Bank vs Canara Bank & Another
AIR 2000 SC 1535: [2000] 101 Comp Cas 64 (SC). Thus,
enforcing charge under RDB Act is gets priority over the
Companies Act
Section 456 Custody of company's property - with Court
(liquidator)
 Ss.531, 531A, 532, 534 and 536 - transfer of property
several months prior to winding up becomes void

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Provisions of various laws
The Companies Act 1956
Highlights of important case laws
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HIGHLIGHTS OF IMPORTANT
CASE LAWS
Are Shareholders owners of assets of company?
Chiranjitlal Chaudhari v. Union of India [1951] 21
Comp Cas 33; AIR 1951 SC 41
Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp Cas
1; AIR 1955 SC 74
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directors
Are directors owners of assets of company?
Registrar of Companies, Orissa v. Orissa Paper
Products Ltd and others [1988] 63 Comp Cas 460
(Ori)
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Stamp duty
ROC may impound the document, if not duly
stamped – Chemicals Ltd. v. ROC (1959) 29 Com
Cases 238 (AP)
Instrument executed at Ahmedabad and stamp
duty paid at Ahmedabad, when brought to
Bombay, difference payable – Antifriction Bearings
Corpn. Ltd. vs. State of Maharashtra (1999) 22 CLA
137:(1999) 20 SCL 373 (Bom)
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pledge
PLEDGEE IS NOT TREATED AS A CREDITOR
In Official Liquidator, High Court of Karnataka v.
V. Viswanathan [1984] 56 Comp Cas 435 (Kar), it
was held that
a charge, being a pledge, does not require
registration and in winding up the pledgee is not
treated as a creditor and he is at liberty to issue
necessary statutory notice to sell the pledged
machinery.
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Court decree, no registration
In Praga Tools Limited v. Official Liquidator of
Bengal Engg Company (P) Limited [1984] 56
Comp Cas 214 (Cal) and in Indian Bank v. Official
Liquidator of Chemeen Exports (P) Limited [1998]
16 SCL 524 (SC),
it was held that
the provisions as to registration of charges would
not be applicable to a preliminary decree obtained
by a mortgage creditor which has become final by
operation of law.
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Oral agreement
In Sushil Prasad v. Official Liquidator of Vinod
Motors (P) Limited [1984] 55 Comp Cas 52 (Del),
it was held that
an oral charge over the assets of the company which
was created in good faith for valuable
consideration
with necessary resolutions and the particulars of
which have duly filed with the Registrar of
Companies was
held to be valid.
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NOC Difficulty
DON’T WORRY for registration with ROC
In Central Bank of India v. Saraf Tex Industries
Limited [1998] 15 SCL 60 (Del), it was held that
mere non-availability of no objection letter from
the first charge holder to create a second charge
cannot be an objection for registration of the
second charge where the intention to create second
charge was clear from the terms of sanction itself.
However in winding up, first charge holder may
disregard subsequent charge holder.
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Corporate Guarantee
In S.T.Patil v. Registrar of Companies [1997] 13
SCL 251 (CLB), it was held that offering corporate
guarantees does not require registration under
Section 125 of the Act.
36
Going concern – charge not
filed
In State Bank of India v. Viswaniryat (P) Limited [1989] 65
Com Cas 795 (Ker-DB), it was held that an equitable mortgage
created by a going concern is not void even if the particulars of
the same have not been filed as per Section 125 of the Act.
Unsecured creditors not covered by term 'any creditor' of
sec.125. It covers only creditors who has acquired right against
the property included in mortgage.
S.125 do not invalidate mortgage. If charge not registered
u/s.125, secured creditor is treated as unsecured at the time of
winding up.
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Omission of property in form
In State Bank of India v. Registrar of Companies
[1997] 13 SCL 247 (CLB), the CLB ordered
rectification of Register of Charges when there
was an omission to include charge on immovable
properties in the relevant forms.
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Wrong filing of satisfaction
In IFB Industries Limited in Re [2000] 38 CLA 215
(CLB-EB), CLB ordered
rectification of charges to remove the particulars of
satisfaction of a charge wrongly filed.
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Validity of Charge
CLB NOT THE FORUM
In Corporation Bank v. Registrar of Companies
[1997] 12 SCL 208 (CLB) and in Times Bank
Limited v. Sri Sharada Parameswari Textiles (P)
Limited [2000] 38 CLA 270 (CLB), the CLB held
that
there is no scope for CLB to decide on validity of
charge. However, it should be noted that validity
can be taken up in proper forum and registration of
charges does not take away the right to question
the validity.
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Disputed claim about charge
CLB NOT THE FORUM
In Saradha Finance v. Alsa Investments Private
Limited and others [2002] 110 Comp Cas 713
(CLB), the CLB held that
transactions between the parties are in dispute and
therefore it cannot decide such disputed claims on
the basis of affidavits and counter-affidavits.
CLB held that it will not decide on validity of a
charge.
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Charge by operation of law
Winding up commences - charge is created by
operation of law in favour of creditors on all the
properties of the company Under 529A of the Act, there is a pari passu charge
in favour of workmen creditors and that is the only
charge subject to which secured creditors would be
able to realize their dues out of the proceeds of the
charged properties.
This is applicable even though the secured creditors
could opt to stay outside the winding up.
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Thank You
P. K. Pandya & Co.
Practising Company Secretary
www.pkpandya.com
[email protected]
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