Legal Charge

What is charge?

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”.

In simple words, while undergoing a particular transaction, if the parties intend to make available property, existing or future, as security against a debt with the creditor having a legal right to make it available, there is a charge. Charge includes lien and also equitable charge evidenced by an instrument in writing or by deposit of title deeds or by agreement to deposit.

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.

In the context of advances to companies, a charge maybe classified as:

a.      Fixed charge

A charge is fixed when it is made specifically to cover “definite and ascertained assets” of permanent nature such as land, building & heavy machinery. Thus, a creation of fixed

charge precludes the company from selling the property charged without the consent of the charge holder.

b.      Floating charge

The floating charge, as a type of security, is peculiar to companies, as borrowers. It is a charge on a class of assets, which may be present or future and which change from time to time in the ordinary course of business subject to the terms of the charge, e.g. Stock-in-trade. The company can deal with the property subject to a floating charge according to the provisions/terms. The governing idea of a floating security is to allow a company to carry on its business in the ordinary course, as if no charge has been created. Thus, the company deals with its property, so charged in the normal course of business until the charge “attaches” or becomes “fixed” or “crystallizes”.

 A distinguishing feature between a fixed charge and a floating charge is the degree of control over the property, which the charge holder exercises. Where the charger had a contractual right to collect the proceeds of the charged assets and to place them in his bank accounts to be used in the ordinary course of business, the charge is construed to be a floating one rather than fixed. However on the happening of any of the events specified in the deed of floating charge, it crystallizes (becomes fixed0 and thereafter the assets comprised in the charge are subject to the same restrictions and affected in the same manner as under a fixed/specific charge. The moment such charge crystallizes, all equities so far existing between the company debtor and its creditors will disappear.

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.

1.5      Modification of 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.

What constitutes modification?

Whenever there is a variation in the terms and conditions or the extent of operation of the original charge, it would amount to the modification of charges. However, this depends upon the facts and circumstances of each case. It cannot be generalized. Yet, there are some instances that commonly constitute a modification of charge viz.

(a)        Change in the rate of interest

(b)        Increase in the amount of loan facility.

(c)        Change in the nature of security.

(d)        Revision in the list of assets creating charge.

(e)        Assignment of a charge.

(f)          Addition of another creditor.

(g)        Change in the terms relating to maintenance of margin.

(h)        Change in the nature of security in respect of a charge already created.

 The above list is only illustrative and not an exhaustive one.

1.6      Satisfaction 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.

 On the receipt of ‘Memorandum of Satisfaction of Charge’ from the Registrar of Companies, the chargee should be informed about the same and necessary entries should be made in the Register of charges.

1.7      When does a floating charge crystallize?

A floating charge crystallizes in the following circumstances:

(a)          When a company ceases to carry on the business on a going concern basis and the charge holder appoints a receiver.

(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.

1.8      Charges created by foreign companies

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

II.           REGISTRATION AND ITS SIGNIFICANCE

2.1          Types of charges registrable under The Companies Act, 1956

Before emphasizing on the significance of Registration of charges, let us first have a brief overview of what exactly is Registration of charges and which types of charges are registrable under The Companies act, 1956.

The following charges to be registered with the Registrar of Companies within 30 days after the date of their creation. Registrar has discretion to extent this period by another 30 days.

(1)       A charge for the purpose of securing any issue of Debentures

-       Debentures are commonly secured by Trust Deed through which the property forming the security for debentures is charged to the trustee(s). The definition of debentures is so wide as to include any type of security on the company’s assets whether constituting a charge thereon or not whether, for any reason, any debentures have been issued by a company and omitted to be registered; the company may cancel them and issue a new series and register the latter within thirty days of their issue. A single debenture need not be registered.

(2)         A charge on uncalled share capital of the company

-       In order to create a charge on the uncalled share capital of the company, there should be an express power given in the Memorandum/ Articles of Association, as capital uncalled cannot strictly be termed as the property of the company. It is more in the nature of a power than a property and for such a power to be exercised, there must be an express authority. However, where a power to mortgage all properties or borrow in such other manner, as the company may determine is given, a power to charge uncalled capital is implied.

(3)         A charge on any immovable property

-       It may be noted that a charge on property which has the effect of transferring an interest therein requires registration under the Registration Act also.

(4)         A charge on any book debts of company

-       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.)

(6)         A floating charge on the undertaking or any property of the company      including stock-in-trade.

-       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

-       It would be pertinent to mention here that Banking Regulation Act, 1949 specially prohibits creation of charge on unpaid capital by providing that “No banking company shall create any charge upon any unpaid capital of the company, and any such charge shall be invalid.”

A charge on any ship or any share in a ship or on Goodwill or a Patent or a Licence under a patent or a Trademark or a copyright or Licence under a copyright requires to be registered.

2.2    Object of registration

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.

·         According to the Department of Company Affairs, the most important reason for registering a charge is that the members of the company dealing with the company should be aware of the particulars of the properties, which are mortgaged, or subject to a charge. Unless this is done, the securities shall get diluted and no creditor will be in a position to recover the loan granted.

·         Registration of charges acts as a shield to protect the creditors statutorily in the event of the company being wound up. Thus the securities which are hypothecated or mortgaged can be safeguarded and kept aside for the lending parties of the company at the time of its winding up or liquidation if and only if the charge on such securities is registered.

·         Thus the main purpose of registration of charges is to give a notice so as to enable a prospective lender to ascertain the nature and extent of the security created on the company’s property in order to arrive at a decision on the manner, extend and type of the lending.

·         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.

·         Section 14 of The Banking Regulation Act, 1949 states that no banking company is allowed to create a charge on any unpaid capital of a company.

 Section 14(A) of The Banking Regulation Act, 1949 prohibits a           banking company from creating a floating charge on the undertaking or any property of the Company unless such a charge is certified by the Reserve Bank of India as not being detrimental to the interests of the depositors. In case, the charge is not certified, the aggrieved banking company can file an appeal with the Central Government within 90 days and the decision of the Central Government shall be final.

2.3      Consequences of non-filing

 According to section 125(1) a charge requiring registration is void against the liquidator and any creditor of the company if the particulars thereof are not filed into the Registrar of Companies within the stipulated time. An unregistered charge is also void against any other creditor of the company. Thus if a subsequent charge is created on the same property and the earlier charge has not been registered with the Registrar the earlier charge become void and the latter charge would enjoy precedence over the property

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.

3.2      Condonation of delay

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.

b. By the Company Law Board

 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

IV.1 Procedure for filing for Registration of Charges

Time limit : A company wanting to register the charges on its assets is required to file the necessary documents within 30 days from the date of creation of such a charge.

Forms to be filed : The company is required to file Form Nos.8 and 13 in triplicate while applying for the registration of a charge.

Other documents : The forms for registration of a charge should be accompanied by original or certified true copy of the instrument creating the charge for example, mortgage deed, etc. Further;

Where the instrument or the deed solely relates to the property situated outside India, a copy shall be attested by a certificate either under the seal of the company or under the hand of a responsible officer of the company or under the hand of some person interested in the mortgage or charge on behalf of any person other than the company, stating that it is a true copy.

Where the instrument or the deed relates, whether wholly or partly, to the property situated in India, a copy shall be attested by a certificate of a responsible officer of the company stating that it is true copy or by a certificate of public officer given under and in accordance with the provisions of section 76 of Indian Evidence Act, 1872.

Fees : The fees payable on Form No.8 shall be as per Schedule X of the Companies Act.

Signing of the forms : The forms to be filed shall be signed by both the creator of the charge and the holder of the charge.

V. PROCEDURE

V.1 Procedure for filing for Registration of Charges

Time limit : A company wanting to register the charges on its assets is required to file the necessary documents within 30 days from the date of creation of such a charge.

Forms to be filed : The company is required to file Form Nos.8 and 13 in triplicate while applying for the registration of a charge.

Other documents : The forms for registration of a charge should be accompanied by original or certified true copy of the instrument creating the charge for example, mortgage deed, etc. Further;

Where the instrument or the deed solely relates to the property situated outside India, a copy shall be attested by a certificate either under the seal of the company or under the hand of a responsible officer of the company or under the hand of some person interested in the mortgage or charge on behalf of any person other than the company, stating that it is a true copy.

Where the instrument or the deed relates, whether wholly or partly, to the property situated in India, a copy shall be attested by a certificate of a responsible officer of the company stating that it is true copy or by a certificate of public officer given under and in accordance with the provisions of section 76 of Indian Evidence Act, 1872.

Fees : The fees payable on Form No.8 shall be as per Schedule X of the Companies Act.

Signing of the forms : The forms to be filed shall be signed by both the creator of the charge and the holder of the charge.

4.3 Procedure for filing for Satisfaction of Charges

Time limit : In case of satisfaction of charges, the particulars

shall be filed with the Registrar immediately.

Forms to be filed: The company is required to file Form Nos. 17 and

13 while applying for the modification of a charge.

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.

The following points are to be kept in mind:

1.        A board meeting is to be called to determine the following:

(a)    The name of the Director or the Secretary who is to sign the petition/affidavits;

(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.

2.        (a)  It must bear the heading as given in Form 1 of the Rules.

(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.

(c)     Court fee stamp as applicable is to be affixed on each petition.

3.        The petition is to be supported by an affidavit.

4.        Bank draft evidencing payment of application fee.

A general notice of the proposed petition should be published in the following manner

(i)                  At least once in the language of the district in a newspaper published in the local language where the registered office is situated.

(ii)                At least once in an English newspaper.

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.

The petition, in triplicate, should be addressed to the Bench  Officer and presented in person by the applicant or by his authorized representative either in person or by post.

Such a presentation should be done within a month from the date on which the general notice was published.

On receipt of petition/application, the Bench Officer shall allot a number to it and record it in the register it in the register maintained in his office. It shall then be scrutinized and the petitioner shall be called upon to make good the deficiencies, if any, observed in the petition. The Bench Officer shall also call for a report form the office of the Registrar concerned and other parties mentioned in the petition. The Bench Office shall issue a notice for the date of hearing. The petitioner may appear in person or through an authorized representative, in respect of whom Form 4 (Memorandum of Appearance) has been filed. The Bench may also adjourn hearing, whenever it thinks fit, and on such terms as it may consider proper.

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.

Certified copies of orders

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:

(i)                 Discovery of new and important matter; or

(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

(iii)              On account of some mistake or error apparent on the face of the records; or

(iv)              For any other sufficient reason or cause.

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:

(i)                 Rectification of clerical or arithmetical mistakes in the order; or

 Rectification of errors arising therein from any accidental slip or omission.

Procedure of filing for Registration and Modification of Charges by Foreign Companies:

The Forms to be filed are as under:

(a)        Charges created on properties in India by a foreign company after 15th January, 1937

Prescribed Form is Form No.55 (pursuant to section 600 read with section 125)

(b)        Charges subject to which property in India has been acquired by a foreign company after 15th January, 1937

Prescribed Form No.56 (pursuant to section 600 read with section 127)

(c)         Particulars of an issue of debentures in a series by a foreign company

Prescribed Form No.57 (pursuant to section 600 read with section 128)

(d)        Particulars of series of debentures containing or giving by reference to any other instrument, any charge(s) the benefit of which the debenture holder of the said series are entitled pari passu created by a foreign company

Prescribed Form No.58 (pursuant to section 600 read with sections 128 and 129)

(e)         Particulars of modification of charge created by a foreign company

Prescribed Form No.59 (pursuant to section 600(1) read with section 135)

(f)          Memorandum of satisfaction of charge created by foreign company

a)       Prescribed Form No.60 (pursuant to section 600 read with section 138) 

Filing and registration fees payable by foreign companies

 As per provisions Rule 20 of the Companies (Central Government’s) General Rules and Forms, 1956, the prescribed fee for filing and registration of documents by Foreign Company which has established a place of business in India is Rs.1,000/- w.e.f. 1-5-2000. The filing fees are required to be paid by the foreign companies only to the Registrar of Companies, New Delhi, and no filing fee is required to be paid with Registrar of Companies of the State having company’s place of business in India for the documents filed with him simultaneously.

PROCEDURE OF PRE-SECURITY FOLLOWED BY THE REGISTRAR OF COMPANIES AND PRACTICAL PROBLEMS FACED WHILE REGISTERED CHARGES

The procedure of filing of forms for registration, modification and satisfaction of charges

has been simplified by the Registrar of Companies.

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 entire procedure is generally to be completed within a time span of 2 to 3 days or on the spot if possible.

Thus the Registrar of Companies is following a pre-scrutiny system whereby the documents are scrutinized firstly and then only fees are accepted and registration is done immediately.

Few practical problems faced while registering charges

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 of the company is not correctly mentioned on the forms.

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.

All the columns in the forms are not filled up.

The terms of the document relating to mode of repayment, rate of interest, margin, type of charge do not tally with what is filled in the forms.

The particulars of property mentioned in forms do not tally with the documents.

The amount secured by the charge mentioned in the form does not tally with the documents.

RECORDS TO BE MAINTAINED BY COMPANIES AND INSPECTION THERETO

6.1         Register of Charges

The Registrar of Companies shall in respect of each company keep a register containing the particulars of all the charges requiring registration under Part V. Particulars include total amount secured, a general description of the property charged, names of the trustee, etc.

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

(a)      Particulars in respect of property charged.

(b)      Amount of charge.

(c)      Names of the persons entitled to charge.

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.

6.3      Right to inspect copies of instruments creating charges and company’s register of charges

(1)         The copies of instruments creating charges kept in pursuance of section 136, and the register of charges kept in pursuance of section 143, shall be open during business hours (but subject to such reasonable restrictions as the company in general meeting may impose, so that not less than two hours in each day are allowed for inspection) to the inspection of any creditor or member of the company without fee, at the registered office of the company.

(2)         The register of charges kept in pursuance of section 143 shall also be open, during business hours but subject to the reasonable restrictions aforesaid, to the inspection of any other person on payment of a fee of such sum as may be prescribed for each inspection at the registered office of the company.

(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.

VII.     ROLE OF A CHARTERED ACCOUNTANT IN RESPECT OF REGISTRATION OF CHARGES

7.1         Checklist on verification of forms

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

The auditor should verify that –

(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.

(vi)         The copy of the document enclosed is duly certified to be true by a director, manager or secretary of the company, or by the person who is interested in the mortgage or the charge.

(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.

(ii)           In case of charge on properties acquired, which are subject to an existing charge, apart from the instrument evidencing the acquisition of such property, the original instrument, which created the charge on the property, is also enclosed.

(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.

(vii)       In case of acquisition of the property which is subject to an existing charge, the date of acquisition mentioned in the return should be the same as the date of acquisition of the property mentioned in the document.

(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

In case of return in form No.17 regarding satisfaction of the charge, the particulars are correctly mentioned so as to ensure identification of the charge so satisfied.

Register of charges

 A register containing particulars of creation, modification and satisfaction of the charges is maintained by the company as required under section 143 of the Act and the entries made therein tally with the returns filed with the Registrar.

7.2      To act as an authorized representative for filing and representing a petition u/s. 141 before the Company Law Board

 The petitioner company may, by writing, authorize a practicing Chartered Accountant to appear before the bench of the Company Law Board as an authorized representative for filing and representing the petition u/s 141.

7.3      To obtain charge search reports

Objectives

When the banks resort to lending to corporate borrowers, it is necessary to secure their

advance by way of unencumbered security. It is therefore imperative that they should verify whether there are any charges existing on the properties of the company before sanction and disbursement of the facility, as the stake of the banks in such advance is quite high. Nowadays, it is quite possible that some unscrupulous borrowers may resort to double financing against the same security by approaching two or more different banks. It is therefore necessary to obtain a Prior Charge Search Report from records maintained at Registrar of Companies (ROC) having jurisdiction over the state in which registered office of the company is situated.

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.

Types of charge search reports

There are two types of charge search reports.

(1)          Prior Charge Search Report

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.

(2)          Post Charge Search 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.

Practical difficulties encountered while conducting charge search at ROC

The ROC offices have computerized the records regarding registration of documents of each company. However, the said details are not giving complete information regarding the charge registered since many charges have not been registered in the past by companies and also due to the backlog of files lying in the Registrar of Companies. Hence the computer records are not useful for preparing the charge search report. Further, filing of Form Nos. 8/10/17 & 13 in the “D” file in some of the big ROC offices is not up-to-date. As such, it is quite likely that not all the charge search report prepared by the professional and as a result, liability of the professionals in respect of authenticity of the charge search report is high.

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:

1)         Fill-up the prescribed form to be obtained form ROC by giving the following particulars.

a)           Name of the company.

b)          Registration number of the company.

c)           Records to be inspected.

d)          Name and address of the person who is conducting the inspection.

e)           Signature of the person conducting the inspection.

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.

5)         For conducting inspection, the documents to be inspected are as under.

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.