Whenever a borrower avails any loan from any Bank / Financial Institution – it is mandatory that a charge needs to be filed by the borrower in favour of the lender(s) with the Registrar of Companies (RoC).
By virtue of this, the lender(s) secures better rights over the securities offered by the borrower – which could be various assets / properties or any of its undertakings, present and future.
This becomes pertinent in case where the company is unable to repay its loan and has to go for liquidation. In such cases, the interest of the lender is protected, if the charges are properly filed with RoC. Hence, Banks always insist to file this charge document either as a pre-disbursement condition or sometimes post disbursement however within a certain time frame.
At times, due to enhancement of credit limits or takeover from one bank to another – these charges need to be modified so as to keep it updated with the latest developments happening at borrower’s end.
Moreover, in case the loans are repaid in full, then it is in borrowers’ interest to get this charges released – which is called “Satisfaction of Charges” by filing the respective documents with the RoC.
Unfortunately, many of the borrowers are not aware or updated with the charge status of their own firm. However, with BankKeeping – these shall be updated on real time basis and one shall have full clarity on it at all points of time. Even, the bankers need to know about the updated status of this very critical information.
Overview
An SME company looking to raise a debt as a term loan or working capital finance for its business expansion or day-to-day running approaches the bank and/or financial institution for financial assistance. Such debt requires security, which could be either movable or immovable property. Such legal security over the assets of the company helps banks or financial institutions recover their loans in any unfortunate circumstances.
Such a charge created over the assets of the company is required to be filed with the Registrar of Companies (RoC) by the company. The process of creation of charges over the movable or immovable assets of the company is termed “creation of charge”. Similarly, there is a modification of charge and deletion of charge also.
A charge on a company is a right created by the borrower company on its movable and immovable assets, in favor of a bank and/or financial institution. Generally, companies borrow from such banks and/or financial institutions to finance their long-term and working capital requirements. To secure the amount given as a loan to the company, banks and financial institutions process loan agreements, hypothecation agreements or mortgage deeds, etc., specifying the terms of the loan. They also specify in their agreement terms the repayment along with interest to be paid as per schedule.
This enables companies to get funds from different banks or financial institutions at the same point of time. Thus it becomes pertinent to keep a track of assets mortgaged to the bank and financial institutions for the security for such lenders. Therefore, the creation of charge on the movable and immovable assets of a borrower company ensures lenders the status of the assets pledged to other lenders. This will avoid double financing on the same assets. The charges on a company are public information and can be seen on the Ministry of Company Affairs (MCA) website.
Procedure of Charge Creation and Registration with ROC
Let us see this in a step by step approach:
Step-1: Board Meeting Resolution
The procedure for the creation of charge begins with the board meeting resolution passed by the board of directors of the company for availing loan from the specified bank and/or financial institution and the authority to one or more directors to execute the relevant loan documents or deeds. On signing of loan agreement, whereby the terms of loans are clearly specified between the two parties, along with other relevant documents, the charges over the properties of the company have been created.
In case section 180(3)(c) of companies act, 2013 is applicable for borrowing funds by the company then the company is required to pass special resolution in the general meeting for authorizing the board to borrow funds.
Step-2: Special Resolution
In case where special resolution is required to be passed u/s 180 of the companies act, 2013, form MGT-14 to be filed with the Registrar within 30 days after the resolution was passed attaching the copy of special resolution.
Step-3: Signing
Execute the signing of various documents for availing loan and instrument evidencing creation of charge by the company with the bank/ financial lender.
Step-4: Application for Registration of Charge
The SME or any other borrowing company is required to make an application for registration of charge within 30 days of creation of charge in form CHG-1 (for other than debenture) or in form CHG-9 (for debentures) with the RoC. The particulars of charge filed in form CHG-1 or CHG-9 shall be filed along with the prescribed fees and documents required shall be attached with this form.
Step-5: Applying for Condonation of Delay
In case the company is unable to register the said charge within 30 days of its creation then it is required to apply for condonation of delay beyond 30 days in form CHG-1. The RoC, if satisfied, may allow the company for registration of charge within 300 days or 60 days of creation of charge, as the case may be on payment of additional fees.
Step-6: Issuance of certificate of registration of charge
Where a charge is registered by the registrar, it will issue a certificate of registration of charge in form CHG-2 to the company and charge holder.
What particulars of charges should be filed?
- Total amount secured by the charge.
- Date and details of instrument creating charge.
- Name and address of charge holder.
- General description of the property charged.
- Date of resolution authorising creation of charge.
- Terms and conditions of the loan.
Who can make application for registration of charge
- Creator of charge which means company.
- Charge holder, in case the borrower company fails to apply for the same
Registration of charge with RoC
Post the creation of charge, it is important for the borrower company to register the same with the registrar of companies (roc), along with the required documents that specifies the creation of the charge over a company.
Conditions of charge for registration
As per the Companies Act, 2013 every company is required to register charges created by it on its assets or properties. The different types of charges created on a company must be registered with the RoC. These are as under:
- A charge creation for issuance of debentures or deposits;
- A charge creation for uncalled share capital for the company;
- A charge creation on any immovable property, wherever situated, or any interest therein;
- A charge on any book debt of the company;
- A charge, not being a pledge, on any movable property of the company;
- A floating charge created on the undertaking or any property of the company including stock-in-trade;
- A charge on calls made but not paid;
- A charge on a ship or vessel or any share in a ship or vessel;
- A charge on intangible assets, including goodwill, patent, a license under a patent, trademark, copyright or a license under a copyright.
Minimum Requirements of Charge
Charge should have following essential features:
- There should be two parties, one the creator of charge and the other is charge holder.
- The intention of the borrower to offer its properties as security against loan.
- The subject matter of charge i.e. Assets or properties.
Time Limit for registration of charge creation in RoC
As per Companies Act 2013, the charges are required to be registered with the Registrar of companies within thirty days of its creation. Even the charge modified by the company should be registered within 30 days of modification with the RoC.
In case a company is unable to register within 30 days, then it is required to apply RoC for extension of time in form CHG-1 along with the additional fees.
FAQ’s
What forms are required for charge creation?
The following forms are required for registration of the charge (CHG):
CHG-1- application by company for registration of charge.
CHG-2- issue of certificate of registration of charge by registrar.
CHG-9- application for registration of charge by company in case of debentures.
Consequences of Non-Registration of charge with Lender
If company does not register charge created by it then:
- In an unfortunate situation of winding up of the company, the liquidator will consider the assets or properties of the company as free of any type of charge and consider the creditor as unsecured.
- In case any subsequent charge is created on the same asset or property and the latter is found to be registered, it would be considered with priority which means the latter charge holder will have a better chance to recover its money.
What is Satisfaction of Charges?
In case the loans are repaid in full, then it is in borrowers’ interest to get these charges released – which is called “Satisfaction of Charges” by filing the respective documents with the RoC. This will help in increasing the credit score of the company while applying for a fresh loan, getting better credit due to good repayment history and negotiating better terms with the banks. It also serves the purpose of building trust in the SME business and its owners.
How can BankKeeping help with RoC charge monitoring?
Since all bankers/lenders wish to know this charge status, BankKeeping can help in real-time updates of any charge creation or satisfaction of charges that will give full clarity to owners, lenders, and banks for the SME charge status. That will make the loan processing and verification easier for both parties.
Looking for any assistance with your upcoming or ongoing loan management. Do not hesitate to contact us if you intend to apply for a loan or are looking at restructuring your loan portfolio. We are just a click away from fostering financial relations between a Business and a Bank, eliminating the hassles, mistakes, and in-competencies thereof.
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Role of BankKeeping:
The charge creation with RoC needs to be done effectively with all due deliberation and documentation within a certain time. Sometimes even the owners are not aware or updated of the charge created by their own business. BankKeeping can help you and your CA/Auditors in facilitating the entire process of charge creation/ modification/ satisfaction, by providing regular clarification on the matter – keeping in mind the lender’s perspective as well.
At times when the company may have to dilute its existence or the credit limits are enhanced, the ROC status needs to be updated too. When the company has cleared its dues and repaid its loan successfully, it will do well to update the same and get the charges released. This is called ‘Satisfaction of Charges’ and requires a different set of documents to be presented for update. All this can be handled promptly and effectively with the team at BankKeeping (in association with your CA/Auditors) as we are specialists in the field of banking and finance.
We at BanKeeping are a team of experts, who can help you in your day-to-day interactions with the bank and also guide you with appropriate letter writing, form filling and even negotiating with the banks for the loan application or renewal thereof. The dedicated RMs will help you in your banking loan journey and our Banking Compliance Calendar will keep you on your toes for timely adherence to all the formalities and legalities involved when dealing with Banks.