To understand the meaning of charge in simple words, let’s take an example: The police has charged a person under section 300 of IPC. Here, the word charge means the creation of some obligation on the person. In the same way, the Companies Act of 2013 defines a charge as “an interest created on the company’s property or assets as a security,” according to section 2(16). It also includes a mortgage.
Now, the question arises as to why the creation of charge is important. Let’s understand this by way of an example. XYZ Ltd took a loan of rupees 1 crore from ICICI bank. In return, XYZ Ltd has given its property of Noida office worth rupees 3 crores as security to the bank. Now, here the bank will create a charge on the property of XYZ Ltd granted as security of the bank.
But, after creating a charge, it is also important to register that charge. So, even if the company (XYZ Ltd) tries to sell its Noida property to the general public by way of fraud, the public will be aware that this property of XYZ Ltd is already kept as a security with the ICICI bank. Therefore, every charge created should also be registered with the Registrar of Companies.
Therefore, it is clear that banks require some surety from the company in return for the loan amount, and thus, they create a charge on assets or property of the borrower company. This is known as a charge on assets.
Essential Features of Charge
Essential features of the charge are:
- There are two parties, one is the creator of the charge (company on whose property the charge is created), and the other is the charge holder (one who lends money).
- There must be a subject matter for which the charge is created. Subject-matter here relates to security, and it can be any current or future assets or any other property of the borrower.
- There will be an agreement between the two parties specifying the security rendered for repayment of borrowed money, the interest rate in favour of the lender, etc.
- A charge is of two types – fixed and floating.
Kinds of Charges
The charge on the property of the borrower as security can be of two types, namely:
What Is Fixed or Specific Charge
The charge is fixed or specific when the property or assets given as security are definite and ascertained. The company loses its right to dispose of or transfer that property from the moment it is given as security to the charge holder.
As discussed in the above example, the property of the Noida office of XYZ Ltd was a fixed charge as it is definite and ascertained, and the company cannot dispose of that property till the time it is kept as security with the bank.
What Is Floating Charge
Floating charge is also created on the assets or property put as security, but it is not attached to any definite property. This charge can also be created on future assets. Floating charge is of changing nature. Example: Stock-in-trade
In a floating charge, even if the inventory or stocks are kept as security with the charge holder, still the company can increase, decrease the price of stocks and even modify the inventory until the charge holder wishes to enforce the security.
Case Laws Related to Charge
After reading the concept of charges, it is important to study some related case laws.
Official Liquidator vs Sri Krishna Deo (1958)
As a company’s plant and machinery embedded in the earth or permanently fastened things attached to the earth became part of the company’s immovable property, registration under the Indian Registration Act, 1908 in addition to the Companies Act, 2013 would be required to make the charge valid and effective.
Re Cosslett (Contractors) Ltd
During the construction period, a construction company’s washing machine that was in use on the job site was declared to be the employer’s property under the terms of the contract. Because the machine was simply one fixed object and was not likely to modify, this was considered to have caused a fixed rather than a floating charge.
What’s the Difference Between Fixed and Floating Charges
There are two types of charges – fixed and floating. Let us compare both and understand the difference between them:
Fixed Charge: It is a legal charge.
Floating Charge: It is a charge on equity.
Fixed Charge: It is a charge on defined and ascertained assets.
Floating Charge: This charge is of changing nature.
Fixed Charge: It is a charge on present assets.
Floating Charge: It is a charge on future assets.
Fixed Charge: A company cannot deal with the assets given as security.
Floating Charge: A company can still deal with the assets given as security.
Fixed Charge: A fixed charge is given priority over a floating charge.
Floating Charge: It is shifting in character.
Crystallisation of Floating Charge
Crystallisation can be understood by the word crystal, which means to freeze. You can easily understand that crystallisation of floating charge means freezing of floating charge.
For example: Suppose Apple company (makers of iPhone) borrowed money from SBI bank till 2015, and the bank has created a floating charge on the company’s stock. If the company does not pay the borrowed amount till 2015, then their stock will be crystallised, and they won’t be able to sell iPhones from 2015.
From the above example, it is clear that the company has the right to carry on its business with its stock having a floating charge till the time the charge comes into action or the charge holder determines its rights.
In simple words, a charge is an obligation that arises on a company while borrowing some amount, and it is created on the property or assets of the company that is kept as security or mortgage. There are two parties involved in the charge, one is the creator of the charge (borrower), and the other is the charge holder (one who lends money).