Companies Act Section 2(16) Charge

Charge Section 2(16) of the Companies Act, 2013

Charge Section 2(16)

A "charge" means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.

Key Features:

1. Interest or Lien: 

A charge creates an interest or lien on the company’s property or assets. 

This means that the lender (or charge holder) has a legal right over the company's property or assets as security for the repayment of a debt or performance of an obligation.

2. Property or Assets: 

The charge can be created on any type of property or assets, including tangible assets like land, buildings, machinery, or intangible assets like patents and trademarks.

3. Undertaking: 

The charge can also be on the entire undertaking of the company, which includes all its assets and business operations.

4. Security for Debt: 

The primary purpose of creating a charge is to provide security to a lender or creditor. 

In case the company defaults on its debt or obligation, the charge holder can enforce the charge to recover the debt.

5. Includes Mortgage: 

The term "charge" is broad and includes a mortgage. 

A mortgage is a specific type of charge where real estate property is pledged as security for a loan.

Types of Charges:

1. Fixed Charge: 

A fixed charge is created on specific, identifiable assets. 

These assets are often immovable or long-term assets such as land, buildings, or machinery. 

The company cannot sell or dispose of these assets without the charge holder's consent.

2. Floating Charge: 

A floating charge is created on a class of assets that are constantly changing or circulating, such as stock, inventory, or trade receivables. 

The company can use and dispose of these assets in the ordinary course of business until the charge crystallizes (becomes fixed) upon the occurrence of certain events, such as default or insolvency.

Importance:

1. Securing Loans: 

Creating a charge allows companies to secure loans or credit by pledging their assets. 

This helps in raising funds for various business activities.

2. Creditor Protection: 

Charges protect the interests of creditors by providing them with legal rights over the company's assets. 

This ensures that creditors have a means to recover their debts if the company defaults.

3. Priority of Claims: 

In the event of liquidation or insolvency, registered charges determine the priority of claims. 

Secured creditors with registered charges generally have priority over unsecured creditors.

Registration of Charges:

Mandatory Registration: 

The Companies Act, 2013 mandates the registration of certain charges with the Registrar of Companies (RoC). 

This includes both fixed and floating charges. The registration must be done within 30 days of the creation of the charge.

Public Notice: 

Registration of charges provides public notice of the charge, ensuring transparency and protecting the interests of potential creditors and investors.

Consequences of Non-registration: 

Failure to register a charge can result in the charge being void against the liquidator and other creditors. 

This means the charge holder may lose the priority and security over the charged assets.