Procedure for Creation and Modification of Charges

A charge is a kind of security that a company gives on its assets to safeguard a loan or fulfil an obligation. It means that if the company fails to repay the provided loan, the lender has the legal right to claim those assets.

As per Section 2(16) of the Companies Act, 2013, a “charge” means an interest or lien created on the property or assets of a company or any of its undertakings as security and includes a mortgage.

The provisions governing the creation, registration, modification and satisfaction of charges are contained in Sections 77 to 87 of the Companies Act, 2013 read with the Companies (Registration of Charges) Rules, 2014. Registration of charge ensures transparency and protection of creditor’s interests.

Types of Charges

1. Fixed Charge:

Created on identifiable assets such as land, building or machinery. The company cannot dispose of these assets without the consent of the charge-holder.

2. Floating Charge:

Created on a class of assets like stock, inventory or book debts that fluctuate in the ordinary course of business. The company can use such assets until the charge crystallises.

Statutory Provisions Governing Charges

The following provisions of the Companies Act, 2013 govern charge-related compliance:

• Section 77: Duty to register charges
• Section 78: Application for registration by charge-holder
• Section 79: Application of section to certain matters
• Section 80: Date of notice of charge
• Section 81: Register of charges to be kept by the Registrar
• Section 85: Company’s own register of charges
• Section 86: Penalty for non-compliance
• Section 87: Rectification of register of charges
• Rules: Companies (Registration of Charges) Rules, 2014

Procedure for Creation and Registration of Charge

Step 1: Board Resolution

The Board of Directors must pass a resolution authorising a director or KMP to:

• Execute necessary loan or charge documents (loan agreement, mortgage/hypothecation deed).
• Submit documents to various authorities and the Registrar of Companies (ROC).
• Approve the creation or modification of charge, specifying lender, security type and amount.

(In some cases, shareholder approval under Section 180 may also be required.)

Step 2: Filing of e-Forms

Within 30 days from the date of creation or modification of charge, the company must file:

• Form CHG-1 – For general charges.
• Form CHG-9 – For charges relating to secured debentures.

Information required in CHG-1 includes:

• Date of instrument and charge ID (if modification)
• Nature and brief particulars of the instrument
• Type of charge and charge-holder’s details (Name, Address, Email, PAN)
• Amount secured and description of property charged
• Principal terms (interest rate, repayment terms, facility type)
• Ownership and location details of the property
• Previous charge details and particulars of modification

Information required in CHG-9 includes:

• Purpose: Creation/Modification/Rectification of charge for debentures
• Type of debenture and applicant (Company/Charge-holder/Trustee)
• Date and description of instrument, complete address of charged property
• Debenture and trustee details (name, email, PAN, etc.)
• Issue details, facility terms, interest rate, disbursement date
• Commission/discount and modification details (if applicable)

Step 3: Payment of Fees and Additional Fees

1. If filed within 30 days – normal fees apply.
2. If not filed within 30 days but within the next 30 days:
• Small Companies/OPC: 3× normal fee
• Other Companies: 6× normal fee
3. If not filed within 60 days, it can be filed within a further 60 days with:
• Normal Fee + Additional Fee + Ad valorem Fee (0.025% of the charge amount, max ₹1 lakh for small companies/OPC; 0.05% max ₹5 lakh for others).

Step 4: ROC Verification and Certification

After submission and payment of fees, the ROC verifies the e-Form and attached documents.

If satisfied, the ROC issues:

• Form CHG-2 – Certificate of registration of charge, or
• Form CHG-3 – Certificate of modification of charge.

These details are entered in the Register of Charges maintained by the ROC.

Step 5: Charge-Holder’s Right to Register (Section 78)

If the company fails to register the charge within the duration of 30 days, the charge-holder may apply directly to the ROC for registration. ROC will notify the company; if there is no response within 14 days, registration may proceed upon payment of prescribed fees.

Step 6: Mandatory Attachments

• Instrument(s) of creation or modification
• Board Resolution (optional but advisable)
• Sanction letter or loan agreement (optional)
• For CHG-9 – Debenture issue resolution (mandatory)
• Central Government order (if rectification or condonation)

Step 7: Digital Signature & Certification

The e-Forms must be:

• Digitally signed by Director / Manager / Company Secretary / CEO / CFO / IRP / RP / Liquidator / Authorised Representative (in case of foreign company).
• Certified by a practicing CA/CS/CMA, if applicable.

Step 8: Maintenance of Register of Charges

The company must maintain a Register of Charges (Form CHG-7) at its registered office, in physical or electronic form containing particulars of all charges and modifications. This register must be open for inspection by members and creditors.

Procedure for Modification of Charge

A modification includes any change in terms, conditions, extent or operation of an existing charge.

Steps are similar to charge creation:

• Pass a Board Resolution approving modification.
• Execute a modification or supplemental deed.
• File Form CHG-1 or CHG-9 (for debentures) within 30 days.
• Attach supporting documents and pay prescribed fees.
• Upon verification, ROC issues Certificate of Modification (Form CHG-3).

Satisfaction or Release of Charge

When a loan is repaid or a charge is fully satisfied:

• File Form CHG-4 within 30 days of satisfaction.
• ROC, after verification, issues Form CHG-5 (Certificate of Satisfaction).
• Update company’s internal Register of Charges (Form CHG-7).

Consequences of non-registration

1. The charge becomes void against the liquidator and creditors and the lender loses priority rights.
2. The company’s debt obligation remains, but the lender becomes unsecured.
3. Penalties under Section 86 apply:
• ₹5,00,000 for the company
• ₹50,000 for each officer in default
4. • Further, misstatement or fraud invites action under Section 447.

Private Companies

Private companies are not exempted from any provision related to creation or modification of charges. All procedures and filing requirements apply equally.

Importance of Timely Registration

• Secures lenders’ rights and establishes priority.
• Promotes transparency in the financial dealings.
• Prevents penalties and ensures element of enforceability.
• Enhances corporate credibility and governance standards.

Conclusion

The creation and modification of charges are essential aspects of the corporate borrowing and financial discipline. The Companies Act, 2013 prescribes a transparent, clear and time-bound framework to protect lenders’ interests and ensure corporate accountability. If you need any professional assistance, do contact to Remind Legal, our experts will handle every complinace with an ease.

By following the prescribed statutory timelines, filing e-Forms in accurate manner and also maintaining records, data diligently and securely, companies not only comply with the law but also reinforce trust and credibility among investors and financial institutions.