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Charge and Hypothication under Companies Act, 2013

Charge according to the Companies Act, 2013 – section 2(16) refers to interest creation or a right on a property/asset of a company as a security against loan provided to the company in respect of such interest.

Charge is created by Companies who have the requirement of financial assistance to make their companies productive and in doing so creating any right or interest in assets of companies. Charge also includes mortgage. Charge is created so that the banks or other kind of financial institutions have security for the loans provided by creation of charge on assets of company and having it registered with the Registrar.

Hypothecation: –

Hypothecation refers to charge made on any movable property wherein the borrower has the possession of the property but the creditor has the right to force and take ownership & possession of the said property in case of a default by the borrower. So, in case of hypothecation, on behalf of the bank, the borrower holds the asset. Although the concept of hypothecation agreement may enable the bank, in the case of default to take possession of the goods and sell them, it is possible only when the borrower cooperates with the bank.

As per the Section 2 in The Securitisation and Reconstruction of Financial Assets and enforcement of Security Interest Act, 2002, hypothecation means “a charge in or upon any movable property, existing or future, created by a borrower in favor of a secured creditor without delivery of possession of the movable property, as a security for financial assistance & includes floating charge and crystallization of such charge into fixed charge on movable property”.

On 20 July, 2006, in the case of M/S Indian Oil Corporation V/S M/S Nepc India LTD. & Ors it was held that:

“There is no difference whether the charge created by the deed of hypothecation is a fixed or floating charge. Fixed charge refers to – Where a specific existing property is hypothecated. The term floating charge refers to a charge created generally against the assets held by the debtor at any given point of time during the subsistence of the deed of hypothecation.

What are the Registration Process: –

A company making a charge on their property located within India or outside India shall register their charge with the Registrar within 30 days of creation or modification (in terms and conditions) of such charge with particulars of Charge and a copy of instrument creating the charge signed by the Company and Charge-Holder in such Form mention below:

1. CHG-1: – For other than Debentures.

2. CHG-9: – For Debentures.

3. CHG-7: – Register of Charge (only to be maintained by company for their members).

Thus, by the deed of hypothecation and following the same process as followed in the case of immovable property a charge is created and the applicability is the same as of charge.