Introduction to Charge
A charge is a security provided for securing loans or debentures by way of a mortgage on the assets of the company. Generally, debentures and other borrowings are secured by a charge on the assets of the company. Where property, both existing and future, is agreed to be made available as a security for the repayment of debt and creditors have a present right to have it made available, a charge is created.
The right of the creditor can only be enforced at a future date if terms and conditions regarding the loan are not met. A creditor doesn’t get a legal right either absolute or special to the property charged. He only gets the right to have the security made available/enforced by an order of the Court.
The need for creating charge
Most of the large companies are dependent on share capital and borrowed capital for financing their projects. Borrowed capital consists of funds raised by issuing secured or unsecured debentures or by obtaining loans from financial institutions or banks.
The financial institutions/banks do not lend unless they believe that their funds are safe and they would be repaid as per agreed repayment schedule along with payment of interest, to safeguard the loans from becoming Non-performing Advances(NPAs), banks create right in the assets and properties of the borrowing companies, which is known as a charge on assets. This is done by executing loan or hypothecation agreements, mortgage deeds, etc., which the borrowing company is required to execute in favor of the banks.
Types of Charges
A charge on the property of the company as security for debts may be of the following types:
- A fixed or specific charge
- Floating charge.
Fixed or Specific Charge
A charge is called fixed or specific when it is created to cover assets that are ascertained and definite or are capable of being ascertained and defined, at the time of creating the charge e.g., land, building, or plant and machinery.
A fixed charge is a security in terms of a certain specific property and the company gives up its right to dispose of that property until the charge is satisfied. In other words, the company can deal with such property, subject to the charge so that the charge holder’s interest in the property is not affected and the charge holder gets priority over all subsequent transferees except a bona fide transferee for consideration without notice of the earlier charge. In the winding-up/Liquidation of the company, a debenture holder secured by a specific charge will be placed in the highest-ranking class of creditors.
A floating charge, as a type of security, is peculiar to companies as borrowers. A floating charge is not attached to any definite property but covers the property of a fluctuating type e.g., stock-in-trade, and is thus necessarily equitable.
A floating charge is a charge on a class of assets present and future which in the ordinary course of business is changing from time to time and leaves the company free to deal with the property as it sees fit until the holders of charge take steps to enforce their security. But floating security is not future security. It is present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not specific security; the holder of such charge cannot affirm that the assets are specifically mortgaged to him.