# Charge — Definition, Types & Crystallisation

## 1. Definition — Sec. 2(16)

A Charge means:

An interest or lien
Created on the property or assets of a company or its undertakings (or both)
As security
Includes a mortgage.

## 2. Types of Charge

### A. Fixed Charge

Charge on specific, identifiable assets (e.g., land, building, machinery).
Assets are identified at the time of charge creation.
The company cannot sell the charged asset without the charge-holder's permission.
Typically created via mortgage or deposit of title deeds.
Released upon full repayment of the borrowed money.

### B. Floating Charge

Charge on fluctuating assets like raw materials, stock-in-trade, debtors.
Covers both present and future assets.
Allows the company to deal with the assets in the ordinary course of business.
Typically created via hypothecation or lien.
Converts to a fixed charge upon crystallisation.

### Quick Comparison

Feature	Fixed Charge	Floating Charge
Asset Coverage	Specific, identifiable	Class of changing assets
Dealing in OCB	Not permitted	Permitted
Sale of Asset	Needs creditor's consent	Free in OCB
Mode	Mortgage / Title deeds	Hypothecation / Lien
Status until enforcement	Already fixed	Dormant, becomes fixed on crystallisation

## 3. Crystallisation of Floating Charge

Crystallisation = the moment a floating charge converts to a fixed charge on the assets then available, locking in the creditor's security.

### Why Crystallisation Matters

A floating charge remains inactive (dormant) until crystallisation.
After crystallisation, the security becomes fixed and can be realised for repayment.

### Events Triggering Crystallisation

1. Breach of any term of the floating charge.

2. The company stops operations (ceases business).

3. The company goes into liquidation.

4. The creditor enforces the security (e.g., default).

### Visual Memory Hook

> Floating → Hovers over a pool of changing assets → On default, CRYSTALS form → assets locked at that moment as security.

Worked example

### Example 1

Example — Type Classification:

ABC Ltd. mortgages its factory building to State Bank for a ₹50 crore term loan. Separately, it hypothecates its stock-in-trade and book debts to support a ₹20 crore cash credit facility.

Analysis:

Mortgage of factory building = Fixed Charge (specific identifiable asset; ABC cannot freely sell).
Hypothecation of stock and debtors = Floating Charge (changing class; ABC continues to deal in ordinary course).

### Example 2

Example — Crystallisation:

XYZ Ltd. has a floating charge on its inventory in favour of HDFC. XYZ defaults on instalments. HDFC enforces the security.

Analysis: Enforcement by creditor triggers crystallisation. The floating charge converts to a fixed charge on the inventory existing at that moment. XYZ can no longer freely deal with that inventory.

⚠️ Common exam mistakes

Forgetting that the definition of charge includes 'mortgage' — many students treat them as different.
Confusing floating charge with no charge at all — a floating charge is a valid charge, just not crystallised until trigger event.
Believing intangible assets cannot be charged — they can be charged (the restriction is specifically for public-deposit-backed charges under Sec. 76, not generally).
Forgetting that 'cessation of business' is also a crystallisation trigger.
Treating crystallisation as automatic from inception — it requires a triggering event.

Bare-Act text Section 2(16) · Companies Act, 2013 · click to expand

Section 2(16) — '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.

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