# Charge — Meaning and Types

## Definition [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 elements:

It is an interest or lien (not full ownership).
Created on property/assets/undertaking.
Created as security for some debt or obligation.
Includes mortgage (mortgage = a specific form of charge over immovable property).

## Two Types of Charges

### 1. Fixed Charge

Charge on specific, identifiable assets of permanent nature (e.g., land & building, machinery).
Assets are identified at the time of creation.
Usually created by mortgage or deposit of title deeds.
The borrowing company cannot sell the asset without the charge holder's consent — but it may use the asset.
Charge stands vacated only when the borrowed money is fully repaid.

### 2. Floating Charge

Charge on assets of a fluctuating or changing nature (e.g., raw material, stock-in-trade, debtors).
The pool of assets keeps changing — the company can use them in the ordinary course of business.
A buyer in the ordinary course gets a good title, free of charge.

#### Crystallization of Floating Charge

A floating charge stays dormant (does not bite a specific asset) until it becomes fixed — this is called crystallization.

Crystallization occurs when:

1. The creditor enforces the security due to breach of terms.

2. The company ceases to carry on business.

3. The company goes into liquidation.

Once crystallized, the floating charge attaches to the assets present at that moment and becomes a fixed charge — those assets can no longer be dealt with in the ordinary course.

## Comparison Table

Feature	Fixed Charge	Floating Charge
Nature of assets	Specific, identifiable	Changing, fluctuating
Examples	Land, building, machinery	Stock, debtors, raw material
Right to deal with asset	Restricted (needs lender's consent)	Free use in ordinary course
Buyer's title	Subject to charge	Good title, free of charge
Becomes 'fixed' on	Already fixed	Crystallization

Worked example

### Example 1

Example — Fixed and Floating Charges Together

XYZ Ltd. takes a loan from Bank A and creates:

A fixed charge on its machinery → XYZ cannot sell the machinery without Bank A's consent, but can use it in production.
A floating charge on raw material → XYZ is free to consume and replenish raw material in the ordinary course.

When XYZ defaults, the floating charge crystallises and becomes a fixed charge on the stock of raw material existing at the moment of default. Bank A can now sell both the machinery and the crystallised stock to recover its dues.

⚠️ Common exam mistakes

Believing a charge transfers ownership to the lender — it only creates an interest/lien.
Thinking a floating charge becomes fixed automatically over time — it only crystallises on specific events (default, ceasing business, liquidation).
Confusing fixed charge assets as un-usable — the company may use them, only sale is restricted.
Assuming buyers of stock with a floating charge over it take subject to that charge — in the ordinary course, they take a good title free of charge.
Mistaking 'mortgage' as something separate from a charge — the definition explicitly includes mortgage.

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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Definition of Charge and Types — Fixed vs Floating Charge

Worked example

⚠️ Common exam mistakes