# Registration of Charges — Meaning & Kinds

## 1. Definition of Charge — Sec. 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."

### Why charges are created

When a company borrows term loans or working capital loans from banks/FIs against its property or assets, it must create a charge in favour of the lender. Security may be by way of:

Mortgage (immovable property)
Hypothecation (movables retained with borrower, e.g., stock, vehicles)
Pledge (movables delivered to lender, e.g., gold, shares)

Every such charge must be registered with the Registrar of Companies.

## 2. Kinds of Charge

Feature	Fixed (Specific) Charge	Floating Charge
Nature of asset	Specific, identifiable assets ascertained at the time of creation	A class of present and future assets, changing in the ordinary course of business
Examples	Land, building, heavy machinery	Stock-in-trade, debtors, raw materials
Effect on company	Loses the right to dispose of that property freely	Company is free to deal with the property in the ordinary course until crystallisation
Attachment	Attaches immediately to specific property	Does not attach to any definite property — 'hovers' over a class

## 3. Crystallisation of Floating Charge

A floating charge remains dormant until it becomes fixed (i.e., crystallises). On crystallisation, the underlying assets (e.g., raw material, stock-in-trade) become fixed and are available for realisation to repay borrowed money.

### Events triggering crystallisation

1. Company goes into liquidation.

2. Company ceases to carry on business.

3. A receiver is appointed.

4. Company defaults in repayment of loan and the creditor / debenture-holder appoints a receiver to take possession of charged property to enforce security.

5. Any event specified in the loan agreement / deed on which parties have consented that the charge shall crystallise.

## 4. Visual Summary

```

CHARGE ── interest/lien as security ── includes mortgage

│

────────┴────────

│ │

FIXED FLOATING ── crystallises on liquidation, cessation of

(specific (class of business, receiver appointment, default,

asset) assets) or per loan deed → becomes FIXED

```

Worked example

### Example 1

Example 1 — Identify the type of charge:

A company creates a charge over its present and future book debts to secure a bank overdraft. What kind of charge is this?

Answer: Floating charge. Book debts are a fluctuating class of assets changing in the ordinary course of business. Until crystallisation, the company is free to recover and use these debts.

### Example 2

Example 2 — Effect of receiver appointment:

A bank holds a floating charge over the stock-in-trade of M Ltd. M Ltd. defaults; the bank appoints a receiver. What happens to the floating charge?

Answer: The charge crystallises on the appointment of the receiver. The stock-in-trade is now treated as a fixed charge — the company can no longer deal with it freely, and the assets become available for realisation by the lender.

⚠️ Common exam mistakes

Treating 'pledge' and 'hypothecation' as the same — pledge requires delivery of possession; hypothecation does not.
Believing floating charges remain floating forever — they crystallise into fixed charges on specified trigger events.
Forgetting that the Sec. 2(16) definition is inclusive of mortgages — not limited to them.
Confusing 'charge' with 'lien' — a charge is broader and includes mortgage; a lien is one form of charge.

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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Meaning and Kinds of Charge (Fixed vs Floating) — Sec. 2(16)

Worked example

⚠️ Common exam mistakes