Charge under Transfer of Property Act

What is a Charge under transfer of property act?

Meaning of Charge under Transfer of Property Act: – Charge under Transfer of Property Act is an interest created over an immovable property for securing payment of the amount which is due to the party. Charge is where the immovable property of one person, is by an act of parties or operation of law, made security for the payment of money to another person and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property.

Hence, every mortgage is a charge but not every charge is a mortgage. A charge under Transfer of Property Act is an interest created over an immovable property for securing payment of the amount which is due to the party. The property is not transferred to the lender and only interest is created. It is neither a lien nor a mortgage but some properties of both are present in a charge. 

Charge under Transfer of Property Act| Legal PaathShala

Section 100 of the Transfer of Property Act, 1883 defines charge as, Where a person’s immovable property is, by an act of parties or operation of law, made a security for the payment of money to another, and this transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions therein contained which apply to a simple mortgage shall, so far will also apply to charge.

Nothing in this section applies to a trustee’s charge on trust-property for the  expenses in the execution of his trust, and, to save until the time expressly enforced by any law, any charge will not be enforced against any  property in the hands of the  person to whom such property has been transferred for consideration and without notice of charge.

What are the requisites of a charge under transfer of property act?

The requisites of a Charge under Transfer of Property Act are as follows: –

  • A charge does not regard any transfer of an interest in the immovable property;
  • The property should be specified and it should be made security for the payment of money. A clear and accurate specification of the property is mandatory for the creation of charge.
  • In order to constitute a charge, the form of words is immaterial; it is not necessary to use any technical terms;
  • A charge must be created in favour of a particular person specifically named;
  • A charge may be created orally, although if it is created by an instrument in writing, it must be registered unless made by a will or unless the amount secured is less than one hundred rupees;
  • A charge cannot be created on a future contingency. A charge created by a person on the unknown and uncertain share which one of his heirs may succeed to is invalid as a charge;
  • A charge on the future property is valid and operates on such property when it comes into existence;
  • A charge could be assigned;
  • A charge cannot ordinarily be split up by apportioning liability amongst various persons.

What are the essentials of a valid charge under transfer of property act?

There are some essentials which need to be fulfilled to create a valid Charge under Transfer of Property Act:

  1. Immovable Property: –
    • The charge must be made against an immovable property which may be a present or future property belonging to the borrower.
    • It is nothing but a tool to create security that may be enforceable in court.
    •  To create charges against immovable property, it is necessary that it must be in writing.
    •  Most important thing to keep in mind is that there should be a clear intention to use the property as a security for the payment of money.
    • If the immovable property is not owned by the person to whom the payment is due, the charge cannot be created.
    • For example: – A wife sought in a maintenance suit to construct a charge on the property of the house. The court considered that since the property was neither constructed nor owned by the husband, no charges can be made against such property.
  1. Does not amount to a Mortgage: –
    • A charge is not a mortgage because there is no transfer of property nor is any right transferred, but a personal obligation is created or the right to pay out of a specified property is generated.
    • It is specifically noted in section 100 that a charge is not amount to mortgage, although all provisions that apply to a simple mortgage will also be applicable to charge. In simple mortgagee, the mortgagor  is not required to give possession of his property to the mortgagee. Under a mutual agreement, it is decided that if the mortgagee fails to pay the money within the stipulated time period, the property can be sold in accordance with the law. In a simple mortgage there is a transfer of an interest in the property, but there is no such transfer in charge.
    • A charge is a wider term because it also includes a mortgage i.e. each mortgage is a charge but each charge is not a mortgage.
  1. The Charge created by an Act of Parties: –
    • Here, parties themselves create a charge by entering into an agreement. No special form of words or language is required to create a charge.
    • This would be sufficient to create a charge if it can be seen from the document that there is a clear intention to use that property as a security for the payment of the money, without transferring any right or interest in the property.
    • The Charge Holder’s remedy is only against the charged property.
    • For example: – ‘A’ inherited a property from his grandmother. He receives a certain amount of rent from the property. Now on his own volition (choice), he made an agreement to pay a certain portion of the rent to ‘B’. Here, ‘B’ will have a charge over the said property.
  1. Charges arising by Operation of Law: –
    • A charge can also be made by operation of law. This means that the charge is made without the will or intention of the parties, but the law enforcers them to perform certain obligations.
    • For example: – ‘B’ made the full payment of the purchase money in advance to ‘A’. But ‘A’ neither transferred the property nor registered it in the name of ‘B’. Here, ‘A’ charge will be created by the operation of law over the said property in favor of ‘B’.

Exceptions: –

Section 100 provides two exceptions under which no charge can be made. They are as follows: –

  • The charge which is made on an immovable property which is also a trust property in favor of a trustee for incurring expenses in the execution of his trust i.e. maintaining the trust property.
  • If a property, on which a charge was made, is brought into consideration by a person without any notice of the said charge, such charge cannot be enforced against him.

What is the difference between Charge and Lien?

The difference between Charge and Lien are as follows: –

  • A charge may be created both by an act of parties or by operation of law. A lien arises by operation of law
  • A charge can exist on an immovable property only. A lien can exist on both movable and immovable property
  • A charge is not possessory in its nature. A lien is possessory in nature
  • A charge holder can satisfy his claim by selling the property subject to his charge. A lien holder satisfies himself by private sale or retaining possession of the property.

What are the types of charge under transfer of property act?

The types of Charge under Transfer of Property Act are as follows: –

  1. Fixed Charge: – It is created on properties such as Land and Building, Plant & Machinery, whose identity does not change during the period of loan. The charge is created over discoverable assets i.e. land, building, machinery, goodwill, copyright etc. At the time of the creation of the fixed charge, there is a clearly specified and defined property, the identity of which doesn’t change during the period of the loan.
    • In such an arrangement, the borrower is left only with the possession of the property and the lender has complete control over the asset.
    • The borrower does not have the right to sell, transfer or dispose off the property and requires prior permission.
    • There is an obligation to pay the due amount first.
  1. Floating Charge: – It is created on assets which undergone change (stock). In floating charge, the security is allowed to be used in the ordinary course of business till the charge crystallizes. The charge is made on unascertainable assets i.e. assets, vehicles, debtors, etc. It is dynamic in nature i.e. price and quantity fluctuate time to time.
    • The borrower has the right to sell, transfer or dispose of the property and no prior permission is required.
    • No obligation to pay the due amount first.
  1. Crystallization: – Crystallization is a process in which the floating charge is converted into a fixed charge. This usually happens when the borrower defaults on the payment and the lender takes action to recover the loan. It means the charge becomes fixed when the company/firm ceases to be a going concern or upon the commencement of winding up or on the appointment of receiver.
    • It happens at the time of the closing of the company.
    • 1st Charge: – Where assets are charged to a creditor on first basis, that creditor has the 1st charge. The company exists or the business has to move forward.
    • 2nd Charge: – Where assets are already charged to a creditor on 1st basis and subsequently the charge is created in favour of another creditor.
    • Appointment of a receiver by the court.

What is Registration of Charges?

Meaning of Registration of Charges: – It is the obligation of every corporation to register with the Registrar of Companies specific charges made by the corporation on its assets. The reason for registration of charge is to offer public notice towards those who contemplate giving credit to the corporation on how far the property of the corporation is encumbered.

  • Under Section 77 of the Companies Act, 2013, every company making a charge shall register the particulars of the charge signed by the company its charge-holder together with the instruments created.
  • Therefore all types of charges are required to be registered according to the Act, whether they are made within or outside India.
  • A company must file with the Registrar the detailed information of the charge, along with the Instrument of the charge or its certified copy, in respect of certain charges, within the 30 days of the creation of a charge.
  • If it is not filed, it will be void against the liquidator and any other creditor of the company. However, this does not mean that the charge is completely void and the debt is not recoverable.
  • So until the company goes into liquidation, the charge is good and probably to be implemented.

Condonation of Delay

  • If the Registrar is satisfied that the company has sufficient reason for not filing the details and instruments of charge within 30 days of the formation of such charge, it may allow such registration after 30 days, But within 300 days after forming the charges.
  • The request for extension shall be submitted in Form CHG-10 and shall be accompanied by a statement from the corporation signed by the Secretary or Director claiming that admitting to such late filing, the rights of the intervening creditors of the company does not have adverse impact.
  • If the corporation fails to file a charge even during this three-hundred-day period, it may ask the Central Government to prolong the period in compliance with Section 87.

Difference between Charge and Mortgage under Transfer of Property Act

Difference between charge and mortgage under transfer of property act is given as follows: –

S.No.ChargeMortgage
1. Defined under section 100 of transfer of property act.Define in section 58 of transfer of property act .
2.Interest is made in the property to pay off the loan and there is no transfer of any interest.It involves the transfer of an ownership interest in an immovable property.
3. It is created either by an act of the parties or by the operation of law.It can be created by an act of the parties.
4.Registration is mandatory only when it is made by the act of the parties.Registration should be under the transfer of property Act. It is mandatory.
5. Time is infinite and can continue forever.The time is fixed in a mortgage.
6. Right in personam i.e. enforceable against a person.Right in rem i.e. enforceable against the world.
7. It can be in oral and written form.It must be in writing.

Case laws of Charge under transfer of property act

  1. JK (Bombay) Private Ltd vs. New Kaiser-I-Hind Spinning and Weaving Co Ltd 1970 AIR 1041, 1970 SCR (3) 866

In this case court held that however in the case of a charge, there is no transfer of interest or any of its interest, but only the creation of the right of payment out of the specified property, a mortgage accomplishes the transfer of property or an interest. No particular form of wording is required to create a charge and it is necessary that there should be a clear intention to create security of property for payment of money in the praesenti (at present time).

  1. Raychand Jivaji vs. Basappa Virappa Bellary (1940) 42 BOMLR 1113

In this case court held that it would be sufficient to create a charge if it can be seen from the document that there is a clear intention to use that property as security for the payment of money, without transferring any right or interest in the property.

  1. Debi Singh and Ors. vs. Jagdish Saran Singh AIR 1952 All 716

A mortgage is a legal process under which a person borrows money from another person and secures the repayment of the borrowed money and also pays the interest at the agreed rate, by creating any right or charge in favor of the lender on his movable and/or immovable property.

  1. Hasan vs. Mt Kalawati 147 IC 302, AIR 1933 All 934.

In this case the Calcutta high court held that if an instrument is expressly called a mortgage and the mortgagee gives the power of realization of the mortgaged money from the sale of the premises, it should be considered a mortgage. The fact is that the necessary formalities of due were not intended to convert the mortgage into the charge. If, on the other hand, the instrument is not on the face of a mortgage, but simply creates a lien, or instructs the realization of money from a particular property, without reference to the sale, it creates a charge.

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