Unregistered and Delayed Charges over the Same Plant at Deccan Precision Tools
Deccan Precision Tools Limited created a hypothecation charge over its entire plant and machinery on 18 January 2024 in favour of Purna Bank to secure a ₹6 crore term loan. The charge was filed with the Registrar on 22 March 2024, and the Registrar has demanded additional fee. On 5 April 2024 the company created a second charge over the same machinery for ₹2 crore in favour of a non-banking finance company; that Form CHG-1 was filed on 25 April 2024. While inspecting the company's statutory registers on 10 July 2024, the bank's officer found no entry of a third charge: in 2021 the company had secured a ₹1 crore loan from the sister of a whole-time director against the same machinery, and that charge was never registered at all. The company's total borrowings are within its Section 180(1)(c) limit. The bank wants to know the status of its own security and whether the 2021 charge can still be registered.
1. Is Purna Bank's charge validly secured given that Form CHG-1 was filed 64 days after creation? What would have happened had the delay been longer?
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Normal period. Section 77(1) requires a company creating a charge to file the instrument with the Registrar, in Form CHG-1, within 30 days of creation. The bank's charge was created on 18 January 2024, so the ordinary window closed on 17 February 2024.
Extended period. The proviso to Section 77(1) permits registration within 300 days of creation on payment of the additional fee prescribed by the Companies (Registration of Charges) Rules, 2014. Filing on 22 March 2024 is 64 days after creation, comfortably within 300 days. On payment of the additional fee, computed by reference to the period of delay, the charge is validly registered and the bank's security over the plant and machinery is intact and enforceable. The Registrar's demand for additional fee is lawful and must be met; non-payment does not extend the period.
Had the delay crossed 300 days. The outer limit ran to 13 November 2024. Beyond that, the Registrar has no power to register, and under Section 77 a charge not duly registered is not valid against the liquidator or any creditor of the company; the secured money also becomes immediately payable. The bank would then have been an unsecured creditor despite holding a hypothecation deed.
Practical point. The bank should also verify that the second charge filed on 25 April 2024 carries Form CHG-1 for the same property and that the company's register under Section 85 records all three charges; the register must be open to inspection by any creditor or member without charge.
2. Can the 2021 charge in favour of the director's sister now be registered? What are the consequences if it is not, and what does the loan itself suggest?
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No ordinary registration. The 300-day window under Section 77(1) expired long ago. The Registrar cannot entertain a fresh CHG-1 for a charge created in 2021, and the company cannot cure the omission by filing now with additional fee.
Only route - Section 87. The company or the charge-holder may apply to the Central Government (in practice the Regional Director) for rectification of the register or extension of time. Relief may be granted if the omission was accidental, or due to inadvertence or some other sufficient cause, or is not of a nature to prejudice the position of creditors or shareholders, or on other grounds that are just and equitable. A three-year delay in favour of a whole-time director's close relative is difficult to characterise as inadvertence, and the lender, being an insider, would be taken to have known the law. The application faces a strong likelihood of refusal.
Consequences of non-registration. The charge is invalid against the liquidator and against creditors such as Purna Bank, so the ₹1 crore lender ranks as an unsecured creditor; the loan becomes immediately repayable; and the company and every officer in default are liable to fine under Section 86 for failing to register and for the false or incomplete register maintained under Section 85.
The loan itself. A loan to a person in whom a director is interested attracts Section 185, and requires prior approval by special resolution of the company. The audit committee should verify whether that approval was obtained in 2021; if not, the loan was itself unlawful independently of the registration failure.