CHARGE UNDER TRANSFER OF PROPERTY ACT, 1882

Table of Contents

INTRODUCTION

Charge, Section 100 of the Transfer of Property Act, 1882 –

Where immovable property of one person is by an act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property and all the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge.

Nothing in this section applies to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust, and, save as otherwise expressly provided by any law for the time being in force, no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge.

TYPES OF CHARGE

There are two types of Charge, i.e., a fixed charge and a floating charge depending on their nature

FIXED CHARGE

A fixed charge is attached to an identifiable asset at creation. Assets can include land, property, machinery, copyright, trademark, and much more. The business does not typically sell these fixed assets, and the fixed charge is applied to protect the repayment of the company debt. The simplest way to put it into perspective is to think of a mortgage; you cannot sell your house without your lender’s permission, as you have not yet paid the debt off and own the house. With a fixed charge, the lender has full control of the company asset. Therefore, should any corporation want to sell that particular asset, it must have the lender’s approval to do so or pay off the debt.

EXAMPLE

Mortgage payments
Rent deposits
Chattels and leases
Bill of sale
Factored book debts

FLOATING CHARGE

A Floating charge ‘floats’ by its very nature. While a fixed charge is attached to an asset that can be easily identified, a floating charge is a charge that floats above ever-changing assets.
The floating charge, or a security interest over a fund of changing company assets, allows for more freedom for a business, than the lender.

While a fixed charge protects the lender, the floating charge gives more scope for the company to sell, transfer or dispose of its assets, without seeking approval from the bank. From the lender’s point of view, it leaves them exposed – particularly as floating charge repayments typically recoup less than the fixed charge. However, it’s impossible to attach a fixed charge on all company assets, hence the use of floating charge assets.

EXAMPLE

Stock and inventory
Trade debtors
Movable plant and machinery
Furniture, fixtures and fittings with the business

CREATION OF A CHARGE

Section 100 of the Transfer of Property Act requires that there be a clear intention to use specific property as security for the repayment of a debt. There cannot be a mortgage or a charge if the property is not meant to be used as security. A charge is the consequence of an encumbrance on the property. It has been determined that entering into a memorandum of agreement to sell a property does not create any encumbrances or charges on the property. Receiving advances or funds in accordance with a memorandum is not the same as creating an encumbrance.

The Charge must be imposed against a present or prospective immovable property owned by the borrower. It is just a means of providing security that can be enforced in court. It is necessary to make a charge against immovable property in writing. Most crucial thing to remember is that property must be clearly intended to be used as a security for the money payment.

A charge cannot be issued if the immovable property is not held by the person who owes the money. A wife, for example, demanded the imposition of a charge on the house property in a maintenance suit. The property could not be charged since it was not built nor held by the husband, according to the court.

REQUISITES OF A VALID CHARGE

A charge does not imply that an interest in the immovable property will be transferred.
It is necessary to specify the property and make it a security for the payment of money. For this purpose, a precise and accurate description of the property is required.
It is not required to employ any technical jargon to create a charge; that is to say, the form of words does not matter.
A charge must be established in the name of a specific individual.
A charge can be created orally, but it must be recorded if it is created by a written instrument unless it is made by a Will, or the sum secured is less than one hundred rupees.
A charge on a future contingency cannot be created. A charge made by a person on an unknown and uncertain share, that one of his heirs may inherit, is null and void.
A charge on future property is legal and acts on that property as soon as it is created.
It is possible to assign a charge.
Normally, a fee cannot be broken up by assigning responsibility to different people.

RIGHTS OF CHARGE HOLDER

To preserve the mortgaged property from destruction, forfeiture or sale etc.
For taking sides of the mortgagor’s title to the property.
For making his own title thereto good in opposition to the mortgagor.

TERMINATION OF CHARGE

By Act of parties by the release of Debt or Security.
By the process of Novation, or
By means of Merger.

SECTION – 101 No merger in case of subsequent encumbrance

Any mortgagee of, or person having a charge upon, immovable property, or any transferee from the such mortgagee or charge-holder, may purchase or otherwise acquire the rights in the property of the mortgagor or owner, as the case may be, without thereby causing the mortgage or charge to be merged as between himself and any subsequent mortgagee of, or person having a subsequent charge upon, the same property; and no such subsequent mortgagee or charge-holder shall be entitled to foreclose or sell such property without redeeming the prior mortgage or charge, or otherwise than subject thereto.