NATIONAL LAW

UNIVERSITY,
JODHPUR

WHAT IS A CHARGE? TYPES OF CHARGES AND HOW IS A

CHARGE DIFFERENT FROM A MORTGAGE.

(Paper towards the fulfillment of the assignment in the

subject of Transfer of Property.)

SUBMITTED BY: SUBMITTED TO:

SHIVAM SINGH ANIRUDDH
PANICKER,
ROLL NO.: 1522 F ACULTY
OF LAW
UG SEMESTER IV NATIONAL LAW
UNIVERSITY, JODHPUR
B.B.A.LL.B. (HONS.)

SECTION A.

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SESSION
(JAN - MAY, 2020)
 SCOPE AND MEANING OF CHARGE

A statutory definition of charge has been provided under Section 100 of the
Transfer of Property Act as follows:
Where immovable property of one person is by 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.]1
Another statutory definition is provided under Section 2(16) of the Companies
Act, 2014 which defines charges so as to mean 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 mortgage2.
Section 100 of the Transfer of Property Act, 1882, requires the following
things: -
 There should be an interest which is created. The interest should be
created in favour of someone.
 The presence of two parties, i.e. the creator of the charge (borrower) and
the holder of the charge (lender)
 Charge must be created in favour of immovable property.
 No transfer of actual property.
 Either created by act of parties or by operation of law. It means that
charge so created can be through the will of the parties upon an

1
Section 100, Transfer of Property Act, 1882.
2
Section 2(16), The Companies Act, 2014.
 agreement between them as well as an obligation imposed upon the
parties by the law of the land.
The definition of charge is partially negative and partially positive in character. 3
It is not a necessary condition that there should be a pre-existing liability. It can
be validly created for the discharge of a future contingent liability. 4 It must be
noted that no particular words or form is prescribed to create a charge.
However, the intention of the parties that money is to be paid out of a specific
property, must be very clear.5 For a valid charge, the security towards it should
be specific immovable property, adequately described. Thus, an agreement that
gives immovable property as security for the satisfaction of a debt is an example
of creation of charge.
I. EXCEPTIONS TO THE LAW OF MORTGAGE

There are two exceptions enumerated under this section-

 The charge of a trustee on the trust-property for expenses properly
incurred in the execution of his trust.
 The charge is not applicable on a person who was transferred property for
a consideration but without notice of the charge.

By virtue of the second exception, charges cannot be enforced against any

property in hands of a bona fide transferee for consideration without its notice.
For instance, a charge is created in favour of mother of X and Y. This property
had been inherited from their father. This property is sold to A. He pays full
consideration for it. A is not aware of the charge on property. In this case, A is
not liable for the charge created in favour of mother.
The second exception brings out the primary difference between a charge and a
mortgage which is also the subject-matter of this assignment. While the purpose
of a charge is to secure payment of money, there is no transfer of a right in this
property in favour of the other to make it a mortgage. To the contrary, it is
something similar to creating a personal obligation.
3
Mohan Singh v Sewa Ram, AIR 1924 Oudh 215 .

4
Kesri Mal Umrao Singh v Tansukh Rai-Kidar Nath, (1935) 16 Lah 137.
5
Venkata Jagannatha Rao v Maharaja Rava, (1931) 60 Mad LJ 56.
 1. PURPOSE OF A CHARGE
Every venture, company or business requires funds for the smooth functioning
of their operations. This money is usually borrowed from banks or financial
institutions. These lenders do not lend money until they are sure that their funds
will be repaid along with interest. Therefore, in order to secure their loans, the
lenders execute loan agreements, hypothecation agreements, mortgage deeds
and other similar documents which the borrower executes in the favour of
lender. The creation of rights in the assets and properties of borrowing company
is known as charge on assets.
a) REGISTRATION OF CHARGE
By way of Section 77 of the Companies Act every charge created on assets or
the property i.e. intangible or tangible should be registered with the Registrar.
This needs to be done within 30 days of creating it. It can be done within 300
days if a sufficient reason is provided for not registering within 30 days as well
as on additional payment of a fee. If it is unable to do within 300 days an
extension can be sought as well. A charge does not have to necessarily be in
writing6, but if it is reduced to writing, registration becomes necessary 7 in the
case of a non-testamentary instrument of the value of R.s 100 or upwards.
2. TYPES OF CHARGE

a) Charges created by act of parties

It is an agreement that gives immovable property as a security for satisfaction of
a debt but without the transfer of any interest in the property. There is no
particular form of writing required for its creation. 8 It is sufficient if the
document shows the intent to make the land security for the payment of the
money.9 If there is an intention to create a charge in praesenti, an agreement to
mortgage may amount to a charge.10 A mere undertaking to discharge an
obligation or liability is not enough if the intention to make a specified property
or fund liable, is absent.11 For instance, if A inherited an estate from his
6
Mirza Ahmad Baig v Model Mills Nagpur, Ltd, AIR 1926 Ngp 262.
7
Tulsiram v Anusuya, AIR 1924 Ngp 360.
8
JK (Bombay) Private Ltd v New Kaiser-I-Hind Spinning and Weaving Co Ltd AIR 1970 SC 1041.
9
Janardan v Anant (1908) ILR 32 Bom 386.
10
JK (By) P Ltd v New K-I-Hind Spg & Wvg Co [1969] 2 SCR 866.

11
Chacko MC v State Bank of Travancore [1970] 1 SCR 658.
maternal grand-mother and executed an agreement to pay his sister B a fix
annual sum out the rents of the estate then B would said to have charges on the
estate.
b) Charges created by operation of law
A charge by operation of law is one which arises irrespective of the agreement
of the parties. These charges are known as equitable liens in English Law. In a
case decided by the Calcutta High Court,12 it was suggested that charges created
by operation of law have been included in the section. 13 Due to the existence of
other sections in the Act which refer to such charges one would have thought
that they had been included by inadvertence, because the Act relates to transfer
of property by act of parties, as is made explicitly clear by the Preamble of the
Act. Illustrations for this charge include vendors charge for unpaid purchase
money under Section 54 (4)(b) and vendors charge for purchase money paid in
advance under Section 55 (6)(b).

c) Fixed Charge
Fixed Charge is defined as a lien or mortgage created over specific and
identifiable fixed assets like land & building, plant & machinery, intangibles i.e.
trademark, goodwill, copyright, patent and so on against the loan. The charge
covers all those assets that are not sold by the company normally. It is created to
secure the repayment of the debt. In this type of arrangement, the special feature
is that after the creation of charge the lender has full control over the collateral
asset and the company (borrower) is left over with the possession of the asset.
For example in a mortgage, ‘A’ borrows money to buy a house, now ‘A’ cannot
own the house outright until the debt is repaid, nor can ‘A’ sell it without the
lenders permission. The mortgage is a form of fixed charge. Another example is
an assignment of a company's debtor book through factoring or invoice
discounting. This means the bank buys the outstanding invoices and lends
money against them. The debtor book is then subject to a fixed charge. In effect,
the book debts belong to the bank or factoring company, not the company. The
factoring or discounting charge is the most common fixed charge, other than
property.

12
Kinu Ram Das v Mozaffer Hossain Shaha, (1887) 14 Cal 809 F.B

13
Shivrao v Pundluk, (1902) 26 Bom 442.
 d) Floating Charge
The lien or mortgage which is not particular to any asset of the company is
known as Floating Charge. The charge is dynamic in nature in which the
quantity and value of asset changes periodically. It is used as a mechanism to
secure the repayment of a loan. In this type of arrangement the company
(borrower) has the right to sell, transfer or dispose off the asset, in the ordinary
course of business. Hence, no prior permission of the lender is required and also
there is no obligation to pay off the dues first.
For example: stock, finished or raw material work in progress, unfactored
debtors, fixtures and fittings cash, vehicles or assets not subject to fixed
charges.
e) Equitable Charge
An agreement between a company and a person as banian of the company to
advance necessary funds to the company upto a certain limit on being allowed
the sole right to collect all sums due to the company and repay himself advances
made, as also his remuneration, creates an equitable charge on the company’s
outstanding bills for the amount owing to the banian. It is sufficient if the Court
can fairly gather from the instrument an intention by the parties that the
property therein referred to should constitute a security.
f) Statutory charge
The statutory first charge prevails over any other charge including mortgage.
The statutory first charge gets precedence over an existing mortgage right. The
precedence or priority is not confined to right of redemption alone. The charge
created under section 100 Transfer of Property Act cannot be defeated by a
statutory charge which comes into operation at a later stage.
g) Contingent charge
The Courts of Calcutta and Oudh have held that a contingent charge is not a
charge within the meaning of the section. The Courts of Madras, Patna,
Travancore, Cochin, and Lahore have held the contrary. The latter Courts hold
that it is not a mere possibility of a charge but a present charge on existing
property enforceable on the happening of a contingency. A present charge as
security for discharging a contingent liability can be validly created.
 WHAT IS A MORTGAGE?

Section 58 of the Transfer of Property Act defines what a mortgage is: “A

mortgage is the transfer of an interest in specific immoveable property for the
purpose of securing the payment of money advanced or to be advanced by way
of loan, an existing or future debt, or the performance of an engagement which
may give rise to a pecuniary liability.14

DISTINCTION BETWEEN A CHARGE AND MORTGAGE

 A mortgage is where ownership of the property is transferred to obtain a

loan. A charge however is where the interest is created in a property in
order to secure a loan.
 A mortgage may be created only by the act of parties, i.e. it is essentially
a contract between two parties. On the other hand, a charge may be
created either by the act of parties or by the operation of law.
 In every mortgage there is a charge, but every charge is not a mortgage.
 The term is fixed for a mortgage, whereas it is infinite for a charge. A
mortgage is also redeemable, while a charge may create a liability that
cannot be redeemed.
 A mortgage is a transaction for the security of repayment of a debt, or for
performance of an engagement which may give rise to a pecuniary
liability, while in case of a charge, there may or may not be a debt.
 A charge does not require to be attested and proved in the same way as a
mortgage.
 A mortgage gives to the mortgagee a right in rem, but the charge does not
give such a right in favour of the other party.
 A mortgage carries personal liability except if included by personal
contract. A charge however does not create personal liability, but can be
created when it by act of the parties while fulfilling the contract.

14
Section 58, the Transfer of Property Act, 1882
  A charge can be enforced within a period of 12 years only, but mortgages
(except simple mortgage) can be enforced within a period of 30 years.
 A charge created by operation of law does not require registration.
However, for a mortgage it is mandatory and under section 59 of the
Transfer of Property Act. A charge however created by act of parties
requires registration irrespective of the amount involved.
 A mortgage is good against subsequent transferees and may be enforced
against a bona fide purchaser for value with or without notice, while a
charge is good only against subsequent transferee with notice.
 A transaction intended to be a mortgage but not reduced to writing and
registration in cases where such a formality is required cannot operate as
a charge. In Govinda v. Dwarka Nath,15 it was observed that: “if an
instrument is expressly stated to be a mortgage, and give the power of
realization of the mortgage money by sale of mortgaged premises, it
should be held to be a mortgage. The fact that necessary formalities of the
due execution were wanting would not convert the mortgage into a
charge. If, on the other hand, the instrument is not on the face of it a
mortgage, but is simply creating a lien, or directing the realization of
money from a particular property without reference to sale, it creates a
charge.

15
In Govinda Chandra Pal vs Dwarka Nath Pal and Ors., (1906) ILR 33 Cal 666.