Floating Charges: Registration and Crystallization

A Study of Jurisprudence issues with reference to case laws

and legal literature

Semester V B.A. LL.B Course

Paper : Corporate Law I

Submitted By
Pintu Babu, Semester V, Roll No. 110

Submitted To
Dr. Deepak Das
Associate Professor (Law), HNLU

Date of Submission : 05.10.2017

Hidayatullah National Law University

Uparwara Post, Abhanpur, New Raipur, Chattisgarh 492002
 DECLARATION

I hereby declare that the project work entitled Floating Charges: Registration and
Crystallization A Study of Jurisprudence issues with reference to case laws and legal literature
submitted to the Hidayatullah National Law University, Raipur is the original work done by me
under the guidance of Dr. Dipak Das, Associate Professor, Hidayatullah National Law University,
Raipur and this project has been submitted for the partial fulfillments of the requirements for the
award of the degree of BA- LLB. The results embodied in this thesis have not been submitted
to any other University or Institute for the award of any degree or diploma.

Date : 05.10.2017
Place : HNLU Raipur

Pintu Babu, Semester V, Roll No. 110

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 ACKNOWLEDGEMENTS
I, Pintu Babu, feel myself elated, as it gives me immense pleasure to come with the work on
topic, Floating Charges: Registration and Crystallization A Study of Jurisprudence issues with
reference to case laws and legal literature. Words fail to express my deep sense of glee to my
teacher, Dr. Diapk Das, Associate Professor, Hidayatullah National Law University, Raipur, who
enlightened me on my every difficulty in completion of task. I acknowledge the blessings and
support which my mother and father gave in finishing of this task.
I would like to forward my hearty thanks to my University and Vice-Chancellor for providing
all the necessary requirements which aided me to achieve my goal. I also thank Librarian
HNLU, Raipur, for assisting me and allowing me to use the library of the University.

I feel a deep sense of thankfulness to all my seniors, my friends who helped me in achieving my
target.

Date : 05.10.2017
Place : HNLU Raipur

Pintu Babu, Semester V, Roll No. 110

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 TABLE OF CONTENTS

Declaration 02
Acknowledgements 03
Introduction 05
Objectives 06
Scope of study 06
Research Methodology 06
Cases 07
1. Kinds 08
2. Judicial Pronouncements about Different Types of Charges 09
3. Characteristics of Floating Charge 10
4. Crystallization 10
5. Registration of Charges 13
5.1 Compulsory 14
5.2 Optional 14
Conclusion/Findings 15
References 17

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 Introduction
Section 2(16) of the Companies Act 2013, define charges as 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. A charge is creation of a security on the companys property or undertaking in favour
of a companys creditor to secure repayment of a loan or debt or any other obligation. Charge is
defined by The Transfer of Property Act, 18821 as: ,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 the provisions hereinbefore contained which apply to a simple mortgage shall, so far
as may be, apply to such charge. A charge includes a lien and also an equitable charge.2
A charge is a security given for securing credit or debenture by a mortgage on the benefits of a
company. For the most part, the debentures and different borrowings of a company are secured by
a charge on its benefits. A charge is made when a property, whether existing or future, is consented
to be made accessible as a security for the re-payment of obligation.3 Notwithstanding, the loan
boss gets no legitimate directly over the property so charged yet just gets a privilege to have the
security made accessible by a request of the court in case of non-payment of obligation. As
indicated by segment 124 of the Companies Act a charge incorporates a mortgage. It additionally
incorporates lien whether made by a composed instrument or by the store of title deed.4

1
Section 100, The Transfer of Property Act 1882
2
ibid
3
Registration of Charges under Companies Act, 2013, (2015), http://taxguru.in/company-law/registration-charges-
companies-act-2013.html (last visited Sept 26, 2017)
4
ibid

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 OBJECTIVES OF THE STUDY
The study the definition and types of charges under the provisions of Companies Act, 2013.
To study what is floatation of charges and what is Crystallization.
To gain the knowledge of Registration of charges.

SCOPE OF THE STUDY

Chapter X Debentures, Companies Act, 2013; Charges securing debentures on the assets of the
company and the theories related to Floating Charges.

RESEARCH METHODOLOGY
Research Methodology is systematic approach and methods of study concerning for obtaining
new knowledge and generalization and the formulation of theories.
Nature of Study
Non empirical research work has been used in this project as the material in this project mainly
consists of the work of people which is already done. The project is basically doctrinal in nature.
Citations are also provided wherever they were necessary.
Sources of Data
This Project is made on the basis of secondary sources of information, which include:
1) Books, and
2) Information from the internet.

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 Case Laws
Dublin City Distillery Co. v. Deherty, 1914 AC 823
East Africa Hrdware Co., AIR 1949 Bom 262
Evans v. Rival Granite Quarries Ltd, 1910 2kb 979
Imperial Bank of India v. Bengal National Bank, Ltd, AIR 1931 Cal 223
G. Bhar And Co. vs United Bank Of India Ltd. And Ors, AIR 1961 Cal 308
Government Stock Investment Co. Ltd. V. Manila Rly. Co. Ltd., (1897) AC 81 Per Lord
Macnaghten
K. Roy and Bros. vs Ramanath Das and Ors. AIR 1945 Cal 37
Krishna Ayyangar v. Nallaperumal Pillai, (1919) I.L.R. 43 Mad. 550
Lilingworth& another v. Houldsworth& another, (1904) 73 Ch. 739
Maturi U. Rao v. Pendyala A.I.R. 1970 A.P. 225
Meenakshi Mills Ltd v. Registrar of Companies, Madrass, AIR 1966 Mad 24
Wheatly v. Silkstone & High Moor Coal Co. Ltd., (1885) 54 L.J. Ch 78

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1. Kinds of Charges
There are two kinds of charges under Company Law, 2013
1. Fixed Charge
Fixed charge is a type of charge which is created so that assets can be covered. It is a type
of security which is there under the terms of certain specific property.5 Fixed Charges
is a charge fixed or specific when it is made specifically to cover assets which are
ascertainable and definite at the time of creating the charge e.g., land,
buildings, heavy machinery etc.6 A fixed charge is therefore against security of certain
ascertainable specific property.7 The companys right to dispose of the property is
temporarily suspended during the period it is charged or encumbered. In the event of
winding of a company, a debenture holder or creditor secured by a fixed or specific charge
shall be placed in the highest class of creditors.8
2. Floating Charge
A floating charge is a charge which is totally different to the companies as a type of
security. This type of charge is not attached to any definite property. A floating charge
includes a charge which is on the class of acids which is present and future in the ordinary
course of business and this changing from time to time. The essence of a floating charge
is that the security remains dormant until it is fixed or crystallized.9 Floating charge is the
present security. Floating charge can affect all the assets of the company. Floating Charge,
on the other hand, is not attached to any definite
property but covers property which is of a fluctuating nature such as stock in trad
e. It is an equitable charge on the assets for the time being of a going concern.10 It attaches
to the subject charged in the varying condition in which it happens to be from time to time.
It is of this sense of such a charge that it remains dormant until the undertaking charged
ceases to be a going concern, or until the person in whose favour the charge is created
intervenes.

5
Mr. M. Govindarajan, Provisions Relating to Charges Under Companies Act, 2013 (2013),
https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5382 (last Sept 26, 2017).
6
Admin, Creation of Charges under Companies Act, 2013 (2016), http://taxguru.in/company-law/creation-charges-
companies-act-2013.html (last visited Sept 26, 2017)
7
Dublin City Distillery Co. v. Deherty, 1914 AC 823
8
Lord Macnaghten in Lilingworth& another v. Houldsworth& another, (1904) 73 Ch. 739
9
Supra 6
10
Government Stock Investment Co. Ltd. V. Manila Rly. Co. Ltd., (1897) AC 81 Per Lord Macnaghten

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The difference between a fixed charge and floating charge is that a fixed charge is a form future
securities provided to a lender/creditor in assets of the company whereas a floating charge is
Floating security is not a future security; it is a present security which presently affects all the
assets of the company expressed to be included in it and it is also not a specific security.
11

2. Judicial Pronouncements about Different Types of Charges

In the case of Roy & Bros. v. Ramnath Das12 it was stated that there was a plant and machinery of
a company which was attached to the earth and became the part of immovable property therefore
under the Companies Act registration would not be necessary to make this charge valid and
effective. A floating security definition was stated under Government Stock Investment Company
Ltd. v. Manila Rly. Company Ltd.13, is an equitable charge on the assets for the time being of a
going concern. It attaches to the subject charged in the varying condition in which it happens to be
from time to time. It is the essence of such a charge that it remains dormant until the undertaking
charged ceases to be a going concern, or until the person in whose favour the charge is created
intervenes.
In the case of Maturi U. Rao v. Pendyala14 it was stated that When the floating charge crystallizes
it becomes fixed and the assets comprised therein are subject to the same restrictions as the fixed
charge.
In the case of Wheatly v. Silkstone & High Moor Coal Co. Ltd. 15 it was held that Unless
specifically precluded, the company can create fixed charge subsequent to floating charges over
the same property.
The difference between a fixed charge and floating charge is that a fixed charge is a form future
securities provided to a lender/creditor in assets of the company whereas a floating charge is
Floating security is not a future security; it is a present security which presently affects all the
assets of the company expressed to be included in it and it is also not a specific
security.16 In a recent decision, the Supreme Court of Ireland in the matter of J.D Brian Limited

11
Evans v. Rival Granite Quarries Ltd, 1910 2kb 979
12
K. Roy and Bros. vs Ramanath Das and Ors. AIR 1945 Cal 37
13
Government Stock Investment Company Ltd. v. Manila Rly. Company Ltd, [1897] A.C. 81
14
Maturi U. Rao v. Pendyala A.I.R. 1970 A.P. 225
15
Wheatly v. Silkstone & High Moor Coal Co. Ltd., (1885) 54 L.J. Ch 78
16
Evans v. Rival Granite Quarries Ltd, 1910 2kb 979

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(In Liquidation) T/A East Coast Print and Publicity17 has confirmed that a crystallization notice
served prior to the commencement of a winding up can validly crystallize a floating charge and
therefore obtain priority for that charge over preferential creditors claims during liquidation.

3. Characteristic of Floating Charge

Three main characteristic of Floating Charge. These are as follows:
a. It is a charge on a class of assets, present and future.
b. It would be charging from time to time in the ordinary course of business of the company.
c. Until some future step is taken or on behalf of the debenture holders, the company may
carry on its business in the ordinary way dealing with the class of assets charged.
As indicated by McDowell Purcell, Crystallization of floating charges means transformation of
floating charges into fixed charges upon the event of particular occasion. When the charge holder
finds a way to implement his charge, a floating charge turns into a settled charge on the assets
secured by that charge. Until a floating charge turns into a settled charge, the company is allowed
to manage the property charged in any way it regards fit. In any case, once the floating charge
solidifies, the company cant arrange off the charged assets without paying of the charge holder.
Something else, the charge holder can recoup his contribution from the returns. Such process is
called crystallization of floating charges.18

4. Crystallization
There are two types of crystallization in Company law Automatic Crystallization & Express
Crystallization the former type of crystallization are the classic well known crystallization event
such as a winding up or the appointment of a receiver. It is accepted that crystallization will occur
automatically upon the occurrence of these events and this is usually re-iterated in the relevant
security document whereas latter includes events that can vary from case to case and are set out in
the relevant charging document as a matter of contract. For crystallization to occur, some on the

17
In the Matter of J.D. Brian Motors Limited (In Liquidation) T/A Belgard Motors and In the Matter of East Coast
Car Parts Limited (In Liquidation)
18
Surbhi S , http://keydifferences.com/difference-between-fixed-charge-and-floating-charge (last visited Sept 26,
2017)

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part of the charge holder is usually required. Generally this will be the service of a crystallization
notice upon the occurrence of specified events.19
Answering the research question of the paper as to the condition when a floating charge converts
into fixed charge: A floating charge generally remains dormant until it crystallizes or becomes a
fixed charge. A floating crystallizes into a fixed security under the following condition20
i. When company goes into liquidation,
ii. When company ceases to carry on business,
iii. When debenture holders or creditors take steps to enforce the security e.g., by appointing
a receiver to take possession of charged property,
iv. On happening of an event specified in the deed.
A company borrowed money on the security of its stock-in-trade. The charge so created will keep
floating over the changing stock-in-trade and when the time comes for the lender to enforce his
security he will do so by seizing whatever stock is then in companys hands. When happens, the
floating charge becomes fixed or crystallized.21
It was held in G. Bhar And Co. vs United Bank Of India Ltd. And Ors22 A charge or mortgage of
the present description may remain floating for a period. The charge or mortgage may not be
crystallized until some event occurs which either puts a stop to the business, or prevents the
mortgagor from carrying on the business in the usual way. It cannot, however, be said that the
stock-in-trade of the business which has been expressly offered as a security by the borrower would
not be liable under the mortgage until the charge is crystallized.
It has been held in that case that a floating charge is a present charge, though it does not finally
attach or crystallize upon any specific property until the happening of some event which puts an
end to the right of the Company to deal with the property in the course of its business.23
The above mentioned cases tell us that a floating charge will crystallize when company stops
working or there some event which puts a stop on the business of the company. The charge
provided by a creditor will be crystallized in case in the company goes into liquidation or when
the creditor wants to enforce the security he has given to the company.

19
Fixed and floating charges, http://www.companylawclub.co.uk/fixed-and-floating-charges (last visited Sept 26,
2017)
20
Krishna Ayyangar v. Nallaperumal Pillai, (1919) I.L.R. 43 Mad. 550
21
Dr. Avtar Singh, Company Law, 10th Ed 1991, p. 360
22
G. Bhar And Co. vs United Bank Of India Ltd. And Ors, AIR 1961 Cal 308
23
Imperial Dank of India v. Bengal National Bank, Ltd, AIR 1931 Cal 223

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In a recent decision, the Supreme Court of Ireland in the matter of J.D Brian Limited (In
Liquidation) T/A East Coast Print and Publicity has confirmed that a crystallization notice served
prior to the commencement of a winding up can validly crystallize a floating charge and therefore
obtain priority for that charge over preferential creditors claims during liquidation.
This case emerged from the ending up of various organizations in the Belgard Motors Group. Amid
the twisting up procedure, the vendor looked for bearings from the High Court with reference to
whether a floating charge contained in debentures executed by the organizations for the Bank of
Ireland had truly solidified law of liquidation. The outlets questioned whether, as an aftereffect of
crystallization, the floating charge assets were not accessible to fulfill special loan bosses, for
example, the Revenue Commissioners.24 The terms of the debentures permitted the bank to serve
a notification in composing on the organizations to change over the floating charge into an initially
fixed charge if the bank considered that the charged assets were in danger. This procurement was
conjured by the bank preceding the initiation of the winding up.
The liquidator appealed this decision to the Supreme Court. In its judgment, the Supreme Court
analyzed two issues:
The effect of the crystallization notice served by the bank.
The construction of the provision of the Companies Acts concerning the treatment of
preferential payments in a winding up.
The Supreme Court overturned the decision of the High Court and reached the following
conclusions:
The floating charge created by the debentures was converted into a fixed charge over the
property of each of the companies by virtue of the crystallization notice served by the bank
prior to the commencement of the winding up.
The relevant provision of the Companies Acts affords priority to preferential claims (such
as Revenue claims) against assets which are subject to a charge which is a floating charge
at the commencement of liquidation. The earlier crystallization of the floating charge had
the effect of taking those assets outside the remit of the relevant provision.

24
Floating Charge Crystallisation Postponement Invalidity, https://finapp.co.in/floating-charge/(last visited Sept 26,
2017)

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5. Registration Of Charges

Section 77 of the Companies Act, 2013 provides for mandatory duty of every company to register
the particulars of charge, whether tangible or otherwise and situated in India in such form on
payment such faces in such manner as may be prescribed with the Registrar within 30 days of its
creation. Section 78 provides that where a company fails to register the charge under section 77
the Act, the person in whose favour the charge is created, may apply to the Registrar for registration
of the charge along with the instrument created for the charge Section 82 provides that Registrar
is to be intimated by the company as to the satisfaction of charge so that the Registrar under section
83 may make necessary entries to that effect. Section 84 relates to intimation of appointment of
receiver or manager over the property subject to charge to the Registrar along with a copy of the
order by the company under section 85 of the Act every company is required to maintain a register
of charges of its registered office. Section 86 provides for punishment for contravention of any of
the above provisions committed by the company and its officer concerned. Section 87 of the Act
empowers the central Government for rectification of charges.

Charges created by the company are required to be registered. They are registered through two
channels, namely, (1) the Register of charge kept by the company at a registered office, and (2)
the Register of the Companies kept by the Registrar.

By Section 85 of Companies Act, 2013 it is an obligation on part of the company to keep as its
registered office as a register of charges which contain particulars of charges specifically affecting
the property of the Company and all floating charges on the undertaking or any other property.

Failure to comply with its mandatory provision will make every officer of the company who is
knowingly or willfully a party to the default liable for a fine.

Though the charges are not registered in the Companys own Register due to willful default of any
officer of the Company, will not affect the validity of the charges.

Registration of charges with the Registrar of Companies is the statutory necessity; otherwise they
will be regarded as void against the liquidator or creditor of the company. Subject to the provisions
of the Ct, every charge created on or after April 1, 1914 by Company as security on Companys
property or undertaking is required to be registered with the Registrar of Companies. When a

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Charge becomes void for non-registration, the money secured thereby becomes payable
immediately.

Compulsory Registration

The following charges are to be registered with prescribed time from the date of creation:25

a. A charge is created for the purpose of securing any issue of debentures.

b. A charge is created on uncalled share capital of the Company.
c. A charge is created on any immovable property wherever situate, or any interest therein.
d. A charge is created on any book debts of the Company.
e. A charge, not being a pledge, is created on any movable property of the company.
f. A floating charge is created on the undertaking or any property of the company including
stock-in-trade.
g. A charge is created on calls made but not paid.
h. A charge is created on a ship or any share in a ship.
i. A charge is created on goodwill, on a patent or a license under a patent, on a trade mark,
or on a copyright or a license under a copyright.

Optional Registration

Except the above charges and mortgages, registration is not compulsory. It is to be noted that a
mortgage which is also a pledge does not require registration where the pledge has obtained
possession of the subject-matter such as goods or any movable property of the company. Similarly,
a pronote endorsed by a bank drawn its debtor and delivered to the creditor of the bank is a
mortgage in the nature of a pledge, and so does not require registration. Again, a pledge by a
company on its fixed deposit receipts does not require registration.26

25
East Africa Hrdware Co., AIR 1949 Bom 262
26
Meenakshi Mills Ltd v. Registrar of Companies, Madrass, AIR 1966 Mad 24

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 Conclusion/Findings

The following chart simplifies the difference between Fixed and Floating charge for a better
understanding;
Basis For Comparison Fixed Charge Floating Charge
Meaning Fixed charge refers to a charge Floating charge refers to a
that can be ascertained with a charge that is created on the
specific asset, while creating assets of circulatory nature.
it.

Nature Static Dynamic

Registration of Charge Voluntary Compulsory
What is it? A legal charge. An equitable charge.
Preference First Second
Asset type Non-Current Asset Current Asset
Dealing in asset The company has no right to The company can use or deal
deal with the property, but with asset, until
subject to certain exceptions. crystallization.

Several authors27 have suggested that the floating chargee, prior to crystallisation, may have no
proprietary interest at all in the charged assets. However, this is inconsistent with cases (such
as Spectrum) at the highest level which suggest a proprietary interest does exist.

Alternatively, the floating chargee may have an inchoate type of proprietary interest, with
characteristics that are proprietary but of a lesser order than the proprietary interest of a chargee
with a fixed charge. Some authors have suggested that there is an interest in a fund of assets,28but
the nature and incidents of the interest remain unclear. This has received some judicial support,
from Lord Walker in Spectrum, for example.

27
WJ Gough, Company Charges (2nd edn, 1996)
28
R Goode, Legal Problems of Credit and Security (3rd edn, 2003)

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Another possibility is that the holder of a floating charge may have the same quality of proprietary
interest as a fixed chargee, but one that is subject to defeasance29 or overreaching30 by permitted
dealings by the chargor with the charged assets.

29
S Worthington, Proprietary Interests in Commercial Transactions (1996)
30
R Nolan, 'Property in a Fund' (2004)120 LQR 108

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 References
Company Law, S.R. Myneni, 3rd Ed., 2017
Company Law And Practice, G K Kapoor and Sanjay Dhamija, 20th Ed., 2015
CORPORATE LAWS Containing Companies Act, 2013, Ravi Puliani & Mahesh Puliani
(Eds.) , 31st Ed., 2016
Companies Act, 2013 with SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009, Ravi Pullani & Mahesh Pullani, 24th Ed., 2017
Lexis Nexis the Companies Act, 2013, Lexis Nexis, 5th Ed., 2016
C R Datta on Company Law, C.R. Dutta, 7th Ed., 2016
Taxmans Company Law, G K Kapoor Sanjay Dhamija, 5th Ed., 2017

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