The term “charge” carries multiple meanings across disciplines. In law, physics, and finance, its interpretation changes with context. However, in the banking and securities domain, a charge has a very specific significance: it is a legal right granted by a borrower to a lender over assets as security for repayment of a loan.
This concept lies at the heart of secured lending, giving banks a safeguard against default while allowing borrowers to retain ownership of their assets.
What Is a Charge?
In banking, a charge is a legal interest created over a borrower’s property—present or future—in favor of the lender. It allows the bank to enforce its claim on the asset if the borrower fails to meet repayment obligations. Unlike a sale, ownership does not transfer; rather, the bank obtains the right to take possession, sell, or transfer the charged asset in case of default.
How a Charge Works
1. Granting of Rights – The borrower creates a legal interest (charge) over assets such as property, machinery, or securities.
2. Security for a Loan – The charge acts as collateral, reducing risk for the bank.
3. Lender’s Rights – The bank does not own the asset but can enforce recovery through possession or sale.
4. Legal Formalities – Charges must be properly created and registered to be valid and enforceable.
Types of Assets and Charges
* Fixed Assets – Land and buildings (via mortgage).
*Movable Goods – Plant, machinery, or stock (via pledge or hypothecation).
* Paper Securities – Shares, bonds, or deposits (via lien or assignment).
Purpose of a Charge
* Risk Reduction** – Provides banks with security against defaults.
* Ensuring Repayment** – Acts as an incentive for borrowers to honor obligations.
* Recovery of Dues** – Grants banks the legal right to realize the value of assets if default occurs.
Why Understanding Charges Matters
The idea of a charge extends beyond banking into property law, criminal law, and even physics. Yet, in finance, it plays a **critical role in balancing borrower freedom with lender security**. By understanding charges, both professionals and consumers can make informed decisions about loans, securities, and risk management.
Summary Table: Types of Charge in Banking
| Type of Charge | Asset Covered | Possession | Ownership | Key Features / Legal Effect |
| Pledge | Movable property (gold, goods, securities) | With lender | With borrower | Created by delivery of goods; governed by Indian Contract Act, 1872. |
| Hypothecation | Movable property (vehicles, stock, inventory) | With borrower | With borrower | Bank has right to seize on default; common in working capital finance. |
| Lien | Any property/securities already with bank | With lender | With borrower | Bank can retain possession until dues are cleared; no transfer of ownership. |
| Mortgage | Immovable property (land, building) | With borrower | With borrower | Bank gets legal interest; can sell property on default. Several types (simple, equitable, English, etc.). |
| Fixed Charge | Specific assets (machinery, land) | With borrower (unless pledged) | With borrower | Charge attaches permanently to identified assets; cannot be sold without lender’s consent. |
| Floating Charge | Fluctuating assets (stock-in-trade, receivables) | With borrower | With borrower | Charge hovers over assets until crystallization (on default/closure); then becomes fixed. |
| First Charge | Any asset | Depends on mode | Depends on mode | Gives lender primary right of recovery from secured asset. |
| Second / Pari Passu Charge | Any asset | Depends on mode | Depends on mode | Secondary or equal rights among multiple lenders, common in consortium loans. |
A Charge means an interest or lien created on the property and assets of the company or any of its undertakings or both as security and includes a mortgage.
When a charge created on the property and assets of a company is registered by ROC, it is a notice of such charge to the public from the date of such registration. Any person dealing or acquiring such property or part thereof shall be deemed to have notice of such charge from the date of registration of the charge.
What happens to the lender if the charge created is not registered?
The charge created over security offered becomes void if it is not registered within the stipulated period prescribed under section 125 of companies’ acts. Where a charge is void for non-registration, no right of lien can be claimed by the creditor on the documents of title, as they were only supplementary to the charge and were delivered pursuant to the charge. Further, the unregistered charge becomes unenforceable on the date of winding up order; as the Official Liquidator would treat such creditor whose charge is not registered as an ordinary creditor instead of a secured creditor. Even in the case of going concern, the first charge holder loses the priority of a charge holder if the charge created by him has not been registered. For instance, if the subsequent charge is created on the same property by another lender, the subsequent charge holder who has registered the charge would enjoy priority of charge over such property or assets. In such cases, the second charge-holder (who registered the charge first) may at any time attach the exact property of the borrower and get the charge enforced by selling or disposing–off such property to recover his dues.
The important point to be noted here is that the borrower company is not discharged from its liability and obligations to the creditor just because the security offered for such liabilities turn out to be invalid. The consequence of non-registration of charge is that it badly hits the creditor as explained above i.e. the lender loses the security offered to him for the money financed and also he loses his secured creditor status against the liquidator and other creditors.
In terms of section 125(3) of companies acts, when a charge becomes void, the money secured thereby shall immediately become payable by the company. Further, the company, and every officer of the company or other people who are in default, shall be punishable for not registering the charge (section 142(2) of company acts).
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