Why it is mandatory register a negative lien for creation of charge?

A lien or positive lien is akin to a bailment. It is the claim or legal right to retain goods or securities that are typically used as collateral to satisfy a debt.

There is no legal definition of the term ‘negative lien’ in any of the Indian legislative enactments. But as it is understood in the normal course of business, a ‘Negative Lien’ is an undertaking obtained by the banker/financer, from the borrower that his assets (e.g land, building, machinery, stocks, etc.) mentioned are free from any charge or encumbrance and he would not create any charge or encumbrance on any of these assets in favour of third parties during the period of bank finance. Thus, both a lien (positive lien) and a negative lien confer a right of retention of a property to the debtor as a result of which the person to whom the property belongs is legally prohibited from disposing of the property without discharging the obligation of the other person in whose favour he has given such an undertaking except where the law permits such sale or where the parties have agreed to such sale.

Section 2(16) of the Companies Act defines the term charge as “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. Hence, the term ‘Charge’ under the provisions of the Companies Act 1956 would include any kind of lien, and accordingly same will have to be registered with ROC by filing the requisite ‘Form 8’ for the creation of a charge, in case a company creates a lien in favour of any person.

Typically, in project finance transactions the terms of various agreements generally include negative covenants or negative liens restricting the borrower company as well as in certain cases a promoter/sponsor company from disposing or otherwise creating any encumbrance over their assets (including shares) without the permission of the lender bank or financial institution. Since the term ‘negative lien’ is not defined under any legislation in India, we need to refer to the judicial pronouncements to consider how Indian courts have construed the term ‘negative lien’, and particularly, whether a negative lien is also a subset of a type of lien.

In the case of  Bank of India Ltd v. Rustom Fakirji Cowasjee, AIR 1955BOM419 the Honourable High Court of Bombay has stated the following:

“In the course of his arguments learned Counsel for the defendant laid stress on the words “security” and “negative lien” used in the resolution. I need scarcely observe that these words must be given full effect in ascertaining the intention of the parties, and the resolution must be read as a whole. The writing itself says that the negative lien was to constitute a security for the payment of the loan. Lien, strictly, is neither a jus in rem nor a jus ad rem but is simply a right to possess and retain the property until some claim attaching to it is satisfied or discharged. There are some kinds of lien that are to be found in enactments such as the Companies Act, but most of the different kinds of lien, both particular and general, recognised by our law are to be found stated in the Indian Contract Act. “

It is significant to note from the aforesaid judgments of the Honourable High Court of Bombay that the term ‘negative lien’ has been referred to as ‘lien’ and the said court has used both terms interchangeably. Moreover, the said court has also applied the principles applicable to a ‘lien’ under Indian Law to a ‘negative lien’.

Mandatory Registration of ‘Negative Lien’ as a ‘Charge’ under the Company Laws of India:

In terms of the notification issued by the Ministry of Corporate Affairs on September 12, 2013, read with the clarification issued by the Ministry of Corporate Affairs on September 18, 2013, Section 124 of the Companies Act, 1956 which defined the term ‘Charge’ has been repealed and replaced by Section 2(16) of the Act.  Section 2(16) of the Act defines the term Charge as “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”.

Thus, the term ‘Charge’ under the provisions of the Companies Act, 1956 would include any kind of lien and accordingly in terms of Section 125 of the Companies Act 1956. As per Section 77 of the Companies Act, 2013, a Company has to create a charge with the Registrar of Companies (ROC) within 30 days of the creation of the Charge. Therefore, in terms of Section 125 of the Companies Act, 1956 a ‘Charge’ created by a company in favour of a person over its assets (including shares) which is in the form of a ‘negative lien’ (which is not exempted from registration in terms of Section 125 of the Companies Act, 1956) will have to be registered with the concerned Registrar of Companies within a period of 30 days after the date of creation of such charge by the filing of the requisite ‘Form 8’ in terms of the Companies (Central Government’s) General Rules and Forms, 1956. Provided that the Registrar may, on an application by the company, allow such registration to be made within a period of Sixty Days of such creation on payment of such additional fees as may be prescribed [as per Companies (Amendment) Ordinance 2018].

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