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Charge On Property*
Posted On: 2019-01-30 Author : R.S. Garg, Chairman, Pioneer Housing Finance Academy & former Executive Director, National Housing Bank, New Delhi

Different types of charges a lender can place on the property.
What is a Charge : Dictionary meaning of the word “ charge” is to impose a burden, duty, obligation, or lien; to create a claim against property; to assess; to demand; to accuse; to instruct a jury on matters of law. To impose a tax, duty, or trust. To entrust with responsibilities and duties (e.g., care of another).

By the term ‘charge’ we mean, a right created by the borrower on the property to secure the repayment of debt (principal and interest thereon), in favor of the lender i.e. bank or financial institution, which has advanced funds to the company. In a charge, there are two parties, i.e. creator of the charge (borrower) and the charge-holder (lender). It can take place in two ways, i.e. by the act of the parties concerned or by the operation of law.

Charges under the Companies Act are of 2 types:

  • Fixed Charge: The charge which is created on ascertainable assets, i.e. the assets which do not change their form like land and building, plant and machinery, etc. is known as fixed charge.
  • Floating Charge: When the charge is created over unascertainable assets, i.e. the assets which change its form like debtors, stock, etc. is called floating charge.

Section 100 of the Transfer of Property Act, 1882 defines a charge.
“Where immoveable 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 mortgage can be defined as the transfer of interest, in a particular immovable asset such as building, plant & machinery, etc. in order to secure payment of the funds borrowed or to be borrowed, an existing or future debt from the bank or financial institution that results in the rise of pecuniary liability.

When a charge is created over securities, the title is transferred from the borrower to the lender, who has the right to take possession of the asset and realize the debt through legal course.

The charge on various assets is created according to their nature, such as:

  • On Movable stocks: Pledge and Hypothecation
  • On Immovable property: Mortgage
  • On Life such as insurance policy: Assignment
  • On Deposits: Lien

Key Differences Between Charge and Mortgage

The difference between charge and mortgage can be drawn clearly on the following grounds:

  • The term mortgage alludes to a form of charge, in which the ownership interest in a particular immovable property is transferred. On the other hand, Charge is used to mean the creation of right over the assets in favor of the lender, for securing the repayment of the of the loan.
  • The mortgage is created out of the act of the parties concerned, whereas charge is created either by the operation of law or by the act of the charger holder and charge creator.
  • A mortgage requires compulsory registration under the Transfer of Property Act, 1882. Conversely, when the charge is created as a result of the act of the parties concerned, registration is must, but when the charge is created by operation of law, no such registration is needed at all.
  • The mortgage is for a specified term. Unlike charge, which continues forever.
  • A mortgage carries personal liability, except when it is specifically excluded by an express contract. As against this, no personal liability is created. Nevertheless, when the charge comes into effect due to a contract, then personal liability may be created.

In this article, when we talk about a charge we are really talking about a charge by way of mortgage.

First exclusive Charge : First exclusive charge would mean that the creditor who had given credit facilities on the basis of the security of the property over which charge is created has a right over the security over and above all other persons Under this charge t he lender's rights over the secured property take priority over the borrower's other creditors, which means that if the borrower becomes bankrupt or insolvent, the other creditors will only be repaid the debts owed to them from a sale of the secured property if the mortgage lender is repaid in full first. Pari Passu Charge : The term pari passu charge is used when a number of banks / financial institutions lend to a borrower and the banks / financial institutions agree that they shall share the charge on the security property. In such an arrangement the proceeds of the security will be shared between the banks / financial institutions in proportion to their outstanding liabilities.

Second and subsequent Charge : This is also known as re-mortgage. When a property having a mortgage loan on it is again mortgaged, the subsequent mortgage is called second mortgage. In this case, the lender is second in line for repayment behind the first mortgage. The law permits ‘n’ number of mortgages over the same property. It is for the lender to assess the value of the property and take a view as to whether in the event of sale of the mortgaged property, the value of the property would be more to repay first mortgage as well as his debt.