CHARGES

Transfer of Property Act, 1882

TANMOY MUKHERJEE INSTITUTE OF JURIDICAL SCIENCE

Tanmoy Mukherjee

[Advocate]

 

 

 CHARGES (Sections 100 and 101 of the Transfer of Property Act, 1882)-

Tanmoy Mukherjee

[Advocate]

Sections 100 and 101 of the Transfer of Property Act, 1882 lay down the provisions relating to 'Charges' and run as follows-

Charges (Section 100)-

 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.

No merger in case of subsequent encumbrance (Section 101)-

 Any mortgagee of, or person having a charge upon, immovable property, or any transferee from such mortgagee or charge holder, may purchase or otherwise acquire the rights in the property of the mortgagor or owner, as the case may be, without thereby causing the mortgage or charge to be merged as between himself and any subsequent mortgagee of, or person having a subsequent charge upon, the same property; and no such subsequent mortgagee or charge holder shall be entitled to foreclose or sell such property without redeeming the prior mortgage or charge, or otherwise than subject thereto.

Charge is a form of security for the payment of a debt or performance of an obligation consisting of the right of a creditor to receive payment out of some specific fund or out of the proceeds of the realization of specific property. Such fund or property is said to be the charge.

Section 100 of the T.P.Act defines charge as 'where immovable property of one person is by the act of parties or operation of law made security for payment of money to another and the transaction does not amount to mortgage, the latter person is said to have a charge on the property.

Elements-

A charge contains the following elements-

(1) Immovable property of one person is made security for the payment of money of another;

(2) Property is made security-

(a) by act of parties; or

(b) by operation of law; and

(3) The transaction does not amount to a mortgage.

Kinds of Charge-

As stated above, charge takes place in two ways namely-

(1) Charge by act of parties; and

(2) Charge by operation of Law.

1. Charge by act of parties-

 An agreement, which gives immovable property as security for the satisfaction of a debt without transferring any interest in the property constitutes a charge by the act of parties. The following are the illustrations of charges by the acts of parties.

(i) A inherited an estate from his maternal grandmother and executed an agreement to pay his sister B a fixed annual sum out of the rents of the estate, B has charge on the estate.

(ii) A sued B on a promissory note. The compromise decree directed the payment of the money and further directed that B shall not dispose of his share in a factory until satisfaction of the entire decretal amount. It was held that A had a charge on the property specified.

-No particular form of word is needed for the creation of a charge. It is sufficient if having regard to all the circumstances of the transaction, the document shows, an intention to make the land security for the payment of money mentioned therein. Further, the Act nowhere prescribes any particular mode of creating orally. Where, however, it is created by an instrument, such instrument must be registered unless the amount involved is less than Rs.100. [Section 17(1) (b) of the Registration Act].

2. Charge operation of law-

 A charge by operation of law is one, which arises irrespective of the agreement of the parties. Such charges are known as equitable liens in English Law.

Following are the instances of charge by law or charge by operation of law-

(a) Unpaid Vendor's Lien (Section 55 Clause (4).

(b) Vendee's charge for pre-paid purchased money under Section 55(6).

(c) Marshalling of securities under Section 82 - charge in favor of a person entitled to contribution.

(d) A trustee under the Trust Act, 1882 is entitled to have charge on the property. Section 32 of the Trust Act explains the 'powers of the trustee to hold and charge on the property.

Floating Charge-

 A charge may be floating as well as fixed. A fixed charge is a charge on specific property but a floating charge is an equitable charge on assets for time being of a going concern. It is peculiar to companies, which are able to borrow money without any interference with their assets so long as they are going concerns. In other words, it is a charge on a class of the assets of the company, present as well as future, the assets of the company are constantly undergoing a change but the creditors will not normally interfere with the assets of the company unless there is breach of some condition. As Professor Gower says, the assets are liquid and the charge is floating. It is ambulatory and shifting in its nature hovering over and so to speak floating with the property which it is intended to effect. As it does not attach to any specific property, it remains dormant until it crystallizes.

A floating charge has the following characteristics-

(1) It is a charge on class of assets both present and future.

(2) The class of assets charged is one, which in the ordinary course of business would be changing from time to time.

(3) It is contemplated by the charge that until some future step is taken by those who are interested in the charge the company may carry on its business in the ordinary way, i.e. it may use its assets charged in the ordinary course of its business.

National Provisional Bank of England Limited vs. Charteb Electric Theatres Limited (1916) Ch. 132-

A floating charge is created by debentures on the company's undertaking or its estate, property and effects. It is not necessary that the charge should be on all company's assets. Thus a mortgage of a cinema and of the chattels used in the cinema premises was held to be a floating charge as to the chattels.

Reyork Shive Wool Combers Association-

A floating charge was created by a mortgage, of, book and other debts, which shall become due during the continuance of this security.

Crystallization of Floating Charge-

A floating charge becomes fixed or crystallizes in the following cases-

(1) When the money becomes payable under a condition in the debenture and the debenture holder, (i.e. the creditor) takes some steps to enforce the security;

(2) When the company ceases to carry on business; and

(3) When the company is being wound-up.

Distinction between Mortgage and Charge-

 Although, in a charge the property is made a security for the payment of the loan, yet the transaction does not amount to mortgage. It is important, therefore to distinguish between a charge and mortgage. Following are the notable points of distinction between the two-

(a) A mortgage is transfer of an interest in the property made by the mortgagor as a security for the loan, while the charge is not the transfer of any interest in the property though it is security for the payment of an amount.

(b) A charge may be created by act of parties or by operation of law. A mortgage can only be created by act of parties.

(c) A mortgage deed must be registered and attested by two witnesses, while a charge need not be made in writing, and if reduced to writing, it need not be attested or registered.

(d) In certain types of mortgage (viz. Mortgage by conditional sale and anomalous mortgage) the mortgagor can foreclose the mortgaged property but in charge, the charge holder cannot foreclose though he can get the property sold as in a simple mortgage.

(e) From the very nature of it, a charge, as a general rule, cannot be enforced against a transferee for consideration without notice. But, in a mortgage the transferee of mortgaged property from the mortgagor, can only acquire the remaining interest of the mortgagor, and is therefore only, bound by the mortgage.

(f) In a charge created by act of parties the specification of the particular fund or property negatives a personal liability and the remedy of the charge holder is against the property only. In a mortgage, there can be security as well as personal liability. In fact, the absence of a personal liability is the principal test that distinguishes a charge from a simple mortgage.