Charges and Floating Charges

Law of Property

Table of Contents

Charge Contingent Charge Creation of Charge Charge by Operation of Law Floating Charge Mortgage and Charge Charge by Decree Enforcement of Charge

Charge
Generally speaking where the payment of money is secured on land, but no interest in specific immoveable property is transferred, the transaction amounts to mere charge and not a mortgage. The distinction between a mortgage and a charge is of fundamental character. There is this well marked distinction between the two that a mortgage does, whereas a charge does not, involve a transfer of an interest in specific immovable property. Dr.Ghose remarks: A charge must be distinguished from a simple mortgage. In every mortgage there must be a transfer of an inert in specific immovable property, while in the case of a mere charge, interest is not transferred nor is it necessary that the property to which it relates should be specific. A charge differs from a mortgage not only in the form but also in substance. A plea of purchase for value without notice, for instance, although it may be perfectly good against a charge, will be wholly unavailing against a mortgage. A charge cannot be enforced against the property in the hands of a bona fide purchaser for value without notice. While a mortgagee can follow the mortgaged property in the hands of a transferee, and it is immaterial whether the transferee has or not notice of the mortgage. Unlike a mortgage, which can be created only by act of parties, a charge may be created by act of parties as well as by operation of law, a lien on the other hand, is created only by the operation of law. A document which only gives right to payment out of a particular property1 or which gives property as security for the satisfaction of a debt2, or which gives immovable property as security for the payment of maintenance allowance in property3, without transferring any interest in the property constitutes a charge on the property and is not a mortgage. Where in the petition to compromise embodied in the decree, it is stated that the property would remain attached and liable until the satisfaction of the entire decree, a charge is crated over the property.4 So also, in Chandranath v. Hemnalini it was observed that it is possible to take the view that a charge crated by a decree, though it does not differ in any way from other charges, can be enforced against a transferee of the judgement-debtor by way of enforcing the judgement
1 2

Govinda v.Dwaraka 7 CLJ 492 Ramaswami v. Kuppaswami (1921) M 514; Sher Singh c. Daya Ram, (1932) L 465 FB 3 Maltub v. Kalawati (1933) A 934 4 Sheonarain v. Lakhan, (1945) P 434

itself and the latter being a party to the judgement cannot be heard to say that he is bound by it...this principle, however, can be applied only when the charge can be enforced by enforcement of the judgement itself, for otherwise no question of estoppel would arise. Where the law of estoppel cannot operate the provision of Section n100 must be held to be applicable without any limitation.5 A charge has, however, been held to be a transfer within the meaning of Cl. (2) of Section 9 , Electricity Act, 9 of 1910.6 The second half of Section 100 of the Transfer of Property Act is the general prohibition that no charge shall be enforced against any property in the hands of a transferee for consideration without any property in the hands of a transferee for consideration without notice of the charge and the exception to the general rule must be expressly provided by law. The real core of the saving provisions of law must be not mere enforceability of the charge against the property charges but enforceability of the charge against the said property in the hands of a transferee for consideration without notice of charge.7Section 141 of the Bombay Municipal Act is not express saving provision as contemplated by Section 100 of the Transfer of Property (ibid). In creating charge on immovable property no particular form of words is necessary. What is necessary is that the document must disclose intention to create charge. Family arrangement providing for discharge of personal debt of donor out of share of another did not create a charge on property in favour of the creditor. No charge shall be enforced against the property in the hands so of a person to whom such has been transferred for consideration and without notice of charge.8

5 6

Ashan v. Maina,(1938) N 129 U.P. Government v. Manmohan, 91941) A 345 7 Ahmedabad Municipality v. Haji Abdul, (1971) SC 1201 8 R.M.Arunanchalam v. Commissioner of Income Tax, Madras, AIR 1997 SC 2905

Contingent Charge
Whether a transaction creates a charge or not is to be gathered from the intention of the parties as expressed in the contract. It has been held in some cases that for a document to create a charge......it must be a document that creates such charge immediately on its execution and not one that merely creates charge that operates at some future time. A charge cannot be created on a future contingency.9On the other hand, it has been held that for creation of a valid charge it is not necessity condition that here should be any pre-existing liability: a charge may be undoubtedly be created for the discharge of a contingent liability10Couus-Trotter, J., pointed out that a charge to secure a liability which is not existent in praesenti but is contingent and is liable to arise in which the future is valid under Section 100.11 It is possible to distinguish between a case where the instrument creates a present charge to secure against a future contingent liability and, one where the instrument purports to create a mere contingent charge arising on the happening of a possible future rent.

Madho v. Sidh, 14 C 687 Nandlal v. Dharmadeo, (1925) P 288 11 Imiochi v. Acampat, 33 MLJ 58
10

Creation of Charge
Where a charge as such has not been created plaintiff cannot proceed against properties purchased by third parties pending a partition action from defendant coparceners for the recovery of the subsequent profits.12 Where the vendor sold his bus to the vendee and filed suit for the realisation of money along with the application for the attachment before judgement of said bus and obtained an order and the plaintiff, a third party, owner of the plaint schedule property on request of vendee, offered attachment and the furnished a draft bond to the Court and thereafter vendor and vendee in collusion entered into a compromise to realise the amount due from the property offered as security and created a charge on the plaint schedule property and the bus was released to the vendee. Without consent of the plaintiff, the creation of charge by vendor and the vendee over the plaintiff property for realisation of the amount due would be illegal. Therefore, the decree creating a charge over plaint schedule property would not be binding on plaintiff and as such would be entitled to a decree declaring his right over said property.13 Operation of law A charge which exists in law or implication of law and is further expressed in a decree is a charge by law and falls under the purview of Section 100.14 Charge for maintenance A compromise decree charged the husbands property for maintenance of deserted wife for life after her husbands death the wife became entitled to a share in husbands property. It has been held that decree is still executable against charged property. Decretal charge of wife A charge created by decree in favour of the wife against the husbands property for maintenance is governed by Section 100. If the wife becomes entitled to a share in the husbands property on his death the right of maintenance is not obligated and the decree is executable against the charged property.15

12 13

R.Venkata Subbiah v. Venkata Subbiah, AIR 1975 AP 217,221 Balakrishnan v. P.V.Mohan, AIR 1998 Ker 257 14 Alekhyadhine Ganguly v. Anima Debi, AIR 173 Cal 304 15 Rundibala Roy v. Putubala, AIT 1998 Cal 47

Charge by operation of law

The words include a charge brought into being by a decree of a competent court (See sections 39, 55(c) (b), 56(6) (b), 82 T.P. Act and other Acts.). A compromise decree not being the result of a decision by the court but an acceptance by the court of something to which the parties have agreed if it created a charge on an immovable property and was duly registered amounts to the creation of a security by act of parties within the meaning of Section 100 of the Act.16In order to make the proviso to Section 100 applicable it has to be shown that (a) the property against which the charge is to be enforced must have been transferred for consideration; (b) the transferee has no choice of the charge; (c) the property which is the subject-matter of the charge is in the hands of the person to whom such property has been transferred. Immovable property...is...made security for the payment of money. It is well established that (particular form of words is necessary to create a charge; all that is required is that there must be a clear intention to make the land a security for payment of money. 17Where the property is not intended to serve as security for the payment of money, there is neither a mortgage nor charge, In order to make the property a security for payment of money there should be some expression to signify that the property is liable for such payment, and for that purpose the property must be specified. A general description will not be sufficient unless for the facts and the circumstances the property can be ascertained. There can be no security unless the property concerned is reasonably certain. Where the description is too vague and indefinite the charge is void for uncertainty.18

16 17

Dattatraya Shankar Mote v. Anand Chintamar Datar, (1974) SCC 799 Bholanath v. Sabamongala. (1940) C 93 18 Tulsiram v. Anusa, (1924) N 360

Floating Charge
A floating security is not a future security; it is a present security, which presently affects all that the company expressed to be included in it. On the other hand, it is not a specific security; the holder cannot affirm that the assets are specifically mortgaged to him... (It) is floating mortgage applying to every item comprised in the security, but not specifically affecting any item until some event occurs or some act on part of the mortgagee is doe which causes it to crystallize into a fixed security.19 A specific charge is one that without more fastens on ascertained and definite property capable of being ascertained and denied; a floating charge, on the other hand is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten the subject of the charge within its reach and grasp. A charge may not be, while it if floating, on any specific property and may be created not only by act of parties but by process of law. When, however, a charge becomes fixed on specific immovable property and is created by an act of parties it is to all intents and purposes a mortgage.20

19 20

Evans v. R.G.Q.Ltd., (1910) 2 KB 979 U.P.Governemtn v. Manmohan (1941) A 345

Charge by decree
Under Section 100, like simple mortgage, a charge of property may be realised by a suit for sale. But where the charge is created by a decree, the decree is capable of execution by sale of the charged property without the necessity of having recourse to a suit under Section 67 to enforce the charge.21 Future maintenance awarded by a decree when falling due can be recovered in execution of that decree without further suit. But where the decree creating the charge is merely declaratory and does not contain any provision which entitles the decreeholder to have the hypocenated property sold straightway, he must institute a suit for sale. In a decree for maintenance creating a charge on suit properties, decree holder is entitled to proceed against any charges properties created by court.22 A charge-holder is entitled to enforce payment against the whole or any portion of the property charged. The decision in Ghashiram v. Kundanbai makes a distinction between a charge decree which is merely declaratory and thus incapable of execution, and one which provides for the payment of future maintenance and makes provision expressly or impliedly for its own execution. In the former case the bona fide purchaser for value without notice takes free of the charge, whereas in the latter, i.e., where the Court orders a defendant to pay the plaintiff a certain sum of money and directs that if it is not paid, property which it specifies is to be sold, those orders must be carries out and the judgement-debtor cannot evade them by transferring the property so charged to another, however innocent that other may be. The doctrine of estoppel by record applies. The doctrine of lis pendes may also apply in some cases, though not necessarily always.

21 22

Kashi v. Priya (1924) C 645 Abuoumolli Seshratham v. Atluri Jhansi Laxhmi bai, 1197 AIHC 732 (AP)

Mortgage and Charge

Transaction does not amount to a mortgage, these words signify that if the relation created by the instrument is that of mortgagor and mortgagee and the immovable property has been made security for the payment of the money there is a charge on the property: they do not mean that a transaction purporting on the face of it to be a mortgage is converted into chaos if the instrument cannot operate as a mortgage by reason of defective execution or nor noncompliance with the formalities prescribed by law. Thus an instrument which is invalid as a mortgage for want of attestation cannot operate as a charge under Section 100. In other words a deed constituting a bad mortgage does not make good charge.23 A debt secured by a charge is secured debt for the purpose of Section 3 of U.P.Zamindars Debt Reduction Act 15 of 1953.24 The first paragraph of Section 100 consists of two parts; the first part concerns the creation of a charge over immovable property. A charge may be made by an act of parties or by operation of law. No restriction is put on the manner in which a charge can be made. Where such a change is created, the second part comes into play. The second part does not address itself to the question of creation of a charge. It does not attract the provisions of Section 59 relating to the creation of a mortgage. There is no provision of law which requires that an instrument creating the charge must be attested by witness.25

23 24

Royzuddi v. Kalinat, 33 C 985 Raghuraj v. Murarilal (1967) SC 1631 25 Abdul Jabbar v. Venkata Sastri, (1969) SC 1147

Enforcement of Charge
A charge is enforced by sale26 and if it carries with it a personal liability the charge holder is entitled to a personal decree.27A person who purchases a portion of a property which is subject to charge with notice of the charge is liable to pay the whole amount, but he may sue for contribution.28 A recurring charge is not extinguished by a decree for sale. If two properties are burdened with a charge and one of them is relieved of the liability of paying the charge as a result of its transfer by owner to a person for consideration and without notice of the charge, the charge holder can recover the entire amount from the remaining property. 29 A charge declared in a decree must be enforced by a suit. The doctrine of subrogation applies to a charge and it is immaterial whether the prior mortgagee had notice of the charge.30Where a portion of the property charged had been relieved thereof, without the consent of the holder of the charge, the charge-holder can proceed against the whole property for the enforcement of the charge and the principle of ratable distribution is inapplicable.31

26 27

Gajraj Jain v. State of Bihar, (2004) 7 SCC 151 Ahmedabad Municipality v. Haji Abdul, AIR 1971 SC 1201 28 Babu Ram v. Imam Ullah, AIR 1935 All 411 29 Raghubir Dayal v. Hussain Mirza, AIR 1948 Oudh 147 30 Aravamudhu Ayyangar v. Zamindarini Srinath Abiramvalli Ayah, AIR 1934 Mad 353 31 Hussein Mirza v. Raghubir Dayal, AIR 1947 Oudh 122