Company Law and Practice · Charges

Meaning and Types of Charges under the Companies Act, 2013

Updated 11 October 2026 · Fact-checked

A charge is a security interest a company creates over its property or assets to secure a loan or debt. A fixed charge attaches to specific assets. A floating charge hovers over a changing pool of assets and crystallises on default. To answer, define the charge, classify it, then apply the rule.

Understand Meaning and Types of Charges

A company often borrows money. The lender wants security, so that it can recover its money from the company's assets if the company fails to repay. That security is a charge. Section 77 speaks of a charge created by a company on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India. The Act does not give a full definition here, so in the exam you should describe it in plain words: an interest in the company's property that secures a debt.

Charges are of two main kinds. A fixed (specific) charge attaches to a particular, identified asset, such as a factory building, land or a machine. The company cannot sell that asset without the charge-holder's consent, because the charge goes with the asset. A floating charge is created on a class of assets that keeps changing, such as stock-in-trade, raw material or book debts. The company can keep dealing with those assets in the ordinary course of business. The charge stays dormant until an event such as default or winding up. It then crystallises and becomes fixed on the assets then held.

Section 77 also covers charges on the company's undertakings, so a charge can be on the whole business and not on one item. Section 85 expressly mentions "charges and floating charges" in the register of charges. That is textual support for treating floating charges as a separate type within the term charge.

Study material also distinguishes the common forms of security. A mortgage transfers an interest in specific immovable property to secure a debt. A pledge is a bailment of movable goods as security: possession of the goods passes to the lender. Hypothecation is a charge on movable property where possession stays with the borrower, for example a vehicle loan or a stock loan. A lien is a right to retain goods until a debt is paid. It usually arises by operation of law, not by agreement.

A floating charge is weaker in one respect. Section 332 says that if a company is wound up, a floating charge created within twelve months before the winding up commenced is invalid, unless it is proved that the company was solvent immediately after creating it. It stays valid only for cash paid to the company at or after the creation of the charge, in consideration for it, with interest at five per cent per annum or another notified rate.

Key rules to remember

Meaning of charge: Charge = security interest over company property or assets (or undertakings) to secure a debt; Section 77(1) covers property or assets or undertakings, tangible or otherwise, in or outside India.
Fixed charge: Fixed charge = specific, ascertained asset + company cannot dispose of it free of the charge; Example: land, building, plant.
Floating charge: Floating charge = class of changing assets + company deals freely until crystallisation; Example: stock, book debts. It crystallises on default or winding up.
Mortgage: Mortgage = interest in specific immovable property as security; possession may remain with owner; Fixed security on immovable property.
Pledge: Pledge = movable goods delivered to lender as security; Possession passes to the lender.
Hypothecation: Hypothecation = charge on movables; possession stays with borrower; Can be fixed or floating in nature.
Lien: Lien = right to retain goods until debt is paid; Usually arises by operation of law.
Floating charge before winding up (Section 332): Floating charge created within 12 months before winding up commenced is invalid unless company proved solvent immediately after creation; Valid only for cash paid in consideration, plus interest at 5% p.a. or notified rate.

How to solve Meaning and Types of Charges questions

Use this method for a theory question or a short case on types of charges.

1Define a charge in one sentence: security over the company's property, assets or undertakings to secure a debt (Section 77(1)).
2Identify the asset in the question: specific and identified, or a changing class such as stock or book debts.
3Classify it: specific asset means fixed charge; changing pool means floating charge.
4If the question names a form of security, apply the test: immovable property is mortgage; delivery of movables is pledge; movables kept by borrower is hypothecation; right to retain goods is lien.
5State the consequence: can the company sell the asset freely, and when does a floating charge crystallise.
6If winding up is mentioned, check the twelve-month rule and solvency proof under Section 332.
7Conclude clearly with the type of charge and its effect.

Quickest way: Possession and asset test

When to use it: Use when a question gives facts and asks you to name the type of charge or security.

Ask first: is the asset specific or changing? Specific is fixed; changing is floating.
Ask second: who holds possession? Lender means pledge; borrower means hypothecation or mortgage.
Ask third: is it immovable property? If yes, it is a mortgage.
If the lender only retains goods until payment, call it a lien.
Write the answer in one line, then add one line on the effect.

Common mistakes in Meaning and Types of Charges

Calling a charge on stock-in-trade a fixed charge.
Students see an identifiable asset and forget that stock keeps changing.
Fix: Test whether the company may deal with the asset in the ordinary course. If yes, it is floating.
Saying a pledge leaves possession with the borrower.
Pledge and hypothecation are confused.
Fix: Remember: pledge means possession goes to the lender; hypothecation means the borrower keeps it.
Treating a floating charge as always invalid on winding up.
Half-remembering Section 332.
Fix: It is invalid only if created within twelve months before winding up commenced, and not if solvency is proved. Even then it holds for cash paid plus interest.
Treating a lien as a charge created by agreement.
All four terms are lumped together as security.
Fix: State that a lien is generally a right to retain goods, usually arising by operation of law.
Quoting Section 77 as if it defines fixed and floating charges.
Students link all charge topics to one section.
Fix: Cite Section 77 for the duty to register and the scope of property; Section 85 for the register mentioning charges and floating charges; Section 332 for floating charges in winding up.

Worked examples

Example 1

Sundaram Textiles Ltd. borrows from a bank and creates a charge on its factory land at Coimbatore and also on its entire stock of yarn and trade receivables. Classify the charges and explain how they differ.

Show the solution

A charge secures a debt over the company's property or assets (Section 77(1)).
Factory land is a specific, identified asset. The charge on it is a fixed charge. It is also a mortgage as it is immovable property.
Yarn stock and trade receivables change constantly through sales and collections. The charge on them is a floating charge.
Difference: the company cannot sell the land free of the charge without the bank's consent. It can sell yarn and collect receivables in the ordinary course.
The floating charge crystallises on default or winding up and then attaches to the assets held at that time.

Answer: The charge on the land is fixed (a mortgage). The charge on stock and receivables is floating. The company may deal freely with the floating assets until crystallisation, but not with the land.

Example 2

Kaveri Foods Ltd. created a floating charge on its stock on 1 March 2026 for a loan of ₹50,00,000 received in cash that day. The company went into winding up with commencement on 15 November 2026. Liquidator finds no proof that the company was solvent immediately after creating the charge. Examine the validity of the charge.

Show the solution

Section 332 applies to a floating charge created within twelve months immediately before the commencement of winding up.
From 1 March 2026 to 15 November 2026 is under nine months, so it is within twelve months.
The charge is invalid unless it is proved the company was solvent immediately after creation. No such proof exists.
Exception: the charge remains valid for cash paid to the company at or after creation, in consideration for the charge, with interest at five per cent per annum or another notified rate.
The ₹50,00,000 was paid in cash on the day of creation as consideration.

Answer: The charge is invalid under Section 332 except to the extent of the cash paid, ₹50,00,000, with interest at 5% per annum or such other rate as the Central Government notifies.

Exam tips

Write definitions in one line, then use a short bulleted comparison of fixed and floating charges. Examiners reward clear contrast.
Always give an example asset with each type of charge.
For Section 332 questions, count the twelve months from the date of creation to the commencement of winding up, and state the solvency exception and the cash-paid exception.
Cite sections only where sure: 77 (duty to register), 85 (register of charges), 332 (floating charge on winding up).
End every answer with a clear conclusion in one sentence.

Practice questions from Charges

Meaning and Types of Charges in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Meaning and Types of Charges: frequently asked questions

What is a charge under the Companies Act, 2013?

It is a security interest created by a company over its property, assets or undertakings to secure a debt. Section 77 requires such a charge to be registered with the Registrar within thirty days of its creation.

What is the difference between a fixed charge and a floating charge?

A fixed charge attaches to a specific asset, and the company cannot sell it free of the charge. A floating charge is on a changing class of assets, and the company can deal with them in the ordinary course until the charge crystallises.

What is the difference between mortgage, pledge and hypothecation?

A mortgage is security over immovable property. A pledge is security over movables with delivery of possession to the lender. In hypothecation, the movables stay with the borrower.

When is a floating charge invalid on winding up?

Under Section 332, a floating charge created within twelve months before winding up commenced is invalid unless the company is proved solvent right after creating it. It stays valid for cash paid in consideration plus interest.