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CA Intermediate · Corporate and Other Laws · Registration of Charges

Himalaya Steels Ltd. created an unregistered charge on its stock in favour of Lender A for ₹80 lakh. Later, it created a registered charge on the same stock in favour of Lender B for ₹50 lakh. The company then went into liquidation. Which statement is correct under the Companies Act, 2013?

Lender A's unregistered charge cannot be recognised by the liquidator or other creditors, so Lender B's registered charge prevails. However, Lender A's debt is not extinguished; it remains a claim against the company as an unsecured creditor. Earlier creation date does not help without registration.

  1. ALender A's charge ranks first because it was created earlier, regardless of registration
  2. BBoth charges rank equally and share pro rata
  3. CLender A's charge is void against the liquidator and any creditor for want of registration, but the debt remains payable by the company as an unsecured claim and Lender B's registered charge prevailsCorrect
  4. DLender A's charge is void and the debt itself is extinguished

Explanation

An unregistered charge cannot be taken into account by the liquidator or any other creditor, so it is ineffective against them. However, the underlying debt is not wiped out: the company still owes it, and Lender A can claim as an unsecured creditor. Lender B, having registered, holds a valid secured position over the stock. Thus the debt-extinguished option is wrong, and priority by date alone is wrong because registration is necessary.

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