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CA Intermediate · Corporate and Other Laws · Registration of Charges

Kiran Foods Ltd. created a charge on its stock in favour of Bank X on 5 April, unregistered. On 20 April it created a second charge on the same stock in favour of Bank Y, which was duly registered in time. Subsequently the company went into liquidation. What is the legal position?

An unregistered but registrable charge cannot be relied upon against the liquidator or other creditors, so Bank X loses its security priority. The underlying debt is still payable by the company as an unsecured claim, so the loan itself is not extinguished.

  1. ABank X is secured and ranks ahead because it was created first
  2. BBank X's unregistered charge is not enforceable against the liquidator or any creditor, though the debt remains payableCorrect
  3. CBoth banks rank equally since the property is common
  4. DBank X's debt is wiped out entirely along with the charge

Explanation

An unregistered charge that required registration cannot be taken into account by the liquidator or any other creditor, so Bank X cannot enforce security against them. However, the company's liability to repay the debt continues, so option D is wrong. Order of creation does not help an unregistered charge, which rules out option A.

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