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CA Intermediate · Corporate and Other Laws · Registration of Charges

Sundaram Textiles Ltd. created a mortgage on its factory land in favour of Canara Bank on 10 March to secure a term loan. The company did not file the particulars of the charge with the Registrar. Which statement correctly describes the legal position?

An unregistered charge that requires registration is void against the liquidator and other creditors of the company. The lender's debt survives, but the lender ranks as an unsecured creditor, because registration is what gives the security effect against third parties under the Companies Act.

  1. AThe charge is valid and enforceable against the liquidator and creditors even without registration, since the bank has the title documents
  2. BThe charge is void against the liquidator and any other creditor of the company until it is registered, though the debt itself remains payableCorrect
  3. CThe loan itself becomes void and the bank must refund the money disbursed
  4. DThe charge is valid against all persons if the bank has actual knowledge of other creditors

Explanation

Under the Companies Act, a charge that requires registration but is unregistered is not taken into account by the liquidator or any other creditor, so it is ineffective against them. The underlying debt is not extinguished, and the lender remains an unsecured creditor for it. Option A is wrong because registration, not possession of documents, gives effect against creditors.

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