CHARGE AND ITS KINDS
Nature and Definition of Charge
Where immovable property of a person is made security for the payment of money to another, and the transaction is not a mortgage there is creation of charge. The charge is created in favour of the person who is entitled to such payment. Section 100 of the Act defines charge in the following words :
“Where immovable property of one person is, by act of parties or by operation of law, made security for the payment of money to another and the transaction does not amount to mortgage, the latter person is said to have a charge-on the property.
Charge on an immovable property is created to secure repayment of money. If repayment is not made by the person who is liable for such repayment, it is made out of the property charged for this purpose. Charge is, therefore, created for securing the recovery of some money e.g. maintenance allowance, from the person whose property is so charged. Mortgage is also made to secure a certain sum of money (debt). But, in its very nature a charge is different from mortgage. Mortgage is transfer of an interest in favour of mortgagee; it is, therefore, transfer of property. Charge does not amount to transfer of any interest. When a property is charged, there is no transfer of any interest in favour of the charge holder. The concept is that such charge-holder is simply entitled to recover his money from that property. In other words, an ‘interest’ in the property charged is created in favour of the charge-holder. The person in whose favour a charge is created is called a charge holder.
Section 100 while defining a charge provides, “and the transaction does no amount to mortgage”. This means that charge is almost like a mortgage but, in essence it is not mortgage. Mortgage is wider than a charge. In every mortgage there is a charge, but every charge is not a mortgage.” In Raja Shri Shiv Prasad v. Beni Madhab AIR 1992 Pat. 592, distinguishing the nature of charge from that of mortgage the Patna High Court, observed :
“the broad distinction between a mortgage and a charge is this : whereas a charge only gives a right to payment out of a particular fund or particular property without transferring that fund property, a mortgage is in essence a transfer of an interest in specific immovable property.”
There is very little difference between charge and mortgage in so far as the nature of these two transactions is concerned. Practical differences apart, nature of charge differs from mortgage in the sense that unlike mortgage, charge is not transfer of interest.
Kinds of Charges
Charges are of two kinds : (i) Charges created by act of parties and, (ii) Charges arising by operation of law.
Charges created by act of parties
A charge is created by act of parties when it takes place between two living persons. A charge by act of parties is constituted by an agreement between two or more persons. Under such agreement some immovable property is specified as security for repayment of a certain sum of money, without transfer of any interest of that property. No particular mode of creating a charge has been provided in this Act. Therefore, the general rule as laid down in Section 9 may apply under which a charge may also be created orally. But where the agreement creating & charge is in writing, it must be registered if the charge is valued Rs. 100 or upwards.
It is not necessary to use any particular words for creating a charge. It is sufficient that the document shows an intention to make the property as security for payment of the money mentioned therein. But, the document must create the charge immediately on its execution without operating as some future date. Charge must not be created on a future contingency.
An Encumbrance on property has the effect of being a charge. Entering into memorandum of understanding to sell property has been held to be not creative of any encumbrance or charge on property. Receiving advances or amounts pursuance of the memorandum (MOU) also does not amount to creating encumbrance.
Charge arising by operation of law
Where a charge is created without reference to any agreement or stipulation between the parties, the charge is said to be created by law. Charge by operation of law results due to some legal obligation. In other words, such charges arise under some provisions of law irrespective of any agreement between the parties. For example created by operation of law under Section 55(4) (b) of this Act in the case of unpaid vendor. Similarly, such charge is created in favour of a mortgage unpaid sale proceeds of revenue sale under Section 73 of this Act. Charge created by a decree based upon an award made on agreement out of court or otherwise is also charge created by operation of law. A charge operation of law need not be registered.
A property was mortgaged for a bank loan. It was put to sale for realisation of the loan amount. The auction was on the basis of the property “as is where is”. The auction purchaser ultimately purchased it after negotiations satisfying himself about the state of the property. It could not said that he could not know that the property was subject to the charge for payment of Commercial Tax Dues. He was not allowed to wriggle out of this liability.
Illustrations
(1) A who is co-sharer, pays the entire arrears of rent as required under some provision of law (e.g. Madras Estates Land Act). A has a charge by operation of law, on the other co-sharer’s portion of property.
(2) There was an unregistered agreement for sale of property. The buyer was declining to accept delivery of possession for a justifiable cause. It was held that a charge became created in favour of the buyer on the property by operation of law and not under the agreement. It became irrelevant whether the agreement of sale was registered or not.