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Mandatory Registration of ‘Negative Lien’ as a ‘Charge’ under the CompanyLaws of India
Trushil Vora and Aashita Monani set out the reasoning for registering a negative lien as a charge under the company laws of India.
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As per Section 1 of the Companies Act, 2013 ("Act"), the said Section came into forceon August 29, 2013 when the President of India gave his assent to the Act and in terms of the said Section the remaining provisions shall come into force on such date(s) as would be specified in this regard by the Government in the Official Gazette. ANotification was issued by the Ministry of Corporate Affairs on September 12, 2013 pursuant to which as on date98 Sections of the Acthave come into forceincluding Section 2(16), which defines the term ‘Charge’.
As perthe Notification issued by the Ministry of Corporate Affairs on September 12, 2013 read with the clarification issued by Ministry of Corporate Affairs on September 18, 2013, Section 124 of the Companies Act, 1956 which defined the term ‘Charge’ has been repealed and replaced by Section 2(16) of the Act whichdefines the term Charge as "an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage". Thus, the term ‘Charge’ under the provisions of Companies Act, 1956 would include any kind of lien and accordingly in terms of Section 125 of the Companies Act 1956 (the corresponding section of which, i.e. Section 77 of the Act, is yet to be notified), the same will have to be registered with Registrar of Companies (ROC),by filing the requisite ‘Form 8’ for creation of chargein terms of the Companies (Central Government’s) General Rules and Forms, 1956, in case a company creates lien in favour of any person.
In banking and finance transactions (especially project finance transactions)the termsof various agreements generally include negative covenants or negative lien restricting the borrower company as well as in certain cases a promoter/sponsor company from disposing or otherwise creating any encumbrance over their assets (including shares) without the permission of the banks and/or financial institutions advancing the loan. There is no legal definition of the term ‘negative lien’ in any of the Indian legislative enactment. However, as it is understood in the normal course of business, it is merely a negative covenant which restricts a person from creating any kindof encumbrance over his assets or otherwise disposing them without the prior consent of the other person in whose favour he has given such an undertaking.
It would thus be important to determine whether or not a ‘negative lien’ can be construed to be a type of ‘lien’ i.e. whether or not the term ‘lien’used in the definition of the term Charge under Section 2(16) of the Act would include a ‘negative lien’requiring registration in terms of Section 125 of the Companies Act, 1956.Generally speaking, lien (i.e. a positive lien) is merely a right of a person to retain a property which is in his possession but belonging to another person till such time the debt or other obligation (for which such lien is conferred) is discharged.A negative lien,
on the other hand, is a right of a person to restrict another person from disposing of or creating encumbrance over a property belonging to the latter which is in the latter’s possession or control till the time the debt or other obligation (for which such negative lien is conferred) is discharged. In other words, negative lien is a right of a person requiring retentionby another person of a property belonging to the latter which is in the latter’s possession or control until certain stated obligation is discharged.Thus, neither a lien nor a negative lien gives the right to bring a property to sale but both confer a right of retention of a property as a result of which the person to whom the property belongs is legally precluded from disposing of the property without conferring the right to bring that property to sale to discharge the obligation except where the law permits such sale or where the parties have agreed to such sale.
To our knowledge, the term ‘negative lien’ is not defined under any legislation in India. Thus, a recourse is needed to the judicial pronouncements to consider as to how Indian courts have construed the term ‘negative lien’, and particularly, whether a negative lien is also a subset or a type of lien. Set out below are extracts of two Judgements of the Honourable High Court of Bombay wherein ‘negative lien’ has been dealt with.
In Bank of India Ltd v. Rustom Fakirji Cowasjee, AIR 1955BOM419 the Honourable High Court of Bombay has stated the following:
"In the course of his arguments learned Counsel for the defendant laid stress on the words "security" and "negative lien" used in the resolution. I need scarcely observe that these words must be given full effect in ascertaining the intention of the parties, and the resolution must be read as a whole. The writing itself says that the negative lien was to constitute a security for the payment of the loan. Lien, strictly, is neither a jus in rem nor a jus ad rem, but is simply a right to possess and retain property until some claim attaching to it is satisfied or discharged. (Story on Equity Jurisprudence p. 508.) There are some kinds of lien which are to be found in enactments such as the Companies Act, but most of the different kinds of lien, both particular and general, recognised by our law are to be found stated in the Indian Contract Act. It is true that the provisions of the Contract Act relating to lien are not exhaustive and Section 1 of that Act in terms saves all usages and customs of trade which may be found inconsistent with the provisions of the Contract Act. Then there are some exceptional liens, such as the common law lien of a solicitor. Such exceptional liens apart, the general rule may be stated to be that a lien whether an offspring of statute or arising by any usage or custom is essentially a right of retention. Under our law there is not, in case of a lien, any right of bringing the property to sale unless it is expressly conferred by statute. There are some kinds of lien where such right of sale is expressly recognised, e.g. the lien of an unpaid seller or of a pawnee of goods. But in case of many liens expressly recognised by statute there is no such right of bringing the property to sale and the right remains simply one of retention. It may be that in case of any lien which may be established by any usage or custom of trade there may be this additional right to bring the property to sale. But such usage or custom would have to be pleaded and strictly proved. Such is not the case before me. Here I am concerned with a lien in favour of a bank (emphasis applied), and it is indisputable that the general lien of a banker expressly recognised by Section 171 of the Contract Act (which is a possessory lien) does not confer on the banker any right to bring the property to sale. There is no pleading, and no issue, before me relating to any negative lien of a banker which by usage or custom may be said to confer any such right of bringing the property to sale. It is difficult for me to see that when the positive general lien of a banker does not confer on him any power of bringing the property to sale, how such power can reasonably be implied in case of a negative lien, when the parties have not chosen to state that it was their intention that there was to be such, right and there are no other words from which such intention could be inferred. The words "negative lien" in the resolution, in my judgment, does not in any way add to the effect of the assurance whereby the airline company became bound to keep its assets unincumbered. But as I have already observed the negative lien is given in the form of a declaration and an assurance contained in the resolution itself and, if anything, the expression "negative lien" seems rather incompatible with any implied right to bring the property to sale."
In The Commissioner of Income Tax v. Roshanbabu Mohammed Hussein Merchant, 2005(3)BomCR756 the Honourable High Court of Bombay has stated the following:
"As the said company failed to pay the loan, the Bank filed a suit against the company and on November 19, 1986 consent terms were arrived at in the said suit and as per the said consent terms, the bank was to have a negative lien over the assessee’s aforesaid plot of land which was given as collateral security for the loan and the said lien was to remain operative till the bank’s dues were fully paid."
It would be noted from the aforesaid judgements of the Honourable High Court of Bombay that term ‘negative lien’ has been referred to as ‘lien’ and the said court has used both the terms interchangeably. Further, the said court has also applied the principles applicable to a ‘lien’ under the Indian Law to a ‘negative lien’.
In view of the aforesaid judgements of the Honourable High Court of Bombay, we are of the view that the term ‘lien’as used in the definition of the term ‘Charge’ in Section 2(16) of the Act would also include a ‘negative lien’ since a ‘negative lien’ is a subset of a ‘lien’ in our view i.e. a ‘negative lien’ is a type of a ‘lien’ in our view. Thus, in terms of Section 125 of the Companies Act, 1956 a ‘Charge’ created by a company in favour of a person over its assets (including shares) which is in the form of a ‘negative lien’ (which is not exempted from registration in terms of Section 125 of the Companies Act, 1956) will have to be registered with the concerned Registrar of Companies within a period of 30 days after the date of creation of such charge by filing of the requisite ‘Form 8’ in terms of the Companies (Central Government’s) General Rules and Forms, 1956.
It may further be noted that in banking and finance transactions,the loan agreement as well as certain security documents like a deed of hypothecation or a deed or indenture of mortgage also contain a ‘negative lien’ over the assets charged or secured in terms of such deed. In light of the aforesaid, we are of the view that the ‘Form 8’ filed for registering the charge created vide such deeds should also have a specific mention of the negative lien over the assets created vide such deeds so as to register the said lien.
Registering a negative lien over the assets of a company as stated above will, in our view, act as a public notice, on behalf of banks and/or financial institutions in whose favour such negative lien is created, to others which can prevent a company from creating encumbrance over the assets over which it has conferred such negative lien in favour of the banks and/or financial institutions and can also discourage others from taking a charge over such assets. It will thus give an additional security to the banks and/or financial institutions advancing loan to a company by giving them a right void a latter charge over such assets as against their loan under Section 125 of the Companies Act, 1956.
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TRUSHIL VORAworks as a Senior Associate with SJ Law, Advocates & Solicitors, Mumbai. He can be reached at Trushil@sjlaw.in.AASHITA MONANI works as an Associate with SJ Law, Advocates & Solicitors, Mumbai and can be reached on aashita@sjlaw.in.
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