Methods of Creation of Charge

08/12/2023 0 By indiafreenotes

The Creation of a charge refers to the process by which a security interest or claim is established on a specific asset or property to secure a loan or obligation. This charge gives the lender a level of security in case the borrower defaults on the loan. There are various methods through which a charge can be created, and the specific method often depends on the nature of the asset or property involved. It’s important to note that the legal procedures for creating a charge may vary by jurisdiction, and compliance with applicable laws and regulations is essential. Additionally, the specific terms and conditions of the charge, as outlined in legal documents, define the rights and obligations of both the lender and the borrower. Legal advice is often sought to ensure the proper creation and registration of charges in accordance with the law.


A mortgage is a common method for creating a charge on real estate or immovable property.


The borrower (mortgagor) conveys an interest in the property to the lender (mortgagee) as security for a loan, with the understanding that the lender will have the right to take possession of or sell the property if the borrower defaults on the loan.


In a pledge, the borrower (pledgor) provides a tangible asset (such as shares, securities, or valuable goods) as security for a loan.


The borrower delivers possession of the pledged asset to the lender (pledgee), who retains it until the loan is repaid. Once repaid, the pledged asset is returned to the borrower.

Charge on Movable Assets:

A charge can be created on movable assets, including equipment, inventory, or other tangible personal property.


The borrower grants a security interest to the lender, allowing the lender to take possession of or sell the movable assets in the event of default.

Floating Charge:

A floating charge is a security interest over a class of assets that may change in quantity and value.


It allows the borrower to deal with the assets in the ordinary course of business, but when certain events occur (such as default), the charge “crystallizes,” fixing the assets covered by the charge.

Assignment of Receivables:

A charge can be created by assigning receivables or future income streams as security for a loan.


The borrower assigns the right to receive future payments to the lender, providing the lender with a claim on those payments if the borrower defaults.


Hypothecation involves pledging assets (often movable) as security without transferring possession to the lender.


The borrower retains possession and use of the assets while granting a security interest to the lender. If the borrower defaults, the lender may seize the assets.

Equitable Mortgage:

An equitable mortgage is a security interest created by an agreement or deposit of title deeds.


The borrower deposits the title deeds of the property with the lender, creating a security interest without a formal mortgage deed. It is common in some jurisdictions as an alternative to a formal mortgage.


Debentures are debt instruments issued by a company, and they can create a charge on the company’s assets.


The terms of the debenture document specify the assets charged and the rights of the debenture holders in case of default.