Question

What is meant by the creation of charge in the context of secured loans?

Hint:

Creating a charge makes a loan legally secured, protecting the lender in case of borrower default.

Answer 1

In the context of secured loans, the creation of charge means the legal establishment of the lender’s right over an asset offered by the borrower as collateral. It ensures the lender can claim the asset if the borrower defaults. Types of Charge:

Fixed Charge: Created on fixed assets like land, building, or machinery. These assets cannot be sold without the lender’s permission.
Floating Charge: Created on current assets like inventory or receivables, which can change in nature and value over time.
The charge must be registered with the Registrar of Companies (RoC) under the Companies Act, giving it legal standing. It protects the lender’s interest and determines their claim priority in case of insolvency.