A charge can be said to have arisen when there is an agreement between two parties, a creditor and debtor, that the creditor has an equitable proprietary interest in the secured asset (Land, property, etc.) as security for debt. When the debt is discharged, the charge terminates too. The creditor is called the chargee and the debtor is called the chargor. A charge creates a claim against property used as security by the chargor to obtain money or performance of some obligation.
When a charge is created it does not transfer legal or beneficial ownership or possession on the charge, it merely creates an encumbrance on the asset such that failure on the part of the chargor/debtor to pay back the debt can empower the charge/creditor to act on the asset to recover his money. In other words a charge encumbrances the chargor’s/debtor’s property in favour of the charge/creditor such that the latter can pursue remedies against the property and not merely the debtor in the event of default by the debtor in repaying the debt.
A charge is usually used on company assets by banks and lenders when such company is undergoing liquidation or administration. The creditor can then enforce the security without usually without reference to court. A charge creates rights of a proprietary nature which run with the property such that the charge/creditor can exercise it even against a trustee in bankruptcy.
Creation of a charge
No special words or formalities are needed to create a charge. It is enough if it can be gathered from the instrument an intention by the parties to use the property in question as security Craddock v. The Scottish Provident Institution (1893) 69 L.T. 380. For a charge over land, there must be a contract in writing signed by both parties. Charges created over land usually need to be registered.
Rights of the parties
The charge/creditor acquires a right to be paid out of the property securing his loan the moment the charge is created. This right resides in him until it becomes realizable. The chargor/debtor has the right to unencumber his property by redemption.
Realisation of charges
The charge/creditor may realize his security by sale of the property or the appointment of a receiver. He does not have the right to foreclosure since he has not title to be perfected by a foreclosure order. The charge/creditor may apply to court for an order of sale or for the appointment of a receiver. However where the charge is by deed the charge/creditor has a statutory power of sale and does not need recourse to the courts.
Difference between a charge and a mortgage transaction
The charge requires no formalities or special words for its creation.
A mortgage is created by strict adherence to the formalities. Where there is any lapse, an intention to create a legal mortgage may end up in the creation of an equitable mortgage.
A creditor/charge does not have right to possession nor is any other right in the land transferred to him. What he has is the right (created in him by the charge) to be paid out of the property charged.
A mortgage conveys to the legal mortgagee a legal interest in the property The equitable mortgagee may gain right to possession by agreement of parties.
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