Fixed and floating charge

Fixed and floating charge
See also

A fixed charge is a security taken by a lender on a particular debt. A floating charge is a security interest in a pool of changing assets of a company or other artificial person.

The usual form of security is charge. The charge is used to secure any transactions where the company raises its capital through the issuance of a debenture[1]. The debenture is a document that either creates a debt or recognizes it, and any document that satisfies any of these conditions is a 'debenture'[2].

Floating charge[edit]

In legal systems with the Anglo-Saxon system of law, there is such a type of encumbrance as floating charge. This concept represents the ability of the creditor to pledge a pool of assets of the debtor, whose composition is constantly changing[3]. The assets that are pledged are not clearly defined; often it is simply all existing and future assets of the debtor. Such a pool includes not only assets that exist at the moment, but also future assets.

A floating charge acts in equity and becomes a fixed charge at a "crystallization event", which is usually defined such as[4]:

  • non-performance of payment obligations of the company;
  • liquidated company;
  • any actions of the company that endanger the charged assets.

The main characteristics of floating charge[5]:

  • it may cover future assets; thus, there is no need to identify and pledge each individual asset that becomes the debtor's property;
  • the debtor may carry out transactions with assets in the ordinary course of business until the charge is crystallized;
  • needs a public registration;
  • recovery is made by appointing an administrator who can manage the business in favor of the lender, and can also sell such assets as an economic unit, which will not lead to the depreciation of assets in the event of their sale separately.

Floating charge is generally weaker than fixed charge[6]:

  • the borrower has the right to freely dispose of and control the encumbered assets in the ordinary course of business.
  • the value of the encumbered assets is uncertain prior to crystallization, which may be too late for the creditor to seize the assets and recover its outstanding debt.
  • to be valid, a floating charge must be registered. Unregistered within the prescribed time frame may invalidate the charges and put the lender in an unsecured position.
  • floating rank is lower in priority of fixed charge by creditors.
  • can be easier allocated compared to a fixed charge.
  • floating charge is not recognized in all jurisdictions.

Fixed charge[edit]

A fixed charge is generally established for certain property (e.g. land, expensive equipment, etc.). In the case of a fixed pledge, the pledger may not dispose of the pledged property without the consent of the pledgee, and the pledger must retain the property in his possession[7].

The main difference between a floating charge and a fixed one is that in case of bankruptcy, the pledgee on a fixed charge will receive satisfaction of his claims at the expense of the pledged property mainly in front of all other creditors, and the pledgee on a floating charge – after the distribution of the amount received from the sale of the pledged property in favor of a number of creditors[8].

Registration[edit]

The company is obliged to register within 30 days from the date of its creation, if this is not done, the charge will be dropped against the liquidator and any creditors of the company[9]. In this case, the accrual will not ensure the priority of the accrual and will actually be attributed to the position of the unsecured creditor. To avoid possible non-registration by the company, any person interested in the fee can register the fee before the end of the period allowed for registration. Registration is important to establish any form of priority over the company's asset[10].

Footnotes[edit]

  1. Zhuravel M. (2015), p. 49
  2. Zhuravel M. (2015), p. 49
  3. Chin A. W. (2017), p. 9
  4. Chin A. W. (2017), p. 9
  5. Fixed and Floating Security (2011), p. 3
  6. Zhuravel M. (2015), p. 51
  7. Fixed and Floating Security (2011), p. 3
  8. Paterson S. (2016), p. 3
  9. Chin A. W. (2017), p. 10
  10. Chin A. W. (2017), p. 10

References[edit]

Author: Anastasiia Ilnytska