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Corporate practice bd |
What are Fixed and Floating Charges? |With Examples
Fixed charges and floating charges are types of security interests that lenders can hold over the assets of a borrower to secure repayment of a loan. Here's a breakdown of each:
Fixed Charges:
A fixed charge is a specific security interest taken over a particular asset or group of assets owned by the borrower. The asset is identified and attached to the loan as security.
Examples of assets subject to fixed charges include land, buildings, machinery, or specific pieces of equipment.
Once a fixed charge is created, the borrower cannot dispose of the asset without the lender's consent. The lender has a first claim over the proceeds of the sale of the asset in case of default.
Floating Charges:
A floating charge is a security interest taken over a class of assets that may change in quantity and value over time. The assets subject to a floating charge continue to be used and traded in the ordinary course of business.
Examples of assets subject to floating charges include inventory, accounts receivable, and other movable assets.
A floating charge allows the borrower to deal with the charged assets in the ordinary course of business without needing the lender's consent. However, if the borrower defaults on the loan, the floating charge "crystallizes," meaning it becomes fixed or attached to specific assets at that point in time. Once crystallized, the lender's claim over the assets becomes fixed, and the borrower's ability to deal with those assets is restricted.
Now, regarding your question, a floating charge crystallizes under certain circumstances, typically when the borrower defaults on the loan or when specified events occur. Some common events that trigger the crystallization of a floating charge include:
1.Default on loan payments or other obligations under the loan agreement.
2.Insolvency or bankruptcy of the borrower.
3.Appointment of a receiver or administrator over the borrower's assets.
4.Breach of specific terms or covenants in the loan agreement.
Once the floating charge crystallizes, it becomes fixed or attached to specific assets, and the lender's claim over those assets takes priority over other creditors' claims. The lender may then take steps to enforce its security interest, such as seizing and selling the assets to recover the outstanding debt.