What are company law floating charges?

Answer 1

A

A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership (LLP), which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets. The conversion (called crystallisation) can be triggered by a number of events; it has become an implied term in debentures (in English law) that a cessation of the company's right to deal with the assets in the ordinary course of business will lead to automatic crystallisation. Additionally, according to express terms of a typical loan agreement, default by the chargor is a trigger for crystallisation. Such defaults typically include non-payment, invalidity of any of the lending or security documents or the launch of insolvency proceedings.

Floating charges can only be granted by companies. If an individual person or a partnership[1] was to purport to grant a floating charge, it would be void as a general assignment in bankruptcy.[2]

Floating charges take effect in equity only, and consequently are defeated by a bona fide purchaser for value without notice of any asset caught by them. In practice, as the chargor has power to dispose of assets under a floating charge, this is only of any consequence in relation to disposals after the charge has crystallised.

The floating charge has been described as "one of equity's most brilliant creations."[3]floating charge is a particular type of security, available only to companies. It is an equitable charge on (usually) all the company's assets both present and future, on terms that the company may deal with the assets in the ordinary course of business. Very occasionally the charge is over just a class of the company's assets, such as its stock.

The floating charge is useful for many companies, allowing them to borrow even though they have no specific assets, such as freehold premises, which they can use as security. A floating charge allows all the company's assets, such as stock in trade, plant and machinery, vehicles, etc., to be charged.

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