8g Fixed vs Floating Charges Flashcards
Can a debenture be secured?
Yes, if it’s issued with a charge, the charge relates to a specific or class of assets depending on whether the charge is fixed or floating.
What is a charge?
Security against a loan which reduces the risk for the investor.
Can a company issue both floating and fixed charges?
Yes and a partnership can only issue fixed.
What is a fixed charge?
Charge on specific asset(s) e.g. mortgage is secured against the house.
What is the problem with issuing a fixed charge?
No freedom to sell the asset in which it relates to without the lenders permission.
The company should therefore only issue fixed charges on assets they plan to retain e.g. trading premises.
Are fixed charges high or low priority?
High priority so if the company goes into liquidation, charges will be paid first.
What is a floating charge?
A charge over a class of assets re both present and future e.g. if it were a charge over stock, you wouldn’t keep stock in the business as you would be trading with it meaning the value will change until crystallisation.
What is crystallisation?
The company can no longer freely deal with the assets due to a crystallising event.
What are examples of a crystallising event?
- Liquidation
- Company ceases trade
- Any other event disclosed in the terms of the loan e.g. company fails to maintain the property or maintain sufficient levels of stock.
What are the advantages of a floating charge?
- Company can deal freely with the assets.
- Wider class of assets can be charged
What are the disadvantages of charges?
- Value of the assets are uncertain.
- Lower priority than fixed.
- A liquidator can ignore if it was created within 12 months of winding up.
Even on crystallisation, the floating charge holder may not even get paid until after a number of higher priority creditors. What type of creditors will this be?
- Judgement creditors
- Preferential creditors
- Fixed charge holders
- Reservation of title creditor
- Unsecured creditors
What’s a judgement creditor?
Creditor who has received a court judgement in their favour allowing them to seize one or more named assets to sell and gain repayment for their debts.
What is a preferential creditor?
People such as employees who, if the only assets available are those subject to floating charges, may be repaid first.
What is a reservation of title creditor?
Creditors who have sold goods on the condition that they will retain legal ownership until the goods are paid for.
