A charge is a claim by a creditor on the property and assets of the company as security for repayment of a loan. The charge on the assets may either be fixed or Floating.
A fixed charge is one which is created on some definite or specific property of a permanent nature e.g. a building, land or heavy machinery. It prevents the company from the property so charged free of the burden of the debt.
In the event of winding up a debenture holder secured by a specific charge is in the highest ranking class of creditors (secured creditor). Where the property of the company is specifically company charged, the company cannot sell it without the consent of the holder of the charge.
The charge can either be equitable or legal. In a legal charge, the full ownership of the property is transferred to the creditors (lenders) without delivery of possession of the mortgaged property and the mortgager reserves the right to regain the full ownership upon payment of the loan and interest.
In an equitable mortgage, only the title deed or documents of ownership of the property are deposited with the creditor as security without transferring the legal ownership.
Floating charge is defined as one which is ambulatory (shifting) in nature hovering over the property which it intends to affect until some event occurs or some act is done which causes it to settle on the subject matter of the charge within its reach. It does not attach to a specific asset.
In Illingworth vs. Houldsworth, Lord McNaughten defined a floating charge in the following word “a floating charge is ambulatory (shifting) in its nature, hovering over, so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten in the subject of the charge within its reach “. It is an equitable charge on the assets of the company for the time being of a going concern. It does not relate to any specific property over which it is created. It may, however, fasten upon any specific property including any which is subject to a fixed charge, but it can be restricted to a limited class of property. It attaches to the subject charged in the varying condition in force from time to time.
It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be going concern or until the person in whose favour the charge is created intervenes
This right to intervene may however be suspended by agreement. However, if there is no agreement for suspension he may exercise his right whenever he pleases after default.
The property, which is subject to the floating charge, can be dealt with by the company without consulting the holder of the charge and may be sold, exchanged or otherwise dealt with in any way that the directors may think fit.
Upon the happening of certain event(s) which are specified in the trust deed, the floating charge becomes fixed or in technical terminology, crystallized and becomes fastened to the assets ‘in being of the company.