CONSEQUENCES OF FLOATING CHARGE

As discussed previously, a company creates floating charge over its assets. The floating
charge is a useful security as it enables companies to raise more debt finance secured against their
fluctuating assets, for instance trading stock. Moreover, due to its flexibility, most companies
creates floating charge compared to a fixed charge. Despite the floating charge holder may have
less protection, it is still a beneficial security and remains significant from a legal perspective.1
There are few consequences can be determined from the floating charge.

Firstly, by having the floating charge, it allows company to deal with the charged assets in
its ordinary course of business. Such as, mortgaging, leasing or use of the proceeds of charged
assets until it is intervened. However, this is subject to clause by lenders in the company as there
are certainly some risks to be deal associated with the floating charges. By this way, the lender
will definitely finds ways to protect themselves from having to go through those risks. For instance,
the lender will render a clause before the dealings to have an automatic crystallization clause. A
crystallization of a floating charge usually happens when the company is wound-up. It may also
happens during the new appointments of manager or receiver in the company. From this
crystallization event, the floating charge will turn into a fixed charge.2

Moreover, the creation of floating charge in a company could protect the holders against
other lenders using negative pledges. This may prohibit and restricts the creation of any subsequent
charges. It is said that the floating charge holder has a priority over the other holders who deemed
to have notice of the negative pledges, especially during insolvency situations. It is important that
by having this kind of flexibility of a floating charge, it is upon terms that are agreed by parties
involved in a company.3 This can be seen in the case of Re Valletort Sanitary Steam Laundry Co
Ltd4, where 36 the court held that the chargee would only be bound by the pledge if he had actual
knowledge of it. For such requirement, there must also be notice of such pledge beforehand. The

1
Katherine Brown, ‘In what ways does the floating charge fall short of being an ideal security for credit extended
to companies, especially small companies, by banks and other parties dealing with those companies?’ (2006)
<http://flax.nzdl.org/greenstone3/flax;jsessionid=3D0AE333C17D241CD64D824A735DA2FC?a=d&c=BAWESS&d=D
2148&dt=simple&p.a=b&p.s=ClassifierBrowse> accessed 5 December 2018
2
Colin Winter, ‘Floating Charge’ (Ingram Winter Green, 2013) <www.iwg.co.uk/images/Security-Briefing-Note.pdf>
accessed 7 December 2018
3
Ibid 1.
4
[1903] 2 Ch 654.
terms will determine whether there should be intervention by the courts by little or even no judicial
intervention at all with this process.

The floating charge also allows the holders to obtain fixed charges over an ever greater
class of assets increased to enable a lender to take security over those assets of the debtors which
it had failed to cover by taking of such fixed charges. In England, a practice of quasi-security
devices began to be used by lenders to obtain a form of a charge over tangible assets, such as
retention of title and, sale and leasebacks. The expansion in law for such security to creditors in
England is more likely that the securitized assets was sufficient to cover the value of the
indebtedness owned by charger to the lender.5

Next, the floating charge provides security against unsecured creditors and the floating
charge holder will be liable to take steps to enforce. It is a kind of considerable control over the
company’s affairs granted to the floating charge holders.6 One of the control is to block during the
appointment of an administrator if the company becomes insolvent. This is to ensure a maximum
return to them as floating charge holders. In addition, this is also achieved by the floating charge
holder appointing a receiver out of court in accordance with the provisions when creating the
floating charge instrument, which normally known as the debenture deed. Besides, it is considered
as a veto holds by the floating charge holders. It happens before the court hearing of the petition
for administration order.

Thus, it can be said that the consequences of floating charge is an advantageous to both
companies and the lenders. This is because, the company will be free to deal with the assets under
the floating charge while the charge holders will benefit from the fact that the charge attaches to
all assets in a class. As mentioned, there will be risks to be tolerated by the holders, the proportion
of advantages are better than the disadvantages, due to the risk of assets may decrease over time.
It is a norm for both parties in an agreement of a company to experience such risks.

5
Cabrelli, ‘The Case against the Floating Charge in Scotland’ [2005] vol. 9 Edinburgh Law Review
<https://www.euppublishing.com/doi/abs/10.3366/elr.2005.9.3.407> accessed 5 December 2018
6
Jayne Backett, ‘Fixed and Floating Security’ (Field Fisher Waterhouse, England, 2011)
<https://www.fieldfisher.com/publications/2011/06/fixed-and-floating-security> accessed 7 December 2018
REFERENCES
Backett J, ‘Fixed and Floating Security’ (England, 2011)
<https://www.fieldfisher.com/publications/2011/06/fixed-and-floating-security> accessed
7 December 2018

Brown K, ‘In what ways does the floating charge fall short of being an ideal security for credit
extended to companies, especially small companies, by banks and other parties dealing
with those companies?’ (2006)
<http://flax.nzdl.org/greenstone3/flax;jsessionid=3D0AE333C17D241CD64D824A735D
A2FC?a=d&c=BAWESS&d=D2148&dt=simple&p.a=b&p.s=ClassifierBrowse>
accessed 5 December 2018

Cabrelli, ‘The Case against the Floating Charge in Scotland’ [2005] 9 ELR 420
<https://www.euppublishing.com/doi/abs/10.3366/elr.2005.9.3.407> accessed 5
December 2018

Winter C, ‘Floating Charge’ (Ingram Winter Green, 2013) ) <www.iwg.co.uk/images/Security-

Briefing-Note.pdf> accessed 7 December 2018

Re Valletort Sanitary Steam Laundry Co Ltd [1903] 2 Ch 654