ACCA F4 - Corp and Business Law (ENG)

248 16: Loan capital  Part E Capital and the financing of companies

3 Charges

A charge over the assets of a company gives a creditor a prior claim over other creditors to payment of

their debt out of these assets.

Charges may be either fixed, which attach to the relevant asset on creation, or floating, which attach on

'crystallisation'. For this reason it is not possible to identify the assets to which a floating charge relates

(until crystallisation).

3.1 Definition

A charge is an encumbrance upon real or personal property granting the holder certain rights over that

property. They are often used as security for a debt owed to the charge holder. The most common form of

charge is by way of legal mortgage, used to secure the indebtedness of borrowers in-house purchase

transactions. In the case of companies, charges over assets are most frequently granted to persons who

provide loan capital to the business.

A charge secured over a company's assets gives to the creditor (called the 'chargee') a prior claim (over

other creditors) to payment of their debt out of those assets. Charges are of two kinds, fixed and floating.

3.2 Fixed charges

A fixed charge is a form of protection given to secured creditors relating to specific assets of a company.

The charge grants the holder the right of enforcement against the identified asset (in the event of default in

repayment or some other matter) so that the creditor may realise the asset to meet the debt owed. Fixed

charges rank first in order of priority in liquidation.

Fixed (or specific) charges attach to the relevant asset as soon as the charge is created. By its nature a

fixed charge is best suited to assets which the company is likely to retain for a long period. A mortgage is

an example of a fixed charge.

If the company disposes of the charged asset it will either repay the secured debt out of the proceeds of

sale so that the charge is discharged at the time of sale, or pass the asset over to the purchaser still

subject to the charge.

3.3 Floating charges

A floating charge has been defined, in case law as:

(a) A charge on a class of assets of a company, present and future ...

(b) Which class is, in the ordinary course of the company's business, changing from time to time and ...

(c) Until the holders enforce the charge the company may carry on business and deal with the assets

charged.

Floating charges do not attach to the relevant assets until the charge crystallises.

A floating charge is not restricted to assets such as receivables or inventory. A floating charge over 'the

undertaking and assets' of a company (the most common type) applies to future as well as to current

assets.

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