250 16: Loan capital Part E Capital and the financing of companies
Events causing crystallisation
The liquidation of the company
Cessation of the company's business
Active intervention by the chargee, generally by way of appointing a receiver
If the charge contract so provides, when notice is given by the chargee that the charge is converted into a
fixed charge (on whatever assets of the relevant class are owned by the company at the time of the giving
of notice)
The crystallisation of another floating charge if it causes the company to cease business.Floating charge contracts sometimes make provision for 'automatic crystallisation'. This is where the
charge is to crystallise when a specified event – such as a breach of some term by the company – occurs,
regardless of whether:
The chargee learns of the event.
The chargee wants to enforce the charge as a result of the event.
Such clauses have been accepted by the courts if they state that, on the event happening, the floating
charge is converted to a fixed one. Clauses which provide only that a company is to cease to deal with
charged assets on the occurrence of a particular event have been rejected.3.7 Comparison of fixed and floating charges
Floating charges rank behind a number of other creditors on liquidation, in particular preferential creditors
such as employees.A fixed charge is normally the more satisfactory form of security since it confers immediate rights over
identified assets. A floating charge has some advantage in being applicable to current assets which may
be easier to realise than long term assets subject to a fixed charge. If for example a company becomes
insolvent it may be easier to sell its inventory than its empty factory.The principal disadvantages of floating charges
The holder of a floating charge cannot be certain until the charge crystallises which assets will form
their security.
Even when a floating charge has crystallised over an identified pool of assets the chargeholder may find
themself postponed to the claim of other creditors as follows.(a) A judgement creditor or landlord who has seized goods and sold them may retain the proceeds if
received before the appointment of the debentureholder's receiver.(b) Preferential debts such as wages may be paid out of assets subject to a floating charge unless
there are other uncharged assets available for this purpose.(c) The holder of a fixed charge over the same assets will usually have priority over a floating charge
on those assets even if that charge was created before the fixed charge.(d) A creditor may have sold goods and delivered them to the company on condition that they are to
retain legal ownership until they have been paid (a Romalpa clause).
A floating charge may become invalid automatically if the company creates the charge to secure an
existing debt and goes into liquidation within a year thereafter. The period is only six months with a fixed
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