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Capital and financing

Fixed v floating charges

Characteristics

If a debenture is issued with a charge the creditor is given security for their loan.

Characteristic Fixed Charge Floating Charge

Type of asset Charge relates to a specific Charge relates to a class of
charged asset. assets, and refers to these
assets present and future.

Must the asset be Yes: intention is to retain the No: the assets within the
retained asset permanently in the class may change from time
business e.g. trading premises. to time e.g. stock.

Freedom to deal The company has no general The company has freedom
with the asset freedom to sell the asset. If it to deal with the charged
does dispose of it, it must either assets in the ordinary course
repay the debt or transfer the of its business.
charge to the purchaser.

Crystallisation

A fixed charge attaches to an asset as soon as the charge is created. However, a
floating charge does not attach to any particular asset until crystallisation.

Crystallisation means the company can no longer deal freely with the
assets. It occurs in the following cases:

 On liquidation

 When the company ceases to carry on business; or

 On any event specified in the debenture (e.g. the company is
unable to pay its debts; the company fails to look after its property;
the company fails to keep stock levels sufficiently high).

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