Fixed Charges, Floating Charges and Crystallisation

In one line

A fixed charge fastens on identified property the moment it is made; a floating charge hovers over a shifting class of assets and lets the company keep trading with them until something makes it settle, and that settling is called crystallisation.

In exam wording: the Companies Act 2013 does not define either kind, but section 85(1) requires a company's own register to include "all charges and floating charges", and section 332 provides that a floating charge created within the twelve months immediately preceding the commencement of a winding up is invalid unless the company was solvent immediately after its creation, except for cash actually paid at or after its creation in consideration for it, with interest at five per cent per annum or such other rate as the Central Government may notify.

Why the law has this at all

Think about what a manufacturer can offer a lender.

Its factory is easy: it does not move, it can be identified in a document, and nobody minds if the company cannot sell it without the bank's consent. A fixed charge works perfectly.

Its stock of raw material and finished goods is a different matter. That is where the company's real value sits, and it is also the thing the company must be free to sell every single day. A fixed charge over it would either be useless to the lender, because the goods are gone by lunchtime, or fatal to the company, because it would need the bank's consent for every sale.

The floating charge is the answer that commerce invented and the courts accepted. It covers a class of assets as it exists from time to time, and it deliberately leaves the company free to deal with those assets in the ordinary course of business until something happens to stop it. When that happens the charge crystallises: it stops floating and fastens on whatever assets are in the class at that moment, becoming in effect a fixed charge over them.

And then the law has to guard the obvious abuse. A company that knows it is sinking can give a floating charge to a friendly creditor, usually a director, for a debt that already exists, and thereby convert an unsecured claim into a secured one at the expense of everybody else. Section 332 exists to stop precisely that.

Some words this chapter uses

To crystallise is to convert a floating charge into a fixed one over the assets then in the class. In the ordinary course of business means the routine trading the company was set up to do. A receiver is a person appointed to take charge of property subject to a charge. A debenture holder here is a secured lender. Solvent means able to pay debts as they fall due. Preferential payments are the claims section 327 puts ahead of others in a winding up.