Floating Charge
Floating charge is a lien bestowed on an asset, and is bound to change its quantity. A charge can be registered on an asset allowing the owner to continue using it normally.[1] When there is failure on the part of the owner or the person who borrowed, the person who borrowed goes to liquidation and the floating assets crystallizes the floating charge and becomes a fixed charge. Floating charges, it should be noted, applies only to companies or other limited liability partnership arrangements. A floating charge is not given to an individual.[2]
The performance of a company and overall functions can only work if the company has enough capital. A company can use its authority to use its assets as security for an accrued loan. Floating charge was a creation of lawyers in proprietary law practice and was made law by courts in England, which recognized floating charges.[3] Due to the many risks involved in securing a debt, the floating charge was most preferred due to uncertainties that surround a corporation. Creditors wanted a means they could protect themselves from uncertainties involved with a company. Floating charges make it easier to get compensation.[4]
Several questions have been raised about the effectiveness of a floating charge. The United Kingdom courts accept floating charges as a form of security, but there are other laws that try to restrict its use.[5] Countries like the US do not fully accept its use. The United States courts are of the view that floating charges gives too much freedom to the debtors and therefore cannot pass the test of a genuine security.[6] The courts see a creation of a dominion over the assets so secured and this renders the whole arrangement void and therefore the creation of contractual rights, rather than the recognized proprietary rights [7]
Nonetheless, there are several advantages associated with floating charges and therefore the genesis of its recognition in the United Kingdom, Australia among other states. A floating charge attaches property as security without being specific to any particular asset. This is due to the vulnerable nature of companies and therefore the banks do not want to place themselves at risk.[8] An attachment therefore does not occur until the process of crystallization takes place.[9] Security is developed from all the assets the company owns and this will include any future assets it will own. The charge is ms much more secured also because the property to be acquired in future by the company shall also form part of the floating charge.
Common law has developed elaborate procedure on how floating charges take effect over other unsecured creditors.[10] The first creditor has an advantage over other subsequent floating charges that run concurrently. Therefore the first credit has an advantage over a subsequent credit advanced.[11] This kind of charge possibly attracts more credit from banks due to its secure nature and handsome returns to the lender.[12]
Conclusion
Floating charge is an effective form of security it grants several rights to the creditor. The creditor assumes the role of proprietor and also the arrangement is contractual
Bibliography
Birds, John. Annotated Companies Legislation. Oxford: Oxford University Press, 2010.
Davies, P L, Sarah Worthington, Eva Micheler, P L. Davies, and L C. B. Gower. Gower and Davies’ Principles of Modern Company Law. London: Sweet & Maxwell, 2008.
Gillooly, Michael. Securities Over Personalty. Sydney: Federation Press, 1994.
Mallon, Christopher, and Shai Y. Waisman. The Law and Practice of Restructuring in the Uk and Us. Oxford: Oxford University Press, 2011.
McCormack, G. Secured Credit Under English and American Law. Cambridge, UK: Cambridge University Press, 2004.
The Journal of the Law Society of Scotland. Edinburgh: Law Society of Scotland, 1956.
Tomasic, Roman, Stephen Bottomley, and Rob McQueen. Corporations Law in Australia. Leichhardt, NSW: Federation Press, 2002.
Wood, Philip, and Philip Wood. Comparative Law of Security Interests and Title Finance. London: Sweet & Maxwell, 2007.
Worthington, Sarah. Commercial Law and Commercial Practice. Oxford: Hart, 2003.
Ziegler, Alexander . Transfer of Ownership in International Trade. Alphen aan den Rijn: Wolters Kluwer, 2011.
[1] Philip Wood and Philip Wood. Comparative Law of Security Interests and Title Finance. London: Sweet & Maxwell, 2007.
[2] Parker Hood and John Virgo. Principles of Lender Liability. Oxford, UK: Oxford University Press, 2012.
[3] Alexander Ziegler. Transfer of Ownership in International Trade. Alphen aan den Rijn: Wolters Kluwer, 2011.
[4] Sarah Worthington. Commercial Law and Commercial Practice. Oxford: Hart, 2003.
[5] G McCormack. Secured Credit Under English and American Law. Cambridge, UK: Cambridge University Press, 2004.
[6] Christopher Mallon and Shai Y. Waisman. The Law and Practice of Restructuring in the Uk and Us. Oxford: Oxford University Press, 2011.
[7] P L Davies, Sarah Worthington, Eva Micheler, P L. Davies, and L C. B. Gower. Gower and Davies’ Principles of Modern Company Law. London: Sweet & Maxwell, 2008.
[8] Michael Gillooly. Securities Over Personalty. Sydney: Federation Press, 1994.
[9] (Supra)
[10] Roman Tomasic, Stephen Bottomley, and Rob McQueen. Corporations Law in Australia. Leichhardt, NSW: Federation Press, 2002.
[11] The Journal of the Law Society of Scotland. Edinburgh: Law Society of Scotland, 1956. Print.
[12] John Birds. Annotated Companies Legislation. Oxford: Oxford University Press, 2010.