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Understanding Fixed and Floating charges on Property
The company, when borrows money like any other person can give security to its creditors. When a security is given, a charge is said to have created over it.
The security may be either a movable property or an immovable property of the company. The charge includes a mortgage also. A charge that can be created over the assets of a company may be either a fixed charge or a floating charge.
A fixed charge is one, which is created on some definite property of the company. Example, a charge on land and buildings. When a charge is created, the company cannot deal with that property without the consent of the holder of the charge.
A floating charge, on the other hand, is created on some class of property, which is ever changing. It means the charge covers not only the present assets of the company but also covers the future assets of the company.
Differences between Fixed Charge and Floating Charge
The characteristics of both charges can be well understood, if we analyze the points of distinction between the two. They are as follows:
1. A fixed charge is created on some property capable of being defined. A floating charge, on the other hand, shall be generally created upon the whole of the company’s property, including movable and immovable and also property, which is subject to a fixed charge.
2. The company cannot deal with a property, which is subject to a fixed charge. But, it can deal with all the properties, which are subject to a floating charge.
3. A fixed charge shall not become a floating charge. A floating charge, upon the occurrence of certain events may become a fixed charge.
4. If a fixed charge is created over a property, which is subject to a floating charge, the fixed charge shall get priority, whereas if a floating charge is created over the assets, which are subject to a fixed charge, the charges shall not get any priority.
Crystallisation of a Floating Charge
A floating charge will become a fixed charge in the following circumstances:
1. If the company goes into liquidation.
2. If the company ceases to carry on its business.
3. When a receiver is appointed by the Court.
4. If the money becomes payable according to the terms of the charge and the lender takes some steps to enforce it.