floating charge

A floating charge is a security interest over moveable property. Floating charges are equitable and not legal, and 'float' over the assets that it is to secure. Floating charges thus do not attach to any particular asset and crystallises upon an event of default of terms of charge. Accordingly, the charge floats over classes of assets pending some predetermined event (such as an insolvency event). Until the predetermined event takes place, the borrower is able to deal with the assets freely. When a relevant event takes place, the borrower is not able to deal with the secured assets without the permission of the charge holder. The debt may be satisfied by the sale of the charged assets.

Use of Floating Charges

These charges are the appropriate form of specialist security interest over assets which change from day to day, such as inventory or stock in trade. The debtor is entitled to use the assets as if they were not subject to the charge in the ordinary course of business provided that it is not in breach of the terms upon which the charge was given.

Floating charges are charges that:

1. apply to classes of assets of a company or individual in the present, as well as assets coming into possession of the business in the future;
2. which change from time to time during the ordinary course of business;
3. continue to floating over the assets of the business until some named event takes place. Such charges are flexible security devices which may apply to the inventory of a business, intellectual property and the assets of the business generally;
4. to be enforceable against a liquidator or administrator, floating charges must be registered;
5. rank after legal charges in an insolvency.

Floating charges are enforced by the appointment of a liquidator or administrative receiver. It is a more flexible and dynamic security than a fixed charge and is usually granted in a debenture.