FIXED AND FLoATING CHARGES

The Company's Capacity to Borrow and Mention Fixed and Floating Charges and the Crystallisation Process

[Name of the writer]

[Name of the institution]

The Company's Capacity to Borrow and Mention Fixed and Floating Charges and the Crystallisation Process

Company's Capacity to Borrow

Most bankers and the directors of borrowing companies are familiar with the concept of fixed and floating charges. To secure the repayment of facilities from a bank, a company may give a debenture to the bank creating a fixed charge on its assets like its land, machinery or equipment. A fixed charge disentitles the company to sell or dispose of the assets during the existence of the charge without the bank's consent. The company may also or alternatively, give the bank a charge on its circulating assets such as on its raw material, finished goods or present and future book debts or receivables which the company may without reference to the bank, sell or dispose of or deal with freely, unless an event of default occurs which causes the floating charge to 'crystallize' or 'fix' on the circulating assets. This may occur if a receiver is appointed; the company goes into liquidation; ceases to carry on business; is given notice by the bank that the debenture is converted due to default in payment or for other reasons, or if it crystallizes automatically under the terms of the debenture.

It is easy to see that if a bank created a fixed charge on the receivables of a company that it would be impossible for a company to carry on business as the company would need the bank's consent to carry out day to day operations. In fact, as you shall see later, a requirement for the bank's consent to deal with assets is inconsistent with the nature of a floating charge, but a company's inability to deal freely with its assets is the hallmark of the nature of a fixed charge.

In business, the receivables of a company, in particular those of a trading, distributing or and manufacturing company comprise a large part of the company's assets, and banks therefore would like to take a fixed charge over those assets while offering the company the flexibility of being able to use the circulating capital of the collected receivables to carry on the business. So, it's good business for the bank to permit the company to flourish with the use of its receivables so that in turn it may repay the bank loan.

Fixed and floating Charges in Context to Crystallization

Fixed and floating charges are used to secure borrowing by a company. Such borrowing is often done under the terms of a debenture issued by the company. Charges on a company's assets must be registered at Companies House and may also need to be registered in some other way, e.g. a charge on land and buildings must also be registered at the Land Registry.

A fixed charge is a charge or mortgage secured on particular property, e.g. land and buildings, a ship, piece of machinery, shares, intellectual property such ...