General Concept of “Charges“
Fixed Charges and Floating charges are used by the lender to secure the fund of lender that is provided to borrower . Generally, borrower seeks necessary finance from the bank or other financial institution for their business. Bank or other lenders, after compliance of required conditions, sanctioned money to the borrower. Before disbursing the fund the bank may want collateral by taking a mortgage from the borrower. This is called “Charge.” These charges are divided into two types – Fixed Charges and Floating Charges. Company’s assets which are used as charge must be registered. This charge gives creditors security over a debtor’s assets.
Types of Charges
There are two types of Charges:
- Fixed Charges
- Floating Charges
Fixed assets such as land, equipment, and shares of the company commonly secured using a fixed charge. Current assets and future assets, included stock in trade are secured using floating charges. The company may dispose of floating charges assets in the normal course of business, but assets secured as the fixed charge cannot be disposed of.
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 as copyrights, patents, trademarks, etc. The assets secured using a fixed charge cannot be sold by the company because it is created to secure the repayment of the loan.
The lender will take full control over the fixed charges assets. If the borrower fails to repay the borrowed money, the lender may sell the assets and recover their money.
A floating charge is not applied to particular assets. This is the charge that is applied to floating assets and future assets of the company. The quantity and value of assets may change over times. Floating charges are used where fixed charges cannot be applied. Stock, debtors, vehicles are the part of floating charges. In this charges company (borrower) has the right to sell, transfer or dispose of the assets, in the ordinary course of business. In this respect not prior permission of the lender is required to sell or transfer floating assets.
Crystallization of Floating assets
Crystallization means converting the floating charge into a fixed charge. When a borrower defaults on its obligations under the terms of the loan agreement, the charge will crystallize and immediately attach to the assets owned by the company at that time.
Under the following circumstances floating charge crystallize into fixed charge:
- When the company is about to wind up.
- When a company ceases to exist in the future.
- When the court appoints the receiver.
- When the company defaulted on payment, and the lender has taken action against it to recover the debts.