Fixed and Floating Charge: What is the difference?

Introduction:

The most important part of starting a business is having enough money. Capital can be obtained in a variety of ways. When existing capital is insufficient to meet certain standards, a company can expand its capital by taking out loans. These loans, which are typically obtained from financial institutions or people, require the borrower/debtor to provide security. The security is provided in the form of the company’s assets/property. This type of secured loan is known as a mortgage, and it is secured by any property until the obligation is entirely paid off. As a result, the concept of ‘charging’ comes into picture.

Meaning of Charge:

Charge is the term used to describe the collateral used to secure a loan by way of a mortgage on the company’s assets. In the case of a secured loan, ‘charge’ refers to the creditor’s interest in the assets offered by the debtor as security. A charge gives a creditor a right of lien on the property. The two types of charges are fixed and floating charges.

Fixed Charge:

A fixed charge is a lien or mortgage formed against a loan over specified and identifiable fixed assets such as land and buildings, plant and machinery, and intangibles such as trademarks, goodwill, copyright, and patents. It is made to ensure that the loan is paid back. The unique aspect of this type of arrangement is that after the creation of the charge, the lender has complete control over the collateral asset, leaving the company (borrower) in ownership of the asset. As a result, if the corporation intends to sell, transfer, or dispose of the asset, it must either obtain prior lender consent or pay off all outstanding debts.

Floating Charge:

A floating charge relates to assets with a quantity and value that changes periodically, such as stock, debtors and moveable plant and machinery. It allows the business far more flexibility than a fixed charge because it can sell, transfer, or dispose of those assets without first obtaining lender approval or repaying the debt. From the lender’s point of view, a floating charge leaves it more exposed than a fixed charge because the value of the assets can and will change over time.

Crystallization of Charge:

A floating charge can become a fixed charge under several circumstances. Crystallisation of floating charge refers to the process of converting a floating charge into a fixed charge. When such a conversion occurs, the floating charge is no longer floating, even on non-static assets. It becomes a fixed charge, giving the creditor complete authority over specific assets in the case of debt repayment default. Such an occurrence occurs when the following conditions exist.

  • The company is about to shut down.
  • In the future, the company will cease to exist.
  • The receiver is appointed by the court.
  • The company defaulted on payments, and the lender took legal proceedings to collect the loans.

Differences between Floating and Fixed Charge:

  1. A fixed charge is a charge that can be easily associated with a certain asset. Floating Charge is a charge that is created on assets that change on a regular basis.
  2. Fixed Charge is a very specific type of charge. Floating charge, on the other hand, is dynamic.
  3. Fixed charge is prioritized above floating charge.
  4. The fixed charge applies to assets that are specific, identifiable, and present at the time the charge is created. Floating charge, on the other hand, covers both current and future assets.
  5. When the asset is covered under fixed charge, the company cannot deal with the asset until and unless the charge holder agrees for so. However, in the case of floating charge the company can deal with the asset until the charge is converted to fixed charge.

It is vital to know the key differences between floating and fixed charge while taking a loan.

References:

  1. Dev Ahuja, Creation of charge under Companies Act, 2013, Company Ninja, https://thecompany.ninja/creation-of-charge-under-companies-act-2013/
  2. Anonymous, Floating Charges vs Fixed Charges, India Filings, https://www.indiafilings.com/learn/floating-charges-vs-fixed-charges/
  3. Jyoti Kohli, Charges under Companies Act, 2013, Tax guru, https://taxguru.in/company-law/charges-companies-act-2013-meaning-procedure.html

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

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