Floating charge

In most common law jurisdictions it is an implied term in the security documents creating floating charges that a cessation of the company's right to deal with the assets (including by reason of insolvency proceedings) in the ordinary course of business leads to automatic crystallisation.

[b] Floating charges take effect in equity only, and consequently are defeated by a bona fide purchaser for value without notice of any asset covered by them.

[1] They are legal devices created entirely by lawyers in private practice; there is no legislation or judicial decision that was the genesis of a floating charge.

The first recorded English case where a floating charge was recognised was Re Panama, New Zealand, and Australian Royal Mail Co (1870) 5 Ch App 318.

(emphasis added)This led to a push back against the effect of floating charges in the form of the Preferential Payments in Bankruptcy Amendment Act 1897.

Later in Illingworth v Houldsworth [1904] AC 355 at 358 he stated: A description was subsequently given in Re Yorkshire Woolcombers Association [1903] 2 Ch 284, and despite Romer LJ clearly stating in that case that he did not intend to give a definition of the term floating charge, his description is generally cited as the most authoritative definition of what a floating charge is: When conducting a recent review of the authorities, the House of Lords brought some clarity to this area of law in National Westminster bank plc v Spectrum Plus Ltd [2005] UKHL 41.

Practice became such that companies were asked to give "lightweight" floating charges to secured lenders which had no collateral value purely to allow the holders to block administration orders, an approach that was approved by the courts in Re Croftbell Ltd [1990] BCC 781.

In the absence of any special provisions in the relevant document, a floating charge crystallises either upon the appointment of a receiver or upon the commencement of liquidation.

[9] It has also been suggested, relying upon obiter dictum comments by Lord Macnaghten in Government Stocks and Securities Investments Co Ltd v Manila Rly Co that a charge should also crystallise upon the company ceasing to trade as a going concern.

[13] In the United Kingdom there is some inferential support for the validity of automatic crystallisation provisions,[14] but they have never been subject to full judicial consideration.

In Re London Pressed Hinge Co Ltd [1905] 1 Ch 576 Buckley J observed that great mischief arose from the very nature of the floating charge as few of general unsecured trade creditors of the company would even be aware of its existence.

This perception has led to a widening of the classes of preferred creditors who take ahead of the floating charge holders in a number of countries.

In many jurisdictions, because of their dramatic effect on the availability of assets to unsecured creditors on an insolvency, floating charges are required to be registered.

As a mortgage, it can be taken over immovables and movables (real and personal property); must be in due form, i.e. passed before a notary and registered; confers rights in rem including priority ranking, right of pursuit (that is, it runs with the land and cannot be defeated by a bona fide purchaser), creditor's consent required to dispose of subject; and grants powers of recourse, including repossession, judicial foreclosure, sale by mortgagee in possession, or administrative receivership.

[22] Civil law countries generally allow for a commercial pledge to be taken over the pooled movable assets held or acquired for the use of a business or income-producing activity (going concern) and not for sale.

The pool is restricted to movable (personal) property of a long-term nature and of value to the operation of the business, specifically inventory and fixed assets, which include movable tangibles such as trade fixtures, equipment, machinery, tools, furniture; and legal intangibles such as company style (name), logos, goodwill, intellectual property, leases.

The pledge never crystallises like a floating charge; instead the pool is a universitas rerum and treated as a single movable security subject.