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Concept
Floating charge
Summary
In finance, a floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulatory and shifting nature, such as receivables and stock.
The floating charge 'floats' or 'hovers' until the point at which it is converted ("crystallised") into a fixed charge, attached to specific assets of the business. This crystallisation can be triggered by a number of events. 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. Additionally, security documents will usually include express terms that a default by the person granting the security will trigger crystallisation.
In most countries floating charges can only be granted by companies. If an individual person or a partnership was to try to grant a floating charge, then in most jurisdictions which recognise floating charges this would be void as a general assignment in bankruptcy.
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. In practice, as the charger has power to dispose of assets subject to a floating charge, so this is only of consequence in relation to disposals that occur after the charge has crystallised.
The floating charge has been described as "one of equity's most brilliant creations." 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.
In Holroyd v Marshall (1862) 10 HL Cas 191 it was held that equity would recognise a charge over after-acquired property as being effective to create a security interest over that property automatically upon its acquisition.
Official source
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