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Legal Dictionary

floating charge

Definition of floating charge

Further reading

A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership (LLP), which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets. The conversion (called crystallisation) can be triggered by a number of events; it has become an implied term in debentures (in English law) that a cessation of the company's right to deal with the assets in the ordinary course of business will lead to automatic crystallisation. Additionally, according to express terms of a typical loan agreement, default by the chargor is a trigger for crystallisation. Such defaults typically include non-payment, invalidity of any of the lending or security documents or the launch of insolvency proceedings.

Floating charges can only be granted by companies. If an individual person or a partnership was to purport to grant a floating charge, it 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 caught by them. In practice, as the chargor has power to dispose of assets under a floating charge, this is only of any consequence in relation to disposals after the charge has crystallised.

The floating charge has been described as "one of equity's most brilliant creations."

Definition

Although the nature of a floating charge has been widely considered by the courts, historically no full definition has ever been given, and the nature of the chargee's interest in the charged assets (or fund of assets) remains doctrinally uncertain. The earliest descriptions were given by Lord Macnaghten in two cases.

In Government Stocks and Other Securities Investment Co Ltd v Manila Rly Co [1897] AC 81 at 86 he said:

    "A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is the essence of such a charge that it remains dormant until the undertaking ceases to be a going concern, or until the person in whose favour the charge is created intervenes. His right to intervene may of course be suspended by agreement. But if there is no agreement for suspension, he may exercise his right whenever he pleases after default."

Later in Illingworth v Houldsworth [1904] AC 355 at 358 he stated:

    "...a floating is ambulatory and shifting in nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."

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:

  • it is a charge over a class of assets present and future;
  • that class will be changing from time to time; and
  • until the charge crystallises and attaches to the assets, the chargor may carry on its business in the ordinary way.

When conducting a recent review of the authorities, in keeping with that tradition, in National Westminster bank plc v Spectrum Plus Ltd [2005] UKHL 41, the House of Lords elected instead to describe the essential characteristic of a floating charge rather than define it, and they described it thus:

    "the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security."

References:

  1. Wiktionary. Published under the Creative Commons Attribution/Share-Alike License.



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