Floating charges have long been used as a means of securing interest over a number of non-constant assets. These assets are considered to be ‘non-constant’ as they may change with respect to their quantity and/or value. Floating charges are almost exclusively used by Companies, as they allow for the Company to secure a loan without the said loan being an obstacle to the Company’s daily business. This is because these short-term assets can be sold or traded, thus not hindering the Company’s business. Following the sale of these short-term assets, the floating charge moves from them onto the Company’s other assets. This gives the creditor a sense of security as a result of the fact that the charge continues to exist, even if the initial security is no longer held by the Company.
How do they differ to Fixed Charges?
The main difference between floating charges and fixed charges is that in the case of the latter, the asset which is being used to secure the loan cannot be disposed of without the creditor’s consent. This means that if a Company were to sell the asset which it used as security, upon notification and receipt of the creditor’s approval, they will need to use the consideration which they received in order to immediately pay back the debt. This directly contrasts the nature in which floating charges operate, in that assets being used to cover floating charges can be disposed of, so long as the Company has other short-term assets which can be used to cover the existing debt.
Worth noting however, is that floating charges generally have an expiration date. This means that should the expiration date be reached, the Company will need to pay back the debt accrued until that point, along with any applicable interest.
Furthermore, should the Company enter liquidation proceedings, the fixed charge ‘crystallises’, meaning it now becomes a regular fixed charge, using the assets which it was ‘floating’ over at the date on which the liquidation commenced, as its security.
Crystallisation is the procedure by which a floating charge is converted into a fixed charge. In the event that the Company goes into liquidation or is unable to repay the loan/debt, the floating charge becomes crystallised into a fixed charge. Crystallisation can also occur in instances where a Receiver is appointed by a Court, as a result of the Company and the Lender entering into Court proceedings. The important thing to note is that should a floating charge crystallise, the Company would not be able to sell or use the assets in question, as it could when the charge was a floating one. Furthermore, in the event of a floating charge becoming crystallised, the Lender may take possession of the assets.
Legal Aspects to Consider
- Section 89(1) of the Companies Law of Cyprus (Cap. 113) states that in the event that a Receiver is appointed, but the Company is not in the course of being wound up, then the Receiver shall deem the priority of repayment which shall be allocated to the floating charge.
- Section 90(1Α) of Cap. 113 creates a requirement on Companies to register the existence of a floating charge within twenty one (21) days of its creation, having settled the payment of the relevant stamp duty.
- Section 99(1) of Cap. 113 creates an obligation for Companies to maintain a register of charges in their respective registered offices.
- Section 300(3)(b) of Cap. 113 states that should a Company enter into winding up procedures, floating charges become repayable. However, should the Company not have enough funds to cover all debts, then the list of priority of debts shall apply.
- Section 303 of Cap. 113 states that in the event of the winding up of a Company, any floating charges created within the twelve months prior to the commencement of the winding up procedures shall be invalid, unless it can be proven that the Company was solvent immediately after the creation of the floating charge.
Floating charges are, in a nutshell, flexible charges which do not attach to any single asset unless they expire or crystallise. It is a method which is often used by Companies which are looking to obtain a loan of sorts, but which fear that a regular fixed charge (such as a mortgage) would hinder their business. This is because it would prevent the Company from disposing of the asset used as security, in an event where that would be the Company’s most desirable course of action. However, the fear which will undoubtedly linger on the creditor’s mind would be the notion that should the Company enter into liquidation, then there is a chance that the floating charge would be on the lower end of the list of priority, meaning that the debt could very well never end up being paid back. The counter-argument to this claim is the fact that this an aspect which applies to almost all debts and charges nonetheless, since the position of the charge on the list of priority varies from Company to Company.
This Article and any content forming part of it is only intended to provide a guide on the subject matter and does not constitute legal or any other advice. If professional advice is required, G.C Charalambous & Co LLC would be glad to assist you in this respect.