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Meaning of fixed charge,floating charge and crystallization of charge

Meaning of fixed charge,floating charge and crystallization of charge


The Fixed charge is a charge on a defined property offered to the lender as security which should be clearly identifiable. During the existence of fixed charge, the borrower cannot change either the nature/identity of the property or otherwise dispose off the property. The securities commonly covered under fixed charge are a mortgage of immovable properties like Commercial/Industrial Property, non-agricultural land and residential house/flat in the name of borrowers/guarantors. In the case of fixed charge, the borrower has no right to deal with the property, in spite of property is in the actual possession of the borrower. The property can be transferred to any other entity only after full satisfaction of charge or the borrower shall obtain prior approval of the lender for the same in special cases.

Floating charge is an equitable charge on a present and future assets of a company as a security offered to its lender. The nature of this charge is to float over the assets charged rather than fixing on the specific property. The charge on assets of the company is also subject to change in quantity and value of the assets such as inventories, book debts, plant and machinery, vehicles etc. both present and future in the ordinary course of business of the company. The company does not require the consent of the charge holder to deal with (buy, sell or replace) the assets charged in any manner it deems fit during the course of its business. Normally, the floating charge covers all the assets of the company; however, in some cases, it covers only the assets used in the operating cycle of a company. The floating charge becomes the fixed charge in a particular circumstance like liquidation of the company or when the charge holder takes steps to crystallize the floating charge. When the floating charge is converted into fixed charge or crystallized, such property cannot be disposed-off until the dues of the charge holders are fully satisfied.

The floating charge crystallizes on following circumstances.

  • Where the undertaking ceases to be a going concern, regardless of principal money has become due for payment or not (until the debenture or trust deed contains contrary stipulations).
  • When a debenture holder takes steps to crystallize the floating charge to recover his entitled dues.
  • The charge crystallizes even in the event of company’s failure to meet the loan repayment obligations according to specified schedule in terms of predetermined agreement with the lender.
  • Upon the liquidation of the company.

When the floating charge crystallizes it become fixed charge and the company cannot change either the nature/identity of the property or otherwise dispose off the property until the dues of charge holder are fully paid.

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