Banking News

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 property can be transferred to any other entity only after full satisfaction of charge on it.

Floating charge is an equitable charge on 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 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 deem 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 fixed charge in a particular circumstance like liquidation of the company or when the charge holder takes steps to crystalize 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 crystalizes 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 is fully paid.

Related Articles: (Category Loans and advances)

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  • Consequences of registration and non-registration of charge under Companies act 2013
  • Difference between first charge and second charge
  • Meaning of pari-passu Charge
  • Facility of ‘Condonation of delay in registration of charge’ under companies Act 2013
  • Do you know that banks or FIs can register a charge if the borrower company fails?

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