Question

What form of security for debt provides for “ fixed” security on assets such as land and buildings and “floating” security on moveable assets such as inventory. Explain what happens in the event of default by the borrower

LAW

Answer 1

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Fixed charge – It is a form of security where a borrower attaches an identifiable, often immovable asset to a debt. In other words, it means that in case, the borrower defaults, the lender can take his money back from selling off the asset.

It is called fixed charge because the asset which is attached to the debt is fixed and cannot be changed, sold off or transferred till the debt is paid off or the lender has allowed.

Floating charge – It is that scenario where the borrower attaches an asset or a group of assets with fluctuating value with a debt. Since the value of asset fluctuates, lender cannot exercise full control over the asset and is subject to certain risks in case of default. However, in the case of probability of default, the lender can crystallise the floating charge by converting it into fixed charge

Treatment in case of default

In case of default, fixed charge gets preference over floating charge and once it is paid off, only then floating charges can be honoured.