Question

1. Explain the following in the respect of "Corporate Law":
i. What is the difference between fixed and floating charge?
ii. What is the concept of crystallisation?
iii. What is the effect if the charge is not registered?

Answer 1

i. What is the difference between fixed and floating charge?

A charge may be either fixed or floating.

Fixed Charge: A ‘fixed charge’ is a charge which attaches specific assets of the borrowing company. These assets are of permanent nature like land and building, office premises, machinery installed by the company, etc. and are identified at the time of creation of charge. When a charge is created on such assets, the charge remains ‘fixed’ and the borrowing company is not permitted to sell such assets though it may use them. A fixed charge is created by way of mortgage or deposit of title deeds. Assets under fixed charge can be sold only with the permission of the charge-holder. A fixed charge is vacated when the money borrowed against the assets subject to fixed charge is repaid in full.

Floating Charge: A ‘floating charge’ is created on assets which are of fluctuating nature like raw material, stock-in-trade, debtors, etc. A floating charge is created by way of hypothecation or lien. The assets under floating charge keep on changing because the borrowing company is permitted to use them for producing final goods for sale e.g. in case of a company which manufactures leather goods, the raw material in the form of leather, which is subject matter of floating charge, shall be used to manufacture leather goods without seeking any permission from the lender. The raw material (i.e. leather) which was attached at the time of creation of ‘floating charge’ may not be the same after some time though floating charge continues and keeps on attaching the raw material which is currently in possession of the company. Thus, the company is free to deal with the assets which are under floating charge according to its own choice. In a way, it can be said that a floating charge is a present security which covers in its fold all such assets which are mentioned in the hypothecation deed for inclusion in the floating charge.

ii. What is the concept of crystallisation?

A floating charge remains dormant until it becomes fixed or crystallises. On crystallisation, the security (i.e. raw material, stock-in-trade, etc.) becomes fixed and is available for realization so that borrowed money is repaid. Crystallisation of floating charge may occur when the terms and conditions of floating charge are violated or the company ceases to continue its business or the company goes into liquidation or the creditors enforce the security covered by the floating charge, etc.

iii. What is the effect if the charge is not registered?

If a registrable charge though created but was not registered by a company and no certificate of registration of such charge was issued by the Registrar, it shall not be taken into account by the liquidator appointed under the Companies Act or the Insolvency and Bankruptcy Code or any other creditor. However, not registering the charge shall not impact/negate any contract or obligation for the repayment of the money secured by the charge. Further, it may be noted that failure to register charge shall not absolve a company from its liability in respect of any offence under the Companies Act.

Note:- The relevant companies act refrence may be inserted above based on the country.

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