Question

ABC Bhd is a renowned furniture manufacturer. About two years ago, ABC Bhd created a floating charge over its stock-in-trade in favour of Bank Kayaraya Bhd. Then ABC Bhd created a fixed charge over the same assets in favour of Bank Richie Bhd. The fixed charge allowed ABC Bhd to continue trading in manufacturing furniture without any restraint. ABC Bhd was unable to repay the loans and the Bank Richie Bhd. appointed a receiver. Bank Kayaraya Bhd claimed the proceeds from the receiver saying that its harge had priority over the charge given to Bank Richie Bhd.

Required:

a. What is the order of priority of the charges created by ABC Bhd?

b. What should Bank Richie Bhd have done for its charge to enjoy priority?

Answer 1

a. Fixed chargeholder have the priority over floating chargeholders in repayment of their dues. Generally Fixed charge is created on fixed assets like plant, Land, Building etc and Floating charge is created on current assets like stock, debtors.

In the case of ABC bhd, Richie Bhd has created the second charge that is fixed on the stock in trade.In the normal course of business, Richie bhd can not take control of the stock in trade of ABC Bhd and the latter will be using the stock freely (it can sell the stock, purchase new stock etc). That violates the conditions of the fixed charge. Hence fixed charge created by ABC Bhd in favour of Richie Bhd will amount to second floating charge over the stock in trade.

And the First charge holder holds the priority over second charge holder in order of repayment in case of wind upor bankruptcy.

In this case First charge holder i.e.Kayaraya Bhd will have priority.

b. Richie Bhd should have opted for fixed charge over a fixed asset to enjoy preference in repayment of its debts as Fixed charge holder have priority over other creditors.

Note-This is the order of the repayment in case of wind up or bankruptcy:-

Liquidator or receiver

Creditors who are employee of the company (wages owed)

Fixed charge holders

Floating charge holders

Unsecured creditors.