Floating charges take effect in equity only, and consequently are defeated by a bona fide purchaser for value without notice of any asset caught by them. In practice, as the chargor has power to dispose of assets under a floating charge, this is only of any consequence in relation to disposals after the charge has crystallised.
The floating charge has been described as "one of equity's most brilliant creations.
Although the nature of a floating charge has been widely considered by the courts, historically no full definition has ever been given, and the nature of the chargee's interest in the charged assets (or fund of assets) remains doctrinally uncertain. The earliest descriptions were given by Lord Macnaghten in two cases.
In Government Stocks and Other Securities Investment Co Ltd v Manila Rly Co  AC 81 at 86 he said:
Later in Illingworth v Houldsworth  AC 355 at 358 he stated:
A description was subsequently given in Re Yorkshire Woolcombers Association  2 Ch 284, and despite Romer LJ clearly stating in that case that he did not intend to give a definition of the term floating charge, his description is generally cited as the most authoritative definition of what a floating charge is:
When conducting a recent review of the authorities, in keeping with that tradition, in National Westminster bank plc v Spectrum Plus Limited and others  UKHL 41, the House of Lords elected instead to describe the essential characteristic of a floating charge rather than define it, and they described it thus:
Because of the lower priority of a floating charge (as to which see below), most security documents that create floating charges also seek to create fixed charges over as many assets of the company as they reasonably can. In relation to certain assets, this has historically given rise to tension as to whether the charge created is actually a fixed charge, or whether (despite being expressed as a fixed charge) it should be recharacterised as a floating charge, with the lower priority that floating charges have. This issue arises most frequently in relation to trade receivables and cash in bank accounts.
In National Westminster bank plc v Spectrum Plus Limited and others  UKHL 41 the House of Lords finally brought some welcome clarity to this area of the law. The essential test of whether a charge was a fixed charge related to the chargor's power to continue to deal with the asset. In order to preserve the status of a charge as a fixed one, the bank must exercise actual control over disposal of the asset. If the chargor is able to deal with the asset, such as by drawing from the account in which charged funds are kept, or into which the proceeds of trade receivables are deposited, then the holder of the floating charge does not have effective control. Their Lordships held that as this is inconsistent with the status of the charge as fixed (if the chargor company is able to use the proceeds in the ordinary course of its business without the consent of the charge holder), the charge could only take effect as a floating charge.
Several authors have suggested that the floating chargee, prior to crystallization, may have no proprietary interest at all in the charged assets. However, this is inconsistent with cases (such as Spectrum) at the highest level which suggest a proprietary interest does exist.
Alternatively, the floating chargee may have an inchoate type of proprietary interest, with characteristics that are proprietary but of a lesser order than the proprietary interest of a chargee with a fixed charge. Some authors have suggested that there is an interest in a fund of assets , but the nature and incidents of the interest remain unclear. This has received some judicial support, from Lord Walker in Spectrum, for example.
Another possibity is that the holder of a floating charge may have the same quality of proprietary interest as a fixed chargee, but one that is subject to defeasance or overreaching by permitted dealings by the chargor with the charged assets.
Historically, floating charges are a fascinating concept in that they are legal devices created entirely by lawyers in private practice; there is no legislation and no judicial decision that was the genesis of a floating charge. In 1862 in an apparently unconnected decision of Holroyd v Marshall (1862) 10 HL Cas 191 it was held that equity would recognise a charge over after-acquired property as being effective to create a security interest over that property automatically upon its acquisition.
This decision lead to "a further manifestation of the English genius for harnessing the most abstract conceptions to the service of commerce. Documents came to be drafted that purported to grant security over all of the debtor's present and future property, but by contract expressly permitted the debtor to dispose of those assets, free from the charge, until such times as the debtor's business ceased. This charge came to be known as the "floating charge".
The first case in which a floating security device was tested and upheld came a mere eight years after Holroyd v Marshall in Re Panama, New Zealand and Australian Royal Mint Company (1870) 5 Ch App 318; a remarkably quick gestation by any reckoning. The Court of Appeal held that the effect of the document was that the secured creditor could not interfere with the running of the business and its dealings with its own assets until the winding up of the company, but the occurrence of that event entitled the secured creditor to realise its security over the assets and to assert its charge in priority to the general body of creditors
Any residual concern about the efficacy of such charges were comprehensively ousted by the House of Lords in Salomon v. Salomon & Co.  AC 22.
Floating charges are enormously popular as a security device for two principal reasons. From the secured creditor's perspective, the security will cover each and every asset of the chargor. From the chargor's perspective, although all of their assets are encumbered, because the security "floats", they remain free to deal with the assets and dispose of them in the ordinary course of business, thereby obtaining the maximum credit benefit from the lender, but without the inconvenience of requiring the secured creditor's consent to dispose of stock in trade.
However, in many jurisdictions, floating charges are required to be registered in order to perfect them; otherwise they may be unenforceable on the bankruptcy of the debtor. This registration requirement has often led to other property rights (such as rights under a defective retention of title clause), which have been recharacterised as a floating charge being held to be void for non-registration.
Broadly speaking, holding a floating charge gives the secured creditor two key remedies in the event of non-payment of the secured debt by the company. Firstly, the secured creditor can crystallise the charge, and then sell off any assets that the charge then attaches to as if the charge was a fixed charge. Secondly (and more frequently the case, to preserve the company as a going concern), if the floating charge encompasses substantially all of the assets and undertaking of the company, the secured creditor can appoint an administrative receiver to take over the management and control of the business with a view to discharging the debt out of income or selling off the entire business as a going concern.
In countries that permit the making of an administration order, the floating charge had another key benefit. The holder of a floating charge could appoint an administrative receiver and block the appointment of a court appointed administrator, and thus retain control of the distribution of the assets of the company. Practice became such that companies were asked to give "lightweight" floating charges to secured lenders which had no collateral value purely to allow the holders to block administration orders, an approach that was approved by the courts in Re Croftbell Ltd  BCC 781. In the United Kingdom the law has now been changed by statute, but the power to block appointments of administrators has been retained in many other common law jurisdictions.
In certain countries, notably Australia and New Zealand, it was for a time very common to include "automatic crystallisation" provisions which would provide that the floating charge would crystallise upon an event of default automatically and without action from the chargee. Automatic crystallisation provisions have been upheld in New Zealand but there are judicial comments suggesting they may not be recognised as effective in Canada. In the United Kingdom there is some inferential support for the validity of automatic crystallisation provisions, but they have never been subject to full judicial consideration.
The main purpose of any security is to enable the secured creditor to have priority of claim to the bankrupt party's assets in the event of an insolvency. However, because of the nature of floating charge, the priority of floating charge holder's claims normally rank behind:
The floating charge cannot normally be enforced until it has crystallised (and thus, effectively, become a fixed charge) and so most statutes provide that the priority of a fixed charge that was created as a floating charge is treated as a floating charge.
Because of the differences in priority of fixed charges and floating charges, security documents came to be drafted to contain as many charges expressed to be fixed charges as possible, and leave as little as possible covered by the floating charge, where it would have secondary priority to the claims of the preferred creditors. A number of judicial decisions gave conflicting interpretations over the characteristics that were definitive of a fixed charge, particularly with reference to charges over book debts (and a fixed charge that did not contain those characteristics would be "recharacterised" as a floating charge). The position was definitively resolved in NatWest v Spectrum Plus Limited when the House of Lords confirmed that a charge over book debts could be a fixed charge, provided that the secured creditor exhibited the necessary degree of control over the proceeds of the book debts. This would normally require that they either be paid into a blocked account, or that they be paid directly to the secured creditor. Any lesser degree of control was not consistent with a fixed charge, and such charges would be construed as floating charges, regardless of what label the parties had given them.
Floating charges have been criticised as a "raw deal" for unsecured creditors. In Salomon v. Salomon & Co.  AC 22 Lord Macnaghten observed that the injustice of the case (as he saw it) was not caused by the introduction of the concept of limited liability, but by the excessive security created by the floating charge. In Re London Pressed Hinge Co Ltd  1 Ch 576 Buckley J observed that great mischief arose from the very nature of the floating charge as few of general unsecured trade creditors of the company would even be aware of its existence.
As most secured lenders will not usually have recourse to their security until the debtor company is in a parlous financial state, the usual position is that even all the remaining assets of the company are not enough to repay the debt secured by the floating charge, leaving the unsecured creditors with nothing. This perception has led to a widening of the classes of preferred creditors who take ahead of the floating charge holders in a number of countries. The introduction of a regime of voidable floating charges for floating charges taken just prior to the onset of insolvency is a partial response to these criticisms.
Some countries have also sought to "ring fence" recoveries made for wrongful trading or fraudulent trading from the floating charge to create an artificial pool of assets available to the unsecured creditors.
Because of the potential for abuse of a security interest that catches all of a company's assets, many jurisdictions have enacted provisions in their insolvency legislation providing that a floating charge granted shortly prior to the company going into liquidation will be invalid, or invalid to the extent that it does not secure new loans made to the company.
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