Difference between Fixed & Floating charges

By Dr. Abdelgadir Warsama  

It is important to mention that a debenture is normally secured either by a fixed or floating charge or, ideally, by both. The fixed or floating charges are the normal legal or equitable mortgages, however, floating charges, in practice, are restricted to companies and are applicable with certain peculiarities.

They are equitable charges on some or all of the present and future property of the company, subject to the company’s power to deal with it in the ordinary course of business. Such a charge is, therefore, of a particularly valuable means whereby a business concern can raise money without removing any of its property from the business.

The charge remains floating and the property also remains liquid until some default is made and the debenture holder takes steps to enforce his security, or until winding up commences. When such instance occurs the charge “crystallizes” and is converted into a normal fixed charge on the assets of the company at the time of crystallization or which come into existence thereafter.

Default alone will not suffice to crystallize the charge, the debenture holder must intervene to determine the license to the company to deal with the property, normally by appointing a receiver or by applying to the court to do so. But if the company is wound up, no intervention by the debenture holder is necessary, the floating charge automatically crystallizes because the license is subject to the implied condition that the company carries on business.

No particular form of words is necessary in order to create a floating charge, it suffices that the intention is shown, to impose a charge on property present and future, and also to allow the company to continue to deal with that property in the ordinary course of business, however, the expression “ordinary course of business” is construed widely to cover many situations.

In any event, the company will be allowed to continue to buy and sell in the usual way, to pay its unsecured creditors, and even to grant mortgages on the same property unless it is otherwise provided. A floating charge, will clearly be postponed to a later legal mortgage if that mortgagee had no notice of it. Moreover, it is important to say that, the floating charge will be invalid unless registered at the Companies Registry and registration constitutes notice to all.

This is important due to the fact that the debenture holders have impliedly authorized the company to continue to deal with its assets notwithstanding the charge. Because of this authority the floating charge will be postponed to a later fixed charge whether legal or equitable, even if the later charge has notice of it. The company could not create another floating charge on the same assets ranking in priority to or pari passu with the original floating charge. As per the Law of Commerce, in Bahrain, it is generally allowed for a commercial mortgage (pledge) to be taken over pooled movable assets held or acquired for the use of a business or income-producing activity (going concern) and not for sale.

This is similar to “Floating Charges” concept, as the pool is restricted to movable property of a long-term nature and of value to the operation of the business, specially inventory and fixed assets, which include movable tangibles such as trade fixtures, equipment, machinery, tools, furniture and legal intangibles such as company style (name), logos, goodwill, intellectual property, leases…etc. Herein, the pool is treated as a single movable security subject.

The law in Bahrain provides that, where a mortgage is made on an appropriated property, the mortgage shall remain valid even when the mortgaged property has been replaced by property of the same kind and if the mortgaged property is ascertained, the mortgagor may replace it by other property provided that such replacement has been agreed upon in the contract of mortgage and provided that the creditor accepts the substitute without prejudice to the rights of third party.