What is the Difference Between Fixed and Floating Charge?

The main difference between fixed and floating charges lies in the type of assets they are applied to and their flexibility. Here are the key differences between fixed and floating charges:

1. Asset Type: Fixed charges are applied to specific, identifiable assets, such as property, land, and machinery, while floating charges are applied to a company's assets as a whole, including assets that change periodically like stock and inventory.
2. Flexibility: Fixed charges are rigid and grant lenders priority over the specified assets. A company cannot sell or dispose of these assets without the lender's authorization. In contrast, floating charges allow companies more freedom to use, sell, or transfer their assets without seeking approval from the lender.
3. Crystallization: Floating charges can be changed until they are 'crystallized' as fixed charges. Crystallization typically occurs when the company defaults on its loan or goes into administration.
4. Hierarchy in Insolvency: Fixed charges rank higher than floating charges in cases of business insolvency, meaning that fixed charge holders have priority over the assets in the event of default.
5. Registration: Registration of movable assets is voluntary for fixed charges, while registration is compulsory for floating charges, regardless of the asset type.
6. Legal vs. Impartial Charge: Fixed charges are legal charges, while floating charges are impartial.

In conclusion, fixed charges provide greater security to lenders as they have a higher priority in the event of insolvency, while floating charges offer more flexibility for companies to use their assets. The choice between fixed or floating charges depends on the circumstances of each case, and lenders may require both as security for their loans.

Comparative Table: Fixed vs Floating Charge

Here is a table comparing the differences between fixed and floating charges:

• A fixed charge is created on specific, identifiable assets of a company, such as land or property.

• A floating charge is created on a pool of changing assets, such as inventory or receivables, and crystallizes into a fixed charge upon certain events like default or liquidation.

• Fixed charges provide higher security and priority for lenders but limit the borrower's flexibility in managing assets.

• Floating charges offer a broader security base covering a fluctuating pool of assets, with lower priority for lenders but greater flexibility for borrowers to manage assets.

In summary, a fixed charge is a security interest over specific, identifiable assets, while a floating charge covers a pool of changing assets. Fixed charges provide higher security and priority for lenders, and lower priority for floating charges.