Advantages of floating charge
- Enables a company without fixed assets to borrow
- Enhances the borrowing capacity of the companies with fixed assets
- Enables a company to use future assets as current collateral
- The charge does not prevent the company from carrying on business as it is free to sell and acquire new stock
Disadvantages of floating charge
- The value of the charge remains unknown since the company carries on business
- A fixed charge is given more priority to the floating charge
- A floating charge created 6 months before commencement of liquidation is treated as null and void
Crystallization of a floating charge
Circumstances through which crystallization takes place:
- When the company ceases to be going concern.
- Upon commencement of recovery proceedings against the company.
- When a receiver is appointed a debenture holder pursuant to the terms of a debenture or the court on application.
- Failure to pay the principle or interest when due and payable provided the chargee takes some steps to enforce the security
- Occurrence of an event which under the terms of the debenture causes crystallization.
When a floating charge crystallizes it becomes a fixed charge