Give the advantages and the disadvantages of floating charges and the circumstances through which crystallization takes place.

Advantages of floating charge

  1. Enables a company without fixed assets to borrow
  2. Enhances the borrowing capacity of the companies with fixed assets
  3. Enables a company to use future assets as current collateral
  4. 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

  1. The value of the charge remains unknown since the company carries on business
  2. A fixed charge is given more priority to the floating charge
  3. 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:

  1. When the company ceases to be going concern.
  2. Upon commencement of recovery proceedings against the company.
  3. When a receiver is appointed a debenture holder pursuant to the terms of a debenture or the court on application.
  4. Failure to pay the principle or interest when due and payable provided the chargee takes some steps to enforce the security
  5. Occurrence of an event which under the terms of the debenture causes crystallization.

When a floating charge crystallizes it becomes a fixed charge

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