All Assets Charge

Fixed and Floating Charges I

A fixed and floating charge may be created over the entire assets and undertaking of the company.  If it is sufficiently broad, it may capture the entire of company’s undertaking, thereby facilitating its sale for the benefit of the secured creditor. This type of “debenture” is commonly granted by a private company to a single bank.

This is a very flexible form of security, which is not available to partners or sole traders. Individuals can mortgage land or buildings. However, mortgages by individuals of movable items are subject to considerable conditions and restrictions which make them a practical impossibility. Companies are not subject to these restrictions.

A fixed and floating charge may cover all assets, including movable future and circulating assets. The floating charge may be combined with fixed charges so as to capture the entire business or undertaking in a single security.


Fixed and Floating Charges II

A secured debenture with a fixed and floating charge will usually contain fixed charge elements in respect of certain classes of assets but floating charges in respect of other assets, such as debtors, stock and bank accounts, etc.  What appears to be a fixed charge may be a floating charge, if, in the circumstances, the borrower has the requisite freedom to deal with it.  The classification is important because of the statutory limitations that apply to floating charges.

What is a fixed or floating charge relative to the company’s assets, will depend on the terms of the relevant charge in the circumstances.  A fixed charge arises when the secured asset is “tied down” and cannot be dealt with by the company, at least without the lender’s / trustee’s consent.  A floating charge is one where the asset may be dealt with by the company, without the consent of the lender until “crystallisation” whereupon the charge becomes fixed.


Nature of Floating Charges

A floating charge is a charge on a class of assets, present and/ or future, which may be circulating.  It charges assets which the company, in the ordinary course of its business is free to deal with from time-to-time.  It is contemplated that if it is enforced, the charge will crystallise and fix on those assets within its scope at the relevant date.

The floating charge is a present and immediate security (for priority purposes) which immediately affects all assets within its scope.  It is not a future charge that comes into existence on crystallisation.

Under a floating charge, the company is free to deal with assets within the scope of the charge, unless and until the floating charge is enforced. If and when it is enforced, it becomes fixed or “crystallised” on the assets within its scope at that date.

The floating charge assets may be dealt with by the company before crystallisation, even if to do so,  is a breach of the negative pledge clause (restricting such dealing).  The third-party mortgagee who takes the earlier charge is generally bound, only if he has actual knowledge of the restriction.

 


Floating Charge Limitations I

Floating charges are subject to certain weaknesses. Because the company has authority to deal with the assets, they may become subject to fixed charges in favour of a third party, which thereby take priority.

Because of the potential for a floating charge to undermine the position of unsecured creditors, a number of statutory limitations apply. Floating charges given within 12 months of winding up are invalid unless it is proved that the company was solvent at that time unless new consideration is given.

The chargee must extend new cash or provide goods or services at arm’s length together (with interest up to 5% per annum). In the case of a floating charge given to a connected person, this period is increased to two years.

Certain preferential creditors must be paid in priority to the floating charge holder in a winding up from the proceeds of the floating charge security. This includes certain Revenue and employee debts. This is not the position with a fixed charge.


Floating Charge Limitations II

The Revenue preference is for one year’s taxes. This entitlement applies even if the charge holder does not assert the floating charge. The duty to pay preferential creditors is imposed on the receiver notwithstanding that his principal function is to enforce the debenture holder’s security.

A floating charge is a charge over a class of present and future assets, which may change from time to time. Movable property within the scope of a floating charge may already be subject to leases or fixed charges. These would take priority over the floating charge.

Fixed or floating charges may be created over book debts. Fixed charges over book debts may not have priority over Revenue debts. If the company gives notice to the Revenue Commissioners within 21 days of creation, this limitation is significantly curtailed.


Book Debt Charges I

In principle, a fixed charge may be created over the book debts of a company.  The book debts are the company’s receivables in the ordinary course of its business.  They constitute an important current asset.

A lender might seek to a create fixed charges over book debts. However, if the borrower is allowed the freedom to deal with the book debts, there is likely to be a floating charge, with the consequent limitations that follow.

The courts have held that a purported fixed charge, which leaves the borrower with freedom to deal with the secured asset, to be floating charge.  The issue has arisen in particular, in the context of charges over book debts.


Book Debt Charges II

Unless there is a requirement to pay the proceeds of the secured debts into a specific account which the lender controls, it is difficult to show the requisite fixed element in the security. If the borrower is at liberty to withdraw from the account concerned, there is likely to be a floating charge.  A fixed charge requires in that the borrower is from making withdrawals without the lender’s consent. This must accord with the operational reality of the arrangement and must not be a sham.

Taxes legislation gives priority to Revenue debts over the proceeds of a fixed charge on book debts. Subject to certain conditions, this priority may be reversed by giving notice to the Revenue Commissioners within 21 days of the creation of the charge.  In this event, the charge holder is liable only for amounts becoming due for taxes after the service of notice by the Revenue Commissioners.

Before an amendment, the legislation provided that the Revenue could make the holder of the fixed charge on book debts liable to a greater extent. The Revenue priority is capped at the maximum sum which the company charge holder receives.


Crystallisation

Under a floating charge, the company remains free to deal with its assets in the ordinary course of its business.  This may include the sale of secured assets and the creation of mortgages/ charges over them.  There may be a prohibition on such dealing in the debenture deed, in which event a breach would constitute an event of default and allow enforcement.

A third party is bound by the restriction, only if he has actual knowledge of it.  The mere fact that the third party is aware of the debenture and that there is commonly a prohibition on creating further charges in debentures is not sufficient.  In commercial matters, the courts are reluctant to apply a “constructive” notice by which a third party is deemed to be aware of matters, where they are discoverable or should be apparent.

The crystallisation of the floating charge will generally occur when there has been a default. Crystallisation will usually coincide with the enforcement of the debt and the appointment of a receiver over the secured assets. The floating charge will give the charge holder the same rights which the borrower held in the assets at the time of crystallisation.

Clauses in a floating charge may seek to automatically crystallise the charge on the occurrence of certain events (e.g. winding up or even just default). The difficulty with such a provision is that the company may still appear to outsiders, to have the authority to deal with the assets.

While the lender continues to hold out the company as having such authority,  it will be bound under principles of agency, by transfers and dispositions, irrespective of the documented position.  Although the company may have a duty under the charge to account for the proceeds of the sale, this will not necessarily suffice to give the floating charge holder a claim on particular proceeds.  .


Registration

Because the typical fixed and floating charge applies to all of the company’s business assets or all of the assets of a distinct business, the effect is that the lender can take control of the company, lock, stock, and barrel.

A company must register most types of security in the Companies Registration Office within 21 days. The charges which require registration include charges on land, goods, receivables, intangibles and most other classes of assets. It includes fixed and floating charges over any such assets.

If the charge is not registered in time, the security is invalid against the liquidator and other creditors. This is a very serious matter from a lender’s perspective, as the security would not be available at the time when it is most required.

Failure to register the charge within 21 days is also an offence for which the company and every officer in default, may be prosecuted.

If the charge is not registered on time, it is possible to apply to the court for an extension of the time to register. The court has the discretion to grant permission to register late. Permission granted by the court will usually be without prejudice to the rights of any other creditors who have acquired rights in the asset concerned in the meantime.

The CRO issues a certificate proving registration of the charge.


References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch.19    Courtney

Keane on Company Law 5th Ed. (2016) Ch. 20 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore Browne on Companies

Palmer’s Company Law