What is a floating charge

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Crystallization is a term commonly used in reference to the conversion stage which sees a fund
of company assets switch from floating to fixed charge.

In principle, the floating charge can only be active in equity and originally the concept of a
floating charge was devised on the basis of a legal instrument. Although there is no legislation
or judicial decisions made responsible for the appearance of the floating charge.

In the main, the floating charge applied to the assets cannot be regarded as a fully fledged
security capable of delivering payment to cover the underlying debt until such time that an event
occurs. And there are several definitions accorded to the floating charge, with some defining it
as charge over a class of assets present and future, held until crystallization.

The popularity of the floating charge in the securities domain is inspired by the fact that it has a
favorable and comprehensive coverage of the chargor's assets. The floating aspect enriches
the chargor's interests with an unequivocal ability; to the extent of being in a position to do away
with the concerned assets if he/she so wishes.

Such a move allows the chargor to derive the best credit deal from the creditor, minus the need
to seek prior approval as regards the sale of shares or stock involved.

In a way the creditor also remains with a sweet taste in his mouth in that the floating charge
offers significant solutions in case of non-payment by the firm, under such a condition the
creditor can conveniently embark on the crystallization route.

Or alternatively enlist the services of an administrative receiver who officially puts on an
appointed management jacket of the business in question, and fulfill the underlying objective of
his appointment - which is to recover the debt through any necessary means.

Floating charges can be very difficult to enforce, unless the charge goes through to the
crystallization stage. And this means enforcement can be implemented when an official
appointment of a receiver has been made or alternatively via liquidation.

It is also possible to enforce under special cases where provisions are incorporated into the

Due to disparities in the pertinent priorities of floating charges and fixed charges, some security
related documents were compiled in such a way that they create a balance.

The result is a situation whereby the fixed charge appears frequently, while the floating charge
becomes the recipient of lower priority, and thus preferential creditors would treat it in the same
fashion. Principally, security is designed to play the role of allowing the secured creditor the
opportunity to lay claim to assets of a bankrupt individual or entity.

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George Chapungu George Chapungu
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