What is "floating charge"

Floating charge \Floating charge\, lien \lien\, etc. (Law) A charge, lien, etc., that successively attaches to such assets as a person may have from time to time, leaving him more or less free to dispose of or encumber them as if no such charge or lien existed.

This conversion of the floating charge into a fixed charge (called "crystallisation") can be triggered by a number of events. In most common law jurisdictions it is an implied term in security documents creating floating charges that a cessation of the company's right to deal with the assets (including by reason of insolvency proceedings) in the ordinary course of business leads to automatic crystallisation. Additionally, security documents will usually include express terms that a default by the person granting the security will trigger crystallisation.

In most countries floating charges can only be granted by companies, LLPs or similar entities with separate legal personality. If an individual person or a partnership was to try to grant a floating charge, then in most jurisdictions which recognise floating charges this would be void as a general assignment in bankruptcy.

Floating charges take effect in equity only, and consequently are defeated by a bona fide purchaser for value without notice of any asset covered by them. In practice, as the chargor has power to dispose of assets subject to a floating charge, so this is only of consequence in relation to disposals that occur after the charge has crystallised.

The floating charge has been described as "one of equity's most brilliant creations."

"A floating security is an equitable charge on the assets for the time being of a going concern. It attaches to the subject charged in the varying condition in which it happens to be from time to time. It is the essence of such a charge that it remains dormant until the undertaking ceases to be a going concern, or until the person in whose favour the charge is created intervenes. His right to intervene may of course be suspended by agreement. But if there is no agreement for suspension, he may exercise his right whenever he pleases after default."

Later in Illingworth v Houldsworth [1904] AC 355 at 358 he stated:

"...a floating charge is ambulatory and shifting in nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp."

A description was subsequently given in Re Yorkshire Woolcombers Association [1903] 2 Ch 284, and despite Romer LJ clearly stating in that case that he did not intend to give a definition of the term floating charge, his description is generally cited as the most authoritative definition of what a floating charge is:

• it is a charge over a class of assets present and future;
• that class will be changing from time to time; and
• until the charge crystallises and attaches to the assets, the chargor may carry on its business in the ordinary way.

When conducting a recent review of the authorities, in keeping with that tradition, in National Westminster bank plc v Spectrum Plus Ltd [2005] UKHL 41, the House of Lords elected instead to describe the essential characteristic of a floating charge rather than define it, and they described it thus:

"the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event. In the meantime the chargor is left free to use the charged asset and to remove it from the security."