In company law, a “charge” refers to a form of security interest granted over an asset or set of assets by a company (the chargor) to a lender or creditor (the chargee) to secure repayment of a debt or performance of some other obligation. Charges are often used by businesses to obtain loans, where the company’s assets are used as collateral to secure the loan. If the company fails to meet its debt obligations, the lender may have the right to seize the asset covered by the charge.
There are two primary types of charges in company law:
Fixed Charge: This charge is attached to a specific, identifiable asset such as real estate, machinery, or equipment. The company cannot sell or dispose of an asset that is under a fixed charge without the consent of the lender. The advantage of a fixed charge for the lender is that it provides more security and control over the specific asset, and in the event of default, the asset can be directly appropriated or sold to recover the debt.
Floating Charge: Unlike a fixed charge, a floating charge is not attached to any specific asset but covers assets that are current and circulating, such as stock, debtors, and moveable goods. This type of charge is “floating” because it allows the business to use, sell, and replace the assets in the normal course of business without needing prior consent from the lender. The charge “crystallises” (becomes fixed) in certain circumstances, such as the company going into liquidation, cessation of business, or upon the appointment of a receiver. At the point of crystallisation, the floating charge attaches to all current assets or a specified range of assets.
The creation of charges must be properly documented and filed with the registrar of companies, ACRA, to be enforceable against third parties. This registration serves to publicise the charge to potential creditors and others who may transact with the company, informing them of the existing encumbrances on the company’s assets.