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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

A company issues debentures secured by a fixed charge over a specific freehold factory. Which statement best describes the effect of this fixed charge?

A fixed charge gives debenture holders a claim over a specific identified asset, here the factory. On default they can enforce against that asset ahead of floating charge holders, and the company cannot dispose of it freely without their consent.

  1. AHolders can look to that specific asset for repayment ahead of floating charge holders if the company defaultsCorrect
  2. BCompany may freely sell the factory without the holders' consent because the charge attaches only to stock
  3. CHolders rank behind ordinary shareholders on liquidation
  4. DDebentures become convertible into equity on default
  5. Interest on the debentures becomes payable only if profits are sufficient

Explanation

A fixed charge attaches to an identified asset, so the company cannot dispose of it freely without the holders' consent, and holders look to it first on default, ranking ahead of floating charge holders in respect of that asset. Shareholders rank last, and interest is a contractual obligation, not profit-dependent.

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