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ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital

Kestrel Ltd has a fixed charge over its machinery in favour of Lender P and a later floating charge over all assets in favour of Lender Q. Kestrel Ltd is wound up and the machinery is sold. Ignoring preferential and insolvency costs, how do the lenders rank in respect of the machinery proceeds?

Lender P ranks first. A fixed charge over a specific asset normally takes priority over a floating charge covering the same asset, since a floating charge allows the company to grant fixed security. Breadth of the floating charge or the label debenture does not change this.

  1. ALender Q ranks first because floating charges cover all assets
  2. BLender P ranks first because a fixed charge generally takes priority over a floating charge on the same assetCorrect
  3. CThey rank equally because both are debentures

Explanation

A fixed charge attaches to a specific asset and generally takes priority over a floating charge, because the floating charge is subject to the company's power to deal with assets, including granting fixed security. Q's charge being wider does not improve its rank. Both being debentures does not create equality.

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