ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital
Marlow Ltd defaulted on interest payments due under a debenture secured by a floating charge. The debenture states that on default the charge crystallises and the holder may appoint a receiver. What is the effect of crystallisation on the floating charge?
On crystallisation the floating charge becomes fixed over the assets the company owns at that time, and the company can no longer freely deal with them. The holder gains security over those specific assets but does not become their owner.
- AThe charge converts into a fixed charge over the assets then held, and the company loses the right to deal with them freelyCorrect
- BThe charge is cancelled and the debenture holder becomes an unsecured creditor
- CThe charge continues to float and the company may still sell assets free of the charge
- DThe charge transfers ownership of the assets to the debenture holder immediately
Explanation
On crystallisation, a floating charge attaches to the assets then in the company's ownership and becomes in effect a fixed charge. The company can no longer deal with those assets in the ordinary course without the holder's consent. The holder does not become the owner, and the security is not lost.
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