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

Sanvik Ltd borrowed from a bank and granted it a charge over all of its present and future inventory. The inventory is regularly sold and replaced in the ordinary course of trading, and the company may deal freely with it until a specified event occurs. How is this type of charge classified?

The charge is a floating charge. It covers a changing class of assets, namely inventory, which the company may freely sell and replace in the ordinary course of business until the charge crystallises. Fixed charges attach to specific assets and restrict dealings with them.

  1. AA fixed charge, because it is over identifiable assets
  2. BA floating charge, because the assets change and the company may deal with them in the ordinary courseCorrect
  3. CA fixed charge, because it was granted to a bank
  4. DA negative pledge, because it restricts the company's borrowing

Explanation

A floating charge covers a class of assets that changes from time to time, and the company may deal with those assets in the ordinary course of business until crystallisation. Inventory that is regularly sold and replaced fits this description. It is not fixed, because the company is not restricted in dealing with it; the identity of the lender does not determine the type of charge.

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