Question Tag: Fixed Charge

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  • 6 Marks

BCL – Nov 2020 – L1 – Q2c – Types of Capital and the Financing of Companies

Explain the concepts of a fixed charge and a bond in the context of loans taken by companies.

A loan taken by a company limited by shares may or may not be secured by a charge.

Required:
Explain the following:
i) A fixed charge (3 marks)
ii) A bond (3 marks)

i) A fixed charge:
Section 86(2) of ACT 179 provides that debentures may be secured by a fixed charge on certain of the company’s property. Once the property is subject to the fixed charge, the company cannot dispose of it without reference to the debenture holders. The asset subject to the fixed charge is bare land, a building, a vehicle, plant machinery, or equipment. Enforceability of a fixed charge allows the court to appoint a receiver (Section 87(5) of ACT 179). (3 marks)

ii) A bond:
A bond is a written instrument to pay money or do some act if certain circumstances occur or a certain time elapses. The distinguishing feature of a bond is that it is an obligation to pay a fixed sum of money at a definite time with a stated interest. (3 marks)

  • 6 Marks

BCL – Mar 2024 – L1 – Q5b – Types of Capital and the Financing of Companies

Explain the concepts of a fixed charge and a bond in the context of company financing.

A loan taken by a company limited by shares may or may not be secured by a charge.

Required:

In reference to the above statement, explain the following:

i) A fixed charge (3 marks)

ii) A bond (3 marks)

i) A Fixed Charge:

Debentures form part of a company’s loan capital. There are two types of secured debentures: debentures secured by a fixed charge and those secured by a floating charge. A debenture secured by a fixed charge is a loan to the company for which specific property of the company, such as land, buildings, vehicles, plant machinery, or equipment, is used as security to ensure repayment of the loan. In contrast, a floating charge covers general assets or undertakings of the company, allowing the company to continue dealing with those assets until the occurrence of a certain event that “crystallizes” the floating charge into a fixed charge.

A fixed charge on a property has priority over a floating charge affecting that property unless the terms of the floating charge specifically prohibit the company from granting a later charge that has priority over the floating charge, and the person in whose favor that later charge was granted had actual notice of that prohibition at the time when the charge was granted.

(3 marks)

ii) A Bond:

A bond is a written promise to pay money. It is an obligation to pay a fixed sum of money at a definite time with stated interest, and it makes no difference whether a bond is designated by that name or by some other name, as it possesses the characteristics of a bond.

(3 marks)

  • 10 Marks

BCL – Mar 2023 – L1 – Q5a – Types of Capital and the Financing of Companies

Distinguish between fixed and floating charges and explain circumstances for crystallization.

a) A company may raise a loan capital and/or long-term funds by the issue of a debenture or a series of debentures or of debenture stock in order to finance the business without increasing its share capital. Debentures may be secured by a charge or may be unsecured by any charge.

Required:
i) In THREE (3) ways, distinguish between a fixed charge and a floating charge.
(6 marks)

ii) Under what TWO (2) circumstances can a floating charge crystallize into a fixed charge?
(4 marks)

i) Differences between Fixed Charge and Floating Charge:

  • The charge that can be easily identified with a certain asset is known as a Fixed Charge. The charge that is created on assets that change periodically is a Floating Charge.
  • Fixed Charge is specific in nature, unlike Floating Charge, which is dynamic.
  • Registration of movable assets is voluntary in the case of a Fixed Charge. Conversely, when there is a Floating Charge, registration is compulsory irrespective of the asset type.
  • The Fixed Charge is a legal charge, while the Floating Charge is an equitable one.
  • Fixed Charge is given preference over Floating Charge.
  • Fixed Charge covers assets that are specific, ascertainable, and existing during the creation of the charge. On the other hand, Floating Charge covers present or future assets.
  • When the asset is covered under Fixed Charge, the company cannot deal with the asset until and unless the charge holder agrees to it. However, in the case of a Floating Charge, the company can deal with the asset until the charge is converted to a Fixed Charge.

(Any 3 points @ 2 marks each = 6 marks)

ii) Circumstances for Crystallization of a Floating Charge:

  • If a company fails to repay the loan or enters liquidation, the Floating Charge becomes crystallized or frozen into a Fixed Charge. With a Fixed Charge, the assets become fixed by the lender, so the company cannot use the assets or sell them.
  • Crystallization can also happen if a company ends operations or if the borrower and lender go to court, and the court appoints a receiver. Once crystallized, the now-fixed-rate security cannot be sold, and the lender may take possession of it.

(2 points @ 2 marks each = 4 marks)

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