A floating charge is a type of claim on a given asset that tends to change in value or quantity over a period of time. The claim may be associated with a lien on an asset that appreciates or depreciates in value as changes in the marketplace occur, or with an asset held as collateral for a mortgage. This type of charge may be associated with an asset or group of assets that are owned by a company or some sort of limited liability partnership or LLP.
With a floating charge, the assets involved in the arrangement serve as security on some type of loan. As long as there is an outstanding balance remaining on the loan, the lender has some interest in the assets that are pledged as security. Once the loan is retired in full, those assets are once again solely the interest of the owner, and the lender has no reason to lay claim to them in any form.
The current amount of the floating charge is directly related to the current market value of the asset or groups of assets involved in the arrangement. As the value of the assets rise and fall in the marketplace, the amount of the floating charge adjusts accordingly. Assuming that the amount of the charge never falls below the current amount owed on the loan, and the debtor makes consistent and timely payments on the outstanding balance, the constant shifts in value do not impact the relationship between the lender and the borrower. It is only if the debtor becomes unwilling or unable to continue making those scheduled payments that the current amount of the floating charge becomes a focus in the business arrangement.
Should the borrower default on the loan for some reason, the floating charge undergoes a process that is known as crystallization. Essentially, this means that whatever current market value is associated with the pledged assets is locked in at that point; in terms of acting as repayment for the defaulted loan, the value of the assets are now frozen rather than floating or adjusting to new market conditions. At that point, the lender can seize control of the assets, with that locked in value subtracted from the outstanding balance due. The lender can then sell the assets to recoup as much of the loss as possible, or choose to hold onto them for future use, while crediting the frozen charge or value to the defaulted customer’s account.
