24 Mar Taking Security: Fixed/Floating Charge or Both?
Companies typically borrow funds from banks and other financial institutions in the form of loans. The purpose of such borrowing is inter alia to finance a particular project, service an existing debt/refinance or to run the operations of the company. The lender commonly request that the borrower grants security over its assets as collateral for the disbursement of the loan and as such the borrower creates a charge over certain assets it has at its disposal.
There are two main kinds of charges, fixed and floating charge. A fixed charge is a lien or mortgage created over specific and identifiable fixed assets of a company such as land & buildings, plant & machinery, intangibles i.e. trademark, goodwill, copyright, patent etc. All these assets are those which are not normally sold by companies in its ordinary course of business. One of the pertinent features of a fixed charge is that the lender customarily has full control over the collateral asset while the borrower retains possession of the asset for the duration the charge subsists. Consequently, in the event the borrower wishes to sell, dispose or transfer the charged asset, then the prior approval of the lender is required or the borrower must have fully repaid the principal and interest of the loan.
A floating charge is a charge created over assets such as stock, shares, debtors etc. which change in value and quantity intermittently. The principal characteristic of a floating charge is that it does not crystallize into a fixed charge until the occurrence of a particular event and until crystallization; the charger (borrower) can deal with the charged assets in the ordinary course of its business.
As mentioned above, a floating charge does not crystallize until the occurrence of a certain event and such events include:
• The company is about to wind up;
• The company ceases to exist in the future;
• The company appoints a receiver;
• The company has defaulted on a principal or interest payment and the lender has taken action to recover the debts.
It is also germane to note that while a fixed charge is a legal charge, a floating charge is an equitable charge.
One of the essences of taking security is for the secured creditor to have preference of claim of a company’s assets in the likelihood of insolvency. In terms of priority and due to the nature of a floating charge, a floating charge holder’s claim habitually ranks below the following:
• Holder of a fixed charge;
• Preferential creditors – these are those who are given priority by statute.
A debenture is another name for a fixed and floating charge over all of a company’s assets, business and undertaking.
In common law jurisdictions, the taking of security in relation to project finance or any other form of financing is usually through a fixed and floating charge over all the property and assets of the company. The security package favoured by banks in Nigeria would include an All Asset Debenture or a Composite Security Deed which typically contains a fixed charge over certain fixtures and tangibles of the borrower and a floating charge over all the assets of the borrower not otherwise secured by a fixed charge. It may also include pledges, charges on bank accounts, mortgages on real estate, as well as security assignments of rights under key contracts and insurance policies.
Where the assets for which the lender seeks to take security includes landed property, the lender can include the landed property as part of the assets to be charged under the fixed charge. A lender can also choose to take a mortgage over landed property.
All Assets Debentures are registrable instruments and are required to be registered at the Corporate Affairs Commission (“CAC”) and the applicable Lands Registry office (in case land/property has been charged).
Security documents are required to be stamped within 30 days of execution and registered at the CAC within 90 days of the date of creation. Where the documents are executed outside Nigeria, they are required to be stamped within 30 days and registered 90 days after the date on which the instrument or a copy could, in due course of post, and if dispatched with due diligence, have been received in Nigeria.
Berkeley Legal can assist with the stamping and registration of security documents within the timelines stipulated above. The Firm is acquainted with both processes and are able to expedite same to ensure completion in a timely manner.
The content of this document is solely for information purposes only and should not in any way be construed as a legal opinion. If you require specific legal advice on any of the matters covered in this article please contact firstname.lastname@example.org