Crystallization Of Floating Charges



Section 2(16) of the Companies Act 2013, define charges as “means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.”[1] A charge is creation of a security on the company’s property or undertaking in favour of a company’s creditor to secure repayment of a loan or debt or any other obligation. Charge is defined by The Transfer of Property Act, 1882[2]  as: ,where immovable property of one person is by act of parties  or  operation  of  law  made  security  for  the  payment  of  money  to  another,  and  the transaction  does  not  amount  to  a  mortgage,  the  latter  person  is  said  to  have  a  charge  on  the property; and the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge. “A charge includes a lien and also an equitable charge”.[3]

A charge is a security given for securing credit or debenture by a mortgage on the benefits of a company.[4] For the most part, the debentures and different borrowings of a company are secured by a charge on its benefits. A charge is made when a property, whether existing or future, is consented to be made accessible as a security for the re-payment of obligation.[5] Notwithstanding, the loan boss gets no legitimate directly over the property so charged yet just gets a privilege to have the security made accessible by a request of the court in case of non-payment of obligation. As indicated by segment 124 of the Companies Act a charge incorporates a mortgage. It additionally incorporates lien whether made by a composed instrument or by the store of title deed.[6]


There are two kinds of charges under company law

(1) Fixed Charges is  a  charge fixed  or  specific  when  it  is  made  specifically  to cover assets which are ascertainable and definite at the time of creating the charge e.g., land, buildings,  heavy  machinery etc. A fixed charge is therefore against security of certain ascertainable specific property.[7] The company’s right to dispose of the property is temporarily suspended during the period it is charged or encumbered.  In the event of winding of a company, a debenture-holder or creditor secured by a fixed or specific charge shall be placed in the highest class of creditors.[8]

(2) Floating Charge, on  the  other  hand,  is  not  attached  to  any  definite property  but  covers  property  which  is  of  a  fluctuating  nature  such  as  stock  in  trade.[9]  It is an equitable charge on the assets for the time being of a going concern.[10] It attaches to the subject charged  in  the  varying  condition  in  which  it  happens  to  be  from  time  to  time.  It is of this sense of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes.[11]

The difference between a fixed charge and floating charge is that a fixed charge is a form future securities provided to a lender/creditor in assets of the company whereas a floating charge is Floating security is not a future security; it is a present security which presently affects all the assets of  the  company  expressed  to  be  included  in  it and   it  is also   not  a  specific security.[12]


As indicated by McDowell Purcell, Crystallization of floating charges means transformation of floating charges into fixed charges upon the event of particular occasion. When the charge holder finds a way to implement his charge, a floating charge turns into a settled charge on the assets secured by that charge.[13] Until a floating charge turns into a settled charge, the company is allowed to manage the property charged in any way it regards fit. In any case, once the floating charge solidifies, the company can’t arrange off the charged assets without paying of the charge holder.[14] Something else, the charge holder can recoup his contribution from the returns.[15] Such process is called crystallization of floating charges.[16]

There are two types of crystallization in Company law Automatic Crystallization & Express Crystallization the former type of crystallization are the classic well known crystallization event such as a winding up or the appointment of a receiver.  It  is  accepted  that  crystallization  will  occur automatically  upon  the  occurrence  of  these  events  and  this  is  usually  re-iterated  in  the relevant security document whereas latter includes   events that  can  vary  from  case  to  case  and  are  set  out  in  the relevant charging document as a matter of contract. For crystallization to occur, some on the part of the charge holder is usually required.[17]  Generally this will be the service of a “crystallization” notice upon the occurrence of specified events.[18] Answering the research question of the paper as to the condition when a floating charge converts into fixed charge:

A floating charge generally remains dormant until it crystallizes or becomes a fixed charge. A floating crystallizes into a fixed security under the following condition[19] (i) When company goes into liquidation, (ii) When company ceases to carry on business, (iii) When  debenture  holders  or  creditors  take  steps  to  enforce the  security  e.g.,  by appointing a receiver to take possession of charged property, (iv) On happening of an event specified in the deed.

A company borrowed money on the security of its stock-in-trade. The charge so created will keep  floating  over  the  changing  stock-in-trade  and  when  the  time  comes  for  the  lender  to enforce  his  security  he  will  do  so  by  seizing  whatever  stock  is  then in company’s hands. When happens, the floating charge becomes fixed or crystallized.[20]

It was held in G. Bhar And Co. vs United Bank Of India Ltd. And Ors[21] A charge or mortgage of the present description may remain floating for a period. The charge or mortgage may not be crystallized until some event occurs which either puts a stop to the business, or prevents the mortgagor from carrying on the business in the usual way. It cannot, however, be said that the stock-in-trade of the business which has been expressly offered as a security by the borrower would not be liable under the mortgage until the charge is crystallized.[22]

It has been held in that case that a floating charge is a present charge, though it does not finally attach or crystallize upon any specific property until the happening of some event which puts an end to the right of the Company to deal with the property in the course of its business.[23]

The above mentioned cases tell us that a floating charge will crystallize when company stops working or there some event which puts a stop on the business of the company. The charge provided by a creditor will be crystallized in case in the company goes into liquidation or when the creditor wants to enforce the security he has given to the company.[24]

In a recent decision, the Supreme Court of Ireland in the matter of J.D Brian Limited (In Liquidation) T/A East Coast Print and Publicity[25] has confirmed that a crystallization notice served prior to the commencement of a winding up can validly crystallize a floating charge and therefore obtain priority for that charge over preferential creditors’ claims during liquidation.

This case emerged from the ending up of various organizations in the Belgard Motors Group. Amid the twisting up procedure, the vendor looked for bearings from the High Court with reference to whether a floating charge contained in debentures executed by the organizations for the Bank of Ireland had truly solidified law of liquidation. The outlets questioned whether, as an aftereffect of crystallization, the floating charge assets were not accessible to fulfill special loan bosses, for example, the Revenue Commissioners.[26] The terms of the debentures permitted the bank to serve a notification in composing on the organizations to change over the floating charge into an initially fixed charge if the bank considered that the charged assets were in danger. This procurement was conjured by the bank preceding the initiation of the winding up.[27]

The liquidator appealed this decision to the Supreme Court. In its judgment, the Supreme Court analyzed two issues:

  • The effect of the crystallization notice served by the bank
  • The construction of the provision of the Companies Acts concerning the treatment of preferential payments in a winding up

The Supreme Court overturned the decision of the High Court and reached the following conclusions:

  • The floating charge created by the debentures was converted into a fixed charge over the property of each of the companies by virtue of the crystallization notice served by the bank prior to the commencement of the winding up.[28]
  • The relevant provision of the Companies Acts affords priority to preferential claims (such as Revenue claims) against assets which are subject to a charge which is a floating charge at the commencement of liquidation. The earlier crystallization of the floating charge had the effect of taking those assets outside the remit of the relevant provision.[29]


The floating charge permits the lender to recuperate some cash if the assets are sold. In any case, the lendor does not ranks behind some different creditors  like wages, and the endorsed part creditor. It has a variable amount and esteem after some time and can be utilized as a sort of insurance in a credit. The floating charge takes shape into fixed charge if the Company solidifies or the endeavor stops to be a going concern. It got to be take shape and fixed just when: Company goes into liquidation, Company stop to bear on its business, Creditor/debenture Holder implement their security, on the occurrence of any occasion as particular in deed of assention. Prior to the crystallization of the floating charge the company make legitimate mortgages and fair charge. It remains drift until the ending up of the company unless it solidified. Before crystallization company may arrange the property without counseling of holder of charge.

[1] §2(16) Companies Act, 2013.

[2] §100, The Transfer of Property Act.

[3] Supra note 1.

[4] Registration of Charges under Companies Act, 2013, (2015), (last visited Mar 26, 2017).

[5] Id.

[6] Dublin city Distilleryy Co. v. Deherty,1914,AC 823, Dr. N.V. Paranjape, Company Law,( 2012).

[7] Supra note 4.

[8] Lord Macnaghten in Lilingworth& another v. Houldsworth& another, (1904) 73 Ch. 739.

[9] “CHARGES” under The New Companies Act, 2013 (2015).

[10] Government Stock Investment Co. Ltd. V. Manila Rly. Co. Ltd., (1897) AC 81 Per Lord Macnaghten,

[11] Supra note 9.

[12] Evans v. Rival Granite Quarries Ltd, 1910 2kb 979.

[13] Charge, Charge, (last visited Mar 26, 2017).

[14] Id.

[15] Supra note 4.

[16] Surbhi S ,

[17] Supra note 9.

[18] Fixed and floating charges, (last visited Mar 26, 2017).

[19] Krishna Ayyangar v. Nallaperumal Pillai, (1919) I.L.R. 43 Mad. 550.

[20] Dr. Avtar Singh, Company Law, 10th Ed 1991, p. 360.

[21] G. Bhar And Co. vs United Bank Of India Ltd. And Ors, AIR 1961 Cal 308.

[22] Id.

[23] Imperial Dank of India v. Bengal National Bank, Ltd, AIR 1931 Cal 223.

[24] Kanika Ahuja, Creation, Types and Registration of Charge,

[25] In the Matter of J.D. Brian Motors Limited (In Liquidation) T/A Belgard Motors and In the Matter of East Coast Car Parts Limited (In Liquidation) and In the Matter of the Companies Acts 1963 to 2009 (the Companies).

[26] Floating Charge Crystallisation Postponement Invalidity, (last visited Mar 26, 2017).

[27] Id

[28] Id

[29] Id

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