In the early years of the company’s establishment, there are normally substantial loans made by the directors or shareholders to the company. In most cases these are unsecured loans.
The problem with this arrangement is, if the company becomes insolvent and an Administrator or Liquidator is appointed, the lenders will only receive a small portion of the monies advanced, as they would rank equally with all other unsecured creditors.
This situation can be avoided if, at the time of the original advance, the lenders demand a loan agreement secured by a fixed and floating debenture charge over all the assets of the company and registered as a Personal Property Security Charge (PPSR).
The debenture is a written document usually sealed by the company creating it, containing an undertaking by the company to repay the sums due on a specified date or on demand. It also commonly includes the following: - The name of the lender - The amount secured and a reference to the interest being charged - Details of the assets charged, specifying which are subject to a fixed and which to a floating charge - The lender’s rights in the event of non-payment of interest or capital, normally including the right to appoint a receiver - The right to appoint a receiver
A company may charge any of its assets, including uncalled capital, goodwill, and future assets; the security given will be subject to a fixed charge, a floating charge or both
A fixed charge is a mortgage of specific assets and this is normally restricted to property such as land and other fixed business assets.
The company is prevented dealing with such assets without the approval of the secured creditor
It gives the secured creditor a first claim to the proceeds of the sale of the assets over which the charge falls and the secured creditor can usually appoint a Receiver to realise the assets in the event of default
A fixed charge holder will rank before preferential creditors, unsecured creditors and the ATO. Depending on the terms and conditions of the Debenture, a garnishee notice will not apply to assets subject to a Fixed Charge
Therefore, it is critically important that the Debenture contains a provision of automatic default e.g. not requiring the mortgagee to notify the mortgagor of any default
A floating charge is a form of security which is said to “float or change from time to time” over various categories of assets, such as cash, debtors or inventories.
It is not fixed because the company is permitted to deal with the charged assets in the ordinary course of business (e.g. by converting its raw material into finished products for sale)
New or replacement assets automatically become the subject of the floating charge
The holder of such security is, therefore, able to maintain a charge over all the assets of the company while allowing the company to trade in the normal way until a default occurs
If this happens, the secured creditor will usually appoint a receiver to realise the assets to recover the debt