A floating charge is a form of security interest that a company grants over a shifting pool of assets — typically circulating assets such as stock, work-in-progress and receivables — without preventing the company from dealing with those assets in the ordinary course of business. Unlike a fixed charge, which attaches to specific assets, a floating charge "floats" until an event causes it to crystallise (become fixed) over the assets in the charged class.
Key characteristics:
Plain-English summary: a floating charge lets you take security over a company's business assets without stopping the business from trading — but that flexibility comes with priority and enforcement risks to manage.
Day-to-day operation focuses on three practical stages: attachment, the charged business-as-usual period, and crystallisation.
Attachment
Attachment occurs when the company signs the security document and value is given (for example, a loan is advanced). Under PPSA concepts, attachment gives the secured party rights in the collateral subject to perfection. The security document should clearly describe the class of assets (such as stock, accounts receivable, plant specified or excluded).
Business as usual
Until crystallisation, the chargor can deal with assets — sell inventory, collect debts. The floating charge does not create day-to-day control. Typical charged classes include trading stock, raw materials, book debts, goodwill, and plant not specified as fixed assets.
Examples
Stock financing: you take a floating charge over all trading stock. The borrower continues to buy and sell inventory; the security covers whichever stock exists at crystallisation.
Receivables: a floating charge over present and future receivables allows the company to collect debts until enforcement.
Control and practical monitoring
Lenders often supplement floating charges with covenants, reporting requirements, negative pledges and, where possible, fixed charges over key non-circulating assets (for example, land, major plant). Where you need tighter control, consider product structures such as asset finance or trade receivable facilities. Some lenders combine floating charge security with service-specific documentation.
The label a document gives a charge is not decisive: courts examine substance over form. Practical distinctions:
Control
Fixed charge: Lender exercises control over the specific asset; the debtor cannot dispose of it without consent.
Floating charge: Debtor free to deal with the asset class until crystallisation.
Priority and enforcement
Fixed charges generally rank ahead of floating charges in insolvency and have stronger enforcement remedies over the specific asset. Floating charges rank behind many preferential claims and may be subordinate to earlier registered security interests on the PPSR.
Typical assets
Fixed: land, title-registered assets, major plant, specific vehicles.
Floating: stock, receivables, future property, general intangibles.
Label vs substance
Courts will recharacterise a purported fixed charge as floating if the chargor retains the practical ability to deal with the asset (for example, continue to sell inventory or collect proceeds). When drafting, ensure your fixed/floating distinction reflects real control.
When to prefer each
Use a fixed charge when you need certainty over a specific asset and priority. Use a floating charge to take broad security over a trading business with minimal interference in operations.
Creating effective security means more than signing a document. You must understand attachment and perfection, and register appropriately on the PPSR.
Steps to create and perfect
Secure a signed security agreement that describes the collateral sufficiently. Attachment occurs when value is given and the debtor has rights in the collateral.
Most floating charges are perfected by registering a financing statement on the PPS Register. Some security interests are perfected by possession (for example, physical collateral) or by control (for example, certain securities or deposit accounts).
Priority generally depends on the time of registration (first to register wins) subject to statutory exceptions (for example, PMSI or purchase money security interests). Late registration can be fatal to priority — an unregistered interest may be subordinated to other creditors and liquidators.
Consequences of non-registration
An unregistered perfected security (where registration was required) risks losing priority and may be void against a liquidator or external administrator. For floating charges, ensure early PPSR registration to preserve ranking.
Practical note: Always include a clear collateral description: "all present and after-acquired personal property excluding land" is common but ensure you specify excluded assets and any fixed charge components to avoid recharacterisation.
Priority rules determine who gets paid first when the company becomes insolvent. Floating charges face several priority pitfalls.
General ranking order (simplified)
Interaction with Corporations Act remedies
An external administrator (liquidator) or secured party with a fixed charge may appoint a receiver. Under the Corporations Act, certain statutory charges and priority rules apply. Floating charge holders may appoint a receiver in some circumstances, but priority remains lower than fixed charges and certain statutory claims.
Practical consequences
If you rely on a floating charge, expect lower recovery rates in insolvency than fixed charge holders.
Crystallisation
Crystallisation is the process by which a floating charge converts into a fixed charge over the assets that fall within its description at that time.
Triggers:
Upon crystallisation, the chargor's freedom to deal with assets in the charged class is curtailed; the chargee's rights become enforceable over specific assets.
Enforcement options
Interplay with Corporations Act
External administrators' powers (liquidator/administrator) may displace the chargee's enforcement rights in certain circumstances; statutory priorities apply. Practically, a secured creditor should act promptly to enforce and must observe notice and statutory requirements to avoid successful challenges.
Timing and practical steps on enforcement
Check the security document: does it require notice before enforcement? Are there restriction periods post-insolvency? Preserve value: appoint a receiver quickly where proper and lawful; secure access to the charged assets; avoid wrongful enforcement.
For lenders
Advantages: broad coverage over circulating assets; easier to secure multiple asset types. Flexibility: borrower can continue trading, preserving business value. Lower set-up friction than obtaining multiple fixed charges.
Disadvantages: lower priority in insolvency; greater exposure to preferential claims and earlier registrants. Risk of recharacterisation if drafting is weak. Monitoring burden: needs covenants, reporting and perhaps additional security.
For borrowers
Advantages: minimal operational disruption; can continue ordinary trading. Access to working capital against a pool of assets.
Disadvantages: potentially restrictive covenants and reporting obligations. Risk that crystallisation will limit trading capacity and liquidity.
When drafting a floating charge, accuracy and specificity reduce risk. Essential drafting points:
Must-have clauses
Common pitfalls to avoid
Sample crystallisation clause
"On the occurrence of any Event of Default or upon the appointment of an Administrator or Liquidator to the Chargor, the Floating Charge shall immediately crystallise and become a Fixed Charge over all Collateral then existing. The Secured Party may, following crystallisation, appoint a Receiver and exercise all rights to take possession, collect, realise and apply the proceeds of the Collateral in satisfaction of the Secured Obligations."
Lender quick-check
| Item | Yes / No | Notes |
|---|---|---|
| Collateral description clear | Specify present & after-acquired | |
| PPSR registration required & done | Record registration date | |
| Crystallisation triggers defined | Include express notice option | |
| Enforcement powers included | Receiver, sale, collection | |
| Covenants and reporting included | Weekly stock & debtor reports | |
| Fixed security over key assets | Real property, major plant |
For more drafting templates and deeper clause drafting guidance see Drafting commercial security agreements.
When a floating charge may not be appropriate, consider alternatives:
Choose the security that best balances operational flexibility against recoverability and priority.
Scenario A — timely registration
Lender advances $1 million to a trading company secured by a floating charge over stock and receivables. Lender registers the financing statement on the PPSR the same day. Company subsequently defaults; lender gives notice and crystallises the charge, appoints a receiver, and realises stock and debtor lists. Because of early PPSR perfection, lender ranks ahead of later registrants and recovers a significant portion of the loan.
Scenario B — late registration
Same facts but the lender registers on the PPSR two months after advance. Meanwhile another financier registers a PMSI in receivables and a liquidator is appointed. Result: lender's floating charge is subordinated to the PMSI and the liquidator's preferential claims; recovery is reduced and challenges follow.
Lesson: timing of PPSR registration and correct labelling and substance of the charge are decisive.
No. Priority depends on perfection (often PPSR registration) and statutory ranking. Floating charges typically rank below fixed charges and certain preferential claims.
Yes. Floating charges commonly cover after-acquired property (future stock, debtor book) — ensure the security agreement and PPSR statement capture present and after-acquired assets.
Priority generally attaches from the time of registration on the PPSR, subject to PMSI and statutory exceptions.
Yes. Courts examine the substantive control exercised. If the chargor retains practical ability to deal with the asset, recharacterisation is possible — drafting must reflect actual control.
External administration, insolvency events, specified defaults, and express notice by the chargee. Include both automatic and express triggers in documentation.
Failure to register may mean you lose priority and your security may be void against liquidators and other creditors. Always register promptly and verify registration details.
A floating charge allows lenders to secure broad interests in a company's trading assets without stopping the business from operating. The security floats over a changing pool of assets until crystallisation converts it to a fixed charge, typically triggered by default or insolvency. Success depends on clear drafting, timely PPSR registration, and understanding that floating charges rank below fixed charges and many preferential claims in insolvency. Lenders should combine floating charges with covenants, reporting requirements and supplementary security over key assets.
This article is general information only and is not legal, tax or financial advice.