What is a floating charge?

There are three stages. Attachment happens when the company signs the security agreement and value is given, for example when the loan is advanced; the document should describe the charged class clearly, such as all trading stock, raw materials, book debts and goodwill, and say which plant is excluded or held under fixed security. During the business-as-usual period the company sells inventory and collects debts as normal, because the charge creates no day-to-day control.

Crystallisation converts the floating charge into a fixed one over the assets in the class at that time. Automatic triggers are external administration or an insolvency event; express triggers include a default under the loan, notice from the lender, cross-default or the appointment of a receiver. From then on the company's freedom to deal with those assets ends and the lender can appoint a receiver, take possession and sell, or collect proceeds, subject to the notice requirements in the document and the Corporations Act.

Most floating charges are perfected by registering a financing statement on the Personal Property Securities Register; a few security interests are perfected by possession or control instead, such as certain deposit accounts. Priority generally runs from the time of registration, subject to exceptions like the purchase money security interest (PMSI), so late registration can be fatal: an interest that should have been registered can be subordinated to other creditors or void against a liquidator.

The ranking works asset by asset. Perfected security over a specific asset is paid from that asset first, less the costs of realising it, and a perfected PMSI beats an earlier general security interest in the same collateral. Employee entitlements rank ahead of a circulating (floating) security interest, but not ahead of fixed security. Floating charge holders take what is left of the circulating assets, and unsecured creditors and shareholders come last. A lender relying on a floating charge alone usually recovers less than a fixed charge holder.

The label in the document is not decisive: courts look at substance. If the company keeps the practical ability to deal with an asset, selling inventory or collecting proceeds, a purported fixed charge can be recharacterised as floating, with weaker priority. Drafting therefore needs the fixed and floating components to reflect real control, and a common collateral description like "all present and after-acquired property excluding land" should spell out the excluded assets and any fixed charge components.

A fixed charge suits certainty and priority over one asset; a floating charge suits broad security over a trading business with minimal interference. For lenders it offers wide coverage with low set-up friction but a monitoring burden; for borrowers it keeps trading flowing and gives access to working capital, at the cost of reporting obligations and the risk that crystallisation freezes stock and debtors. Alternatives include retention of title, receivables finance and asset finance secured on specific equipment.