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A machine which is on lease and computers and machines which were bought on credit.
Can they be used for fixed and floating charge?The leased machine no, because the company doesn’t own it.
The computers bought on credit yes, because the company owns them but just hasn’t paid for them yet. The status of whether they have paid or not does not change the fact that they own them.
This means whether it is finance lease or operating lease, the company cannot use the leased machine to obtain for a loan. Am I right?
Since computers and machines can be charged, my question is under which type of charges will be more appropriate? Thanks in advance.
That’s not quite correct, both fixed and floating charges are still secured creditors. The difference is a fixed charge is over a specific asset and a floating charge is over a generic class of assets. They are both higher priority than unsecured creditors in the event of the company winding up.
The key difference between fixed and floating charges is the degree of control exercised in practice over the asset or assets in question by the charge holder.If for example,a charge holder exercises no effective control over asset or assets in question and chargee is able to deal with assets registered as fixed charges as they see fit then legally the fixed charge will not be legally regarded as a fixed charge if challenged.Often charges are created that are floating over the entire assets of a company past,present and future in the form of a general floating charge together with a restriction on obtaining any security that will rank higher or equally this security in question without express written permission from charge holder.
But you’re getting the terminology wrong. A floating charge is not the same an unsecured creditor, they are 2 different things, and it’s important to distinguish that as you could get a question on this and lose marks if you don’t use the terminology correctly.
The order of creditors in the event of a winding up is:
Fixed charge holders
Floating charge holders
Preferential creditors (eg employees)
Unsecured creditors
Connected creditors
ShareholdersHere you can see that floating charges are higher in the priority than unsecured creditors (which would include things such as trade creditors and unsecured overdrafts), therefore you cannot just lump floating charge holders in with all the other unsecured creditors. It’s entirely possible that floating charge holder could be paid in full while unsecured creditors get nothing.
I know this might seem nitpicky but the examiners are also nitpicky and will test you on details like this, therefore for the benefit of other students I think it’s important to make the distinction 🙂
Right, but this is a forum for students to help each other with exams, therefore we should really be discussing things from an exam perspective. Not doing so will confuse those who are still studying and don’t have a full grasp of the concepts.
Also my knowledge of leases is not out of date, I’m well aware of how IFRS 16 works and that all leases will now have a right of use asset. All I said was that a company would not be able to place a charge on a leased asset.
Just because a company has an asset on their balance sheet doesn’t mean they own the asset. If they don’t own the asset how could a bank or finance provider use it for security? If the company goes bust the bank can’t then seize the asset and sell it.
I’m sorry if you feel I was dictating to you, I thought we were having a friendly debate…Anyway I agree, you’ve stated your opinion, I’ve stated mine, so let’s move on.
What I find interesting here is that,in my opinion you are both correct.I believe it is possible that a leased asset could have a charge against it probably as a result of a catch-all floating charge on all assets past,present and future of a company.Of course legally the lessor would have prior legal right as a result of holding legal title over asset so any move by administrator to exploit this would almost certainly be unsuccessful in practical terms.Many commercial property leases have clauses that terminate the lease immediately in the event of an insolvency event.Similar reasoning applies to consignment stock which may well appear on statement of financial position but to which the company does not have legal title.
I completely agree with the points you make in your above response.Although the knowledge contained in this thread almost certainly goes beyond what is needed to pass F4, I do not think this is a problem and should help people in their accounting careers.It doesn’t surprise me that you are an accomplished ACCA member given your responses on this thread.Hopefully both you and Chris will continue to post responses to threads when you can as you are both clearly assets to this forum.
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