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floating charges help

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA LW Exams › floating charges help

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by MikeLittle.
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  • April 15, 2019 at 6:00 pm #512946
    kingkongsajang
    Member
    • Topics: 95
    • Replies: 75
    • ☆☆

    Is a floating charge not fixed because the amount that you could get is different depending on how much class of assets there are at the time of crystallisation as well as, how many people (debtors? or loan issue holders?), who have precedence over the floating charge debenture holders?

    So for a floating charge debenture holder, it is what is left after all the more priority debenture holders and creditors have been paid?

    2. Is it correct to use the term creditors for people that are owed money via debt from the company or is debenture holders a more accurate term?

    On a side note,

    3. Is it right to think of fixed charge as collateral in the sense that if the company breaches their terms of loan agreement, the debenture holder has the right to sell the property and keep the proceeds from the sales?

    Thank you very much sir.

    April 15, 2019 at 8:36 pm #512967
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    “Is a floating charge not fixed because the amount that you could get is different depending on how much class of assets there are at the time of crystallisation” yes, but really the ‘floating’ element relates to the fact that the asset to which it relates is transient rather than relating to the amount that would become available

    It’s the asset that floats and therefore the amount rather than the amount that floats

    “So for a floating charge debenture holder, it is what is left after all the more priority debenture holders and creditors have been paid?” Agreed

    “Is it correct to use the term creditors for people that are owed money via debt from the company or is debenture holders a more accurate term?” – either title would be appropriate. It’s just that not all creditors are equal (to paraphrase George Orwell) – some are more equal than others

    “3. Is it right to think of fixed charge as collateral in the sense that if the company breaches their terms of loan agreement, the debenture holder has the right to sell the property and keep the proceeds from the sales?” Yes, provided that that right is written into the debenture agreement

    OK?

    April 16, 2019 at 1:43 pm #513076
    kingkongsajang
    Member
    • Topics: 95
    • Replies: 75
    • ☆☆

    So the asset such as receivables and inventory will be floating because they change in value as business operates and so you cannot know the amount it will be unless crystallization?

    But doesn’t a change in the amount of assets such as inventory, mean a change in value of the asset??

    Thank you sir.

    3. So if the right to have the proceeds from the fixed charge asset is not written in the agreement, how exactly can fixed charge be applied to a specific asset in the sense that, how do you get your money or security from this asset for the money you loaned?

    April 16, 2019 at 9:17 pm #513175
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    “But doesn’t a change in the amount of assets such as inventory, mean a change in value of the asset??”

    Yes, and that’s the risk that the lender faces although, in practice, the lender can insist (say) that the levels of current assets shall not fall below (say) twice the value of current liabilities and, if it does fall below that benchmark, then the charge crystallises

    “3. So if the right to have the proceeds from the fixed charge asset is not written in the agreement, how exactly can fixed charge be applied to a specific asset in the sense that, how do you get your money or security from this asset for the money you loaned?”

    If the underlying value of the fixed charge asset falls to a value lower than the value of the secured loan, then ….

    …. tough! You should have been more prudent / cautious / thorough when assessing the value of that asset.

    Where, however, the borrower is taking steps to destroy / dismantle / damage the property that is the subject of the security, the lender is able to step in to prevent that damage being carried out

    OK?

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