Unlike a fixed charge, which attaches to specific assets (such as a business premises) and prevents the chargor from dealing or disposing of those assets without the chargee’s consent, a floating charge does not immediately attach to any specific assets, but rather floats over the chargor’s assets, allowing the chargor to deal freely with such assets, both present and future. These would usually taken over an asset that may fluctuate with time and be necessary in the day to day running of a business – for example, cash.
The charge will continue to float over the assets until it is either released or, due to the occurrence of a specified event (such as an event of default under the terms of a loan agreement), it ‘crystallises’, converting into a fixed charge and preventing the disposal of the affected assets as outlined above.
If buying assets subject to a floating charge (or looking to take further security over the assets in question), a sensible course of action would be to obtain a letter of non-crystallisation from the seller’s lender, providing a prospective buyer with confirmation that any floating charge over the assets has not crystallised. This would provide the buyer with the comfort that the seller is free to deal with the asset in question.
Such a letter would confirm that:
- the floating charge in question has not crystallised;
- the lender has not taken any steps to crystallise the floating charge; and
- depending on the facts, the lender consents to either the sale or creation of a second floating charge over the charged asset.
Whilst lenders will not usually be under any obligation to give the confirmations provided in a letter of non-crystallisation, in our experience, most will usually be willing to do so.