In liquidation, which statement about charges is true?

In liquidation, which statement about charges is true?

• A. A fixed charge ranks first in liquidation.
• B. A floating charge ranks first in liquidation.
• C. Unsecured debts rank first in liquidation.
• D. There is no priority between charges.

Answer: (A)

In liquidation, there is a clear order to who gets paid first among secured interests. A fixed charge is attached to a specific asset, so when the company is wound up, the proceeds from selling that particular asset go straight to the fixed-charge holder to satisfy that debt. A floating charge, by contrast, covers a class of assets and only crystallizes (takes effect) on insolvency; after fixed charges are dealt with, the floating-charge debt is paid from whatever assets remain. Unsecured debts come after secured creditors. So the statement that a fixed charge ranks first among charges is correct, because fixed charges have priority over floating charges. The other options are not true because a floating charge does not outrank a fixed charge, unsecured debts do not take priority over secured charges, and there is indeed a priority between charges.

In liquidation, there is a clear order to who gets paid first among secured interests. A fixed charge is attached to a specific asset, so when the company is wound up, the proceeds from selling that particular asset go straight to the fixed-charge holder to satisfy that debt. A floating charge, by contrast, covers a class of assets and only crystallizes (takes effect) on insolvency; after fixed charges are dealt with, the floating-charge debt is paid from whatever assets remain. Unsecured debts come after secured creditors.

So the statement that a fixed charge ranks first among charges is correct, because fixed charges have priority over floating charges. The other options are not true because a floating charge does not outrank a fixed charge, unsecured debts do not take priority over secured charges, and there is indeed a priority between charges.