Which statement about floating charges is true?

Which statement about floating charges is true?

• A. Floating charges rank higher than fixed charges in liquidation.
• B. Floating charges rank lower than fixed charges.
• C. Floating charges have no priority in liquidation.
• D. Floating charges always outrank unsecured debts.

Answer: (B)

A fixed charge attaches to a specific asset and is realized first in liquidation, so the holder of a fixed charge gets paid from those assets before the pool of assets available to floating charges is touched. The floating charge covers a fluctuating pool of assets (like stock and debtors) and only gets paid from whatever remains after fixed charges are satisfied. That’s why floating charges rank lower than fixed charges. The other statements misstate the ranking: floating charges do have priority over unsecured debts in the sense of security, but not above fixed charges; they do have some priority, so saying they have no priority is incorrect; and saying they always outrank unsecured ignores other priorities that can affect distribution (such as costs, preferential creditors, and the fixed-charge realisations).

A fixed charge attaches to a specific asset and is realized first in liquidation, so the holder of a fixed charge gets paid from those assets before the pool of assets available to floating charges is touched. The floating charge covers a fluctuating pool of assets (like stock and debtors) and only gets paid from whatever remains after fixed charges are satisfied. That’s why floating charges rank lower than fixed charges.

The other statements misstate the ranking: floating charges do have priority over unsecured debts in the sense of security, but not above fixed charges; they do have some priority, so saying they have no priority is incorrect; and saying they always outrank unsecured ignores other priorities that can affect distribution (such as costs, preferential creditors, and the fixed-charge realisations).