Which statement best describes a floating charge?

Which statement best describes a floating charge?

• A. A floating charge is a charge on a class of assets, present and future, which the class is in the ordinary course of the business, changing from time to time, and until enforcement the company may carry on business; it ranks lower than a fixed charge.
• B. A charge on a single fixed asset
• C. A mortgage on real property
• D. A pledge over cash

Answer: (A)

A floating charge is a security over a class of assets, present and future, that the company may deal with in the ordinary course of business. The assets in that class can change over time as stock, receivables, and other items move in and out of use. The company can continue to operate and use those assets while the charge is outstanding. Importantly, in priority of payments, a floating charge ranks behind fixed charges, which attach to specific assets. This description fits floating charges because it captures the idea of coverage of a fluctuating pool of assets rather than a single fixed asset. It also explains why the business can continue to run while security is in place and why the charge’s priority is below fixed charges when enforcement occurs. The other options describe security interests over specific assets: a charge on a single fixed asset, a mortgage on real property, or a pledge over cash. Those are fixed or possessory arrangements and do not describe the shifting, business-operable pool that characterizes a floating charge.

A floating charge is a security over a class of assets, present and future, that the company may deal with in the ordinary course of business. The assets in that class can change over time as stock, receivables, and other items move in and out of use. The company can continue to operate and use those assets while the charge is outstanding. Importantly, in priority of payments, a floating charge ranks behind fixed charges, which attach to specific assets.

This description fits floating charges because it captures the idea of coverage of a fluctuating pool of assets rather than a single fixed asset. It also explains why the business can continue to run while security is in place and why the charge’s priority is below fixed charges when enforcement occurs.

The other options describe security interests over specific assets: a charge on a single fixed asset, a mortgage on real property, or a pledge over cash. Those are fixed or possessory arrangements and do not describe the shifting, business-operable pool that characterizes a floating charge.