Lloyd's Maritime and Commercial Law Quarterly
The crystallization of floating charges, subordination agreements and priority conflicts
Loo Choon Chiaw*
The taking of a floating charge on a corporate borrower’s assets as a security device has been recognized now for more than a century.1 It may come as a surprise to bankers that, despite the passage of more than a hundred years, some of the basic principles relating to floating charges are yet to be worked out fully. The first objective of this article is to examine and clarify the nature and consequences of crystallization of floating charges. The vexed issue of automatic crystallization will be discussed. The discussion will also touch on the possibility of de-crystallizing or re-floating a floating charge after it has been converted into a fixed charge. The second objective of this article is to examine the effect of subordination agreements in the context of priority conflicts. In the article, special reference will be made to the recent decision of Nourse, J., in Re Woodroffes (MusicalInstruments) Ltd.2 Before one proceeds with the discussion on crystallization, it is essential to consider briefly the origin of floating charges and their nature.
The origin of floating charges
The Industrial Revolution3 brought about the replacement of hand tools by machinery and the commencement of large-scale industrial production. Not only did it cause major changes in the social and economic structure of England, as we shall see it had also sowed the seeds for the emergence of floating charges as a security device.
As pointed out by Pennington,4 by the third decade of the 19th century, industrial and commercial expansion had become so rapid in England that the constant crying need of companies was for more capital. Initially, creditors were quite happy to accept the borrowers’ bonds for repayment of their loans: in short, to provide finance on an unsecured basis. It is axiomatic that, with an increase in the number of companies expanding their operations, there was an increase in corporate failures resulting in more instances of the bondholders being left unpaid or partly paid in their borrowers’ insolvencies. Understandably, this led to a growing reluctance on the part of creditors to lend on a totally unsecured basis. The advent of the limited liability
* Advocate and Solicitor, Singapore. The author gratefully acknowledges the debt which he owes to the leading works on the subject, in particular, W. J. Gough’s Company Charges (1978), R. M. Goode’s Legal Problems of Credit and Security (1982) and R. R. Pennington’s Company Law (5th edn., 1985). These works and others have clarified his thoughts on many of the issues on floating charges.
1 For a full historical account of the evolution of the floating charge, see R. R. Pennington, “The Genesis of the Floating Charge” (1960) 23 M.L.R 630 (hereinafter referred to as “Pennington’s Genesis”); Goode, Commercial Law, 786; and Gough, Company Charges, at p. 77.
2 [1986] Ch. 366 {infra, fn. 32).
3 The period since 1760 to the early 19th century.
4 Pennington’s Genesis (supra, fn. 1), at p. 630.
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