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The value of a fixed and floating charge

A company may grant a charge which is fixed, floating or a combination of both. A fixed charge is one that is over specific assets such as plant and equipment, and land and buildings. A floating charge creates a charge over those assets which can normally be used by a company in the ordinary course of its business, most commonly, stock and debtors.

Due to the ever changing nature of the assets subject to a floating charge, the monitoring of these changes is essential. A lender should require timely information to allow the value of the security to be assessed from time to time. On a regular basis secured lenders should check that a new entity has not been established by the directors, which is not embraced by the security.

There are a great many items which can affect the projected value of a borrower’s floating charge assets.

Forced sale value of assets

The value of assets varies substantially between products and industries. Also, in an insolvency situation, the assets will often be sold on a forced sale basis. This can materially reduce the value of the assets.
Collectability of Debtors – If a company fails the value of debtors can usually be discounted substantially. When a company ceases to trade, customers sometimes delay payments, dispute accounting details, dispute proof of delivery and raise contra claims.

Consider whether a licence has any value where it is combined with an insolvency appointment.
Retention of Title Claims

Many suppliers to a business provide stock on a retention of title basis. The effectiveness of retention of title clauses varies, but where effective, the supplier will retain title to the stock and it would therefore not be available under a floating charge to a lender.
Priority Creditors

In assessing the value of a floating charge it is essential that an assessment be made of creditors entitled to be paid in priority to a secured lender. The largest of these creditors is usually employee entitlements including wages, holiday pay, long service leave, superannuation and redundancy payments.
Statutory Charges

Prior to an asset being sold, all outstanding rates and land taxes are required to be paid.

Certain creditors of the company may be in a position to retain assets by way of a lien which has the effect of giving that creditor a form of security to ensure payment is made. This has the effect of taking an asset away from a secured creditor, which normally would be covered by its charge. Examples include: a mechanic holding a motor vehicle for unpaid repairs to that vehicle; a common carrier may hold a lien over the goods carried until transport and storage fees are paid.
Environmental laws

In certain states of Australia, environmental laws place conditions on the owners of property and banks who take possession of such property. “Making good” such conditions can sometimes be very costly and may have the effect of materially reducing the value of assets.
Costs of Realisation

Allowances should be made for realisation costs such as commissions on the sale of land, advertising costs for the sale of assets, legal fees and Controller’s fees.