Floating Charge - Criticisms

Criticisms

Floating charges have been criticised as a "raw deal" for unsecured creditors. In Salomon v. Salomon & Co. AC 22 Lord Macnaghten observed that the injustice of the case (as he saw it) was not caused by the introduction of the concept of limited liability, but by the excessive security created by the floating charge. In Re London Pressed Hinge Co Ltd 1 Ch 576 Buckley J observed that great mischief arose from the very nature of the floating charge as few of general unsecured trade creditors of the company would even be aware of its existence.

As most secured lenders will not usually have recourse to their security until the debtor company is in a parlous financial state, the usual position is that even all the remaining assets of the company are not enough to repay the debt secured by the floating charge, leaving the unsecured creditors with nothing. This perception has led to a widening of the classes of preferred creditors who take ahead of the floating charge holders in a number of countries. The introduction of a regime of voidable floating charges for floating charges taken just prior to the onset of insolvency is a partial response to these criticisms.

Some countries have also sought to "ring fence" recoveries made for wrongful trading or fraudulent trading from the floating charge to create an artificial pool of assets available to the unsecured creditors.