What are the requirements for Floating Charge on Assets?

A Floating Charge is a type of security interest taken by a lender over a borrower's changing pool of assets, such as inventory, receivables, or property under development, rather than specific fixed assets. Unlike a fixed charge, a floating charge does not attach to particular assets until a triggering event called crystallization occurs. In real estate, floating charges are commonly used in development financing and corporate property lending.

How a Floating Charge Works in Real Estate

• A lender takes a floating charge over assets that change in value and composition over time
• The borrower can continue using, selling, or replacing those assets during normal business operations
• When the borrower defaults or enters insolvency, the floating charge crystallizes into a fixed charge
• The lender then has priority claim over those crystallized assets

Requirements for Creating a Valid Floating Charge

• Written agreement Must be documented in a formal loan or debenture agreement
• Registration Must be registered with the Registrar of Companies (ROC) within 30 days of creation in India
• Clearly defined asset class The charge must specify the category of assets covered
• Board approval Corporate borrowers require board resolution to create a floating charge
• Disclosure in financial statements Must be reported in company accounts and balance sheets

Floating Charge vs. Fixed Charge

• Fixed charge Attached to specific identified assets; borrower cannot sell without lender consent
• Floating charge Covers a class of assets; borrower retains operational freedom until default
• Priority Fixed charge holders rank above floating charge holders in insolvency proceedings
• Flexibility Floating charges are preferred in development and working capital financing

Floating charges offer lenders security over dynamic asset pools while giving borrowers operational flexibility during the loan period. However, they carry higher risk for lenders compared to fixed charges due to their lower priority in insolvency. Borrowers and lenders must ensure proper registration and documentation to make floating charges legally enforceable.