Section B - Scenario 5

AeroLogistics Ltd is a freight service firm. They have a loan from BankCorp secured by a floating charge over all the company's assets. AeroLogistics misses three consecutive loan repayments. BankCorp issues a formal demand for payment, which is ignored. BankCorp then formally notifies AeroLogistics that they are enforcing their security.

What is the legal effect of BankCorp enforcing the security on the floating charge?

Answer options:

The company is automatically placed into compulsory liquidation.

The floating charge crystallizes and becomes a fixed charge over the assets currently held by the company.

The floating charge becomes void and BankCorp becomes an unsecured creditor.

AeroLogistics can continue to freely dispose of its assets in the ordinary course of business.

How to approach this question

Identify the process by which a floating charge attaches to specific assets upon default.

Full Answer

B.The floating charge crystallizes and becomes a fixed charge over the assets currently held by the company.✓ Correct

When a specified event of default occurs (such as missing payments and the bank demanding repayment), a floating charge 'crystallizes'. This means it ceases to float over a shifting class of assets and attaches to the specific assets held by the company at that exact moment, effectively becoming a fixed charge. The company can no longer deal with those assets without the bank's permission.

Common mistakes

Assuming the company can still sell the assets after the bank has enforced the charge.

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Practice the full ACCA LW — Corporate and Business Law Practice Exam 6

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