CRYSTALLISATION OF A FLOATING CHARGE

Debentures usually consist of an undertaking by the company to repay the principal amount at a specified time along with a rate of interest that accrues over this period of time. In the eventuality that the company goes for winding up, all such debenture holders have to take the requisite steps to enforce the security owned by them against the assets of the company, based on which the instrument of the debenture was issued. On doing this the floating charge has to crystallize and be fixed on specific assets of the company. 26 A company had issued debentures and thereby undertook the liability to pay the principal amount along with the interest on the date specified in the instrument. The charge created by this debenture was a floating charge on the present and future assets of the company. Further, this debenture allowed the company to make daily use of the assets so charged and also allowed for the disposition of such property. The company started to default on its payments and did not make such payments as was required for 3 months. The debenture holders did not take any action in order to enforce their security over the assets of the company. Soon after, the company mortgaged its assets. The court held that this subsequent mortgage is valid since the crystallization of the charge on the assets takes place on the intervention of the debenture holders and not on default of payment to the debenture holders by the company.

In-State of AP v. Rajah Ram Janardhana, the difference between a floating and fixed charge is made abundantly clear in this matter. In this case, there were certain debentures that had a specific charge on all the properties which were owned by the company. The company then subsequently made another mortgage in favor of the state of Andhra Pradesh in order to secure funding. The funding was secured under legislation which is State Aid to Industries Act. While the company was winding up there arose a conflict over the priority over the 2 mortgages which were present. The court held that the debenture holders were to get priority over the claim of the state government. Further, the company could not dispose of its assets without the consent of the debenture holders. This cannot happen till the floating charge is converted into a fixed charge, or the floating charge “Crystallizes”. It is only before the winding up of the company that the disposition of assets of the company can take place freely.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.