Crystallisation Of A Floating Charge

http://www.proeconomics.com/Law/Company/Drafting_of_Automatic_Crystallisation_C lauses.html Until a floating charge crystallises, a company can continue to deal with the assets which are the subject-matter of the security in the ordinary course of its business. The scope of a company's 'ordinary course of business' for this purpose is sometimes equated with its objects under its memorandum of association. The common practice of having very extensive objects means that, adopting this approach, there is little or nothing that a company can do which would fall outside the scope of its power to continue to use assets which are the subject of a floating charge. However, if a company does something authorised by its objects which triggers the cessation of its business, this may cause the floating charge to crystallise in accordance with the principles discussed in this section. The existence of an uncrystallised floating charge does not prevent the company's debtors from claiming rights of set-off against it, nor does it preclude any of the company's other creditors from enforcing judgment against its assets. When a floating charge crystallises into a fixed charge, it attaches to the existing assets of the company within the ambit of the charge and, unless the charge excludes this, all such assets that are subsequently acquired. A crystallised floating charge ranks as a fixed charge for the purposes of determining its priority against others' interests in the company's property which are created or acquired after crystallisation. Although there is one case to the contrary,the better view is that crystallisation does not affect the priority of a floating charge against other interests in the same property which predate crystallisation. Crystallisation has the effect of postponing execution creditors to the chargee's interest, and once debtors of the company have notice of crystallisation they are largely precluded from claiming rights of set-off. As charges are essentially contractual documents, it is for the parties to determine crystallising events but, in the absence of any other provision, three crystallising events will be implied. These are intervention by the holder of the charge to take control of the security, such as by appointing a receiver under the terms of the charge, the commencement of the winding up of the company2 and the cessation of its business. It is also possible for the parties to agree additional crystallising events in the terms of the charge. For example, a floating charge may contain a provision which entitles its holder to trigger crystallisation by serving a notice to that effect on the company. Until the 1980s it was uncertain whether under English law it was possible to provide for automatic crystallisation upon the happening of an event that did not require intervention from the holder of the charge and which, unlike liquidation or cessation of business, did not signal the end of the company's business. Dicta in some old cases suggested that, outside situations of cessation of business, the holder of the charge had to intervene positively in order to bring about crystallisation. In England, the powerful dicta of Hoffmann J in Re Brightlife Ltd and his decision in Re Permanent Houses

(Holdings) Ltd heralded the acceptance of the legal effectiveness of automatic crystallisation clauses that did not require the charge-holder to intervene. Elsewhere in the Commonwealth, it has also been specifically held that automatic crystallisation in this form is possible. This acceptance of non-interventionist automatic crystallisation, despite certain policy objections to it, represents a triumph for freedom of contract: a floating charge is a consensual security and it is therefore for the parties to determine its features including the circumstances in which it will crystallise. There is a case here for statutory intervention, with a possible way forward being to follow the Irish model under which debts secured by fixed charges on book debts enjoy no priority over revenue debts; this approach allows companies and their creditors to structure their lending arrangements as they think fit within the bounds of legal possibility but ensures that the preferential status given to certain debts by the insolvency legislation is not deprived of meaningful effect. Automatic crystallisation clause There are now two recognised forms of automatic crystallisation clause: the first is where crystallisation is to happen upon the occurrence of specified events without positive intervention from the holder of the charge; and the second is where crystallisation is to happen if and when the holder of the charge serves a notice to that effect. The first type of clause places the occurrence of crystallisation outside the control of the holder of the charge and, unless the clause is narrowly and carefully drafted, may result in situations where the charge crystallises even though the charge-holder is content for it to continue to exist in uncrystallised form. In anticipation of this, an automatic crystallisation clause may be coupled with an express clause entitling its holder to decrystallise it again. In the absence of such a clause, it should be possible to achieve decrystallisation with the express or implied consent of the holder of the charge. However, there is a risk that if the automatic crystallisation is so widely drafted that the holder of the charge has frequently to agree to decrystallisation, this pattern of events may lead a court to conclude that the original agreement was later varied by the parties so as to exclude the automatic crystallisation provision. The second form of automatic crystallisation clause avoids the issue of unwanted crystallisation by keeping the trigger for crystallisation within the control of the holder of the charge. On the other hand, automatic crystallisation clauses in this form have an in-built delay factor which could operate to the detriment of the holder of the charge in its claim to priority over other interests in the same property.