Module: General Practice
Q114: Consider the following statements regarding Fixed vs. Floating Charges:
Assertion (A): A Floating Charge crystallizes into a Fixed Charge when the company ceases to be a going concern or defaults on the debenture conditions.
Reason (R): A Floating Charge attaches to a specific, identifiable asset from the moment of its creation, preventing the borrower from dealing with it.
Reason (R): A Floating Charge attaches to a specific, identifiable asset from the moment of its creation, preventing the borrower from dealing with it.
✅ Correct Answer: C
Assertion (A) is True: A Floating Charge is a charge on a class of assets (like stock or raw materials) which fluctuates in the ordinary course of business.
It remains "dormant" until a specific event occurs (like default, liquidation, or appointment of a receiver), at which point it "crystallizes" and becomes a Fixed Charge, attaching to the assets present at that moment.
Reason (R) is False: This describes a Fixed Charge.
A Floating Charge explicitly allows the borrower to deal with the assets (sell stock, consume raw material) in the ordinary course of business without seeking the lender's permission.
A Fixed Charge attaches to the specific asset immediately and prevents disposal without permission.
It remains "dormant" until a specific event occurs (like default, liquidation, or appointment of a receiver), at which point it "crystallizes" and becomes a Fixed Charge, attaching to the assets present at that moment.
Reason (R) is False: This describes a Fixed Charge.
A Floating Charge explicitly allows the borrower to deal with the assets (sell stock, consume raw material) in the ordinary course of business without seeking the lender's permission.
A Fixed Charge attaches to the specific asset immediately and prevents disposal without permission.