COMPANY LAW - DEBENTURES (PART 2)- REGISTRATION AND PRIORITY

Description

Debenture security in company law becomes especially significant when one considers floating charges, crystallisation, priority, registration, insolvency, and enforcement. A floating charge differs from a fixed charge because it does not immediately attach to specific assets. Rather, it hovers over a changing class of assets, such as stock, receivables, or circulating business property, while the company continues to deal with them in the ordinary course of business. This flexibility enables the company to keep trading without constantly seeking the lender’s consent. However, that flexible state does not last indefinitely. At some point, the floating charge may crystallise, that is, convert into a fixed charge over the assets within the charged class at the time of crystallisation. Under the Companies Act, 2019 (Act 992), especially ss 89–90, crystallisation may occur upon default, liquidation, appointment of a receiver or manager, intervention by the charge holder, or any event specified in the debenture instrument. Once crystallisation occurs, the company loses the freedom to dispose of the charged assets without consent, and the lender’s security becomes fixed and enforceable. The effect of crystallisation is therefore profound. First, the floating charge becomes fixed on the assets existing at the date of crystallisation. Secondly, the company can no longer deal freely with those assets in the ordinary course of business. Thirdly, the lender may enforce the security through recognised methods such as possession, sale, collection of income, or appointment of a receiver. The purpose is protective: the law prevents the company from dissipating assets once its financial difficulty becomes evident and secures the lender’s position in a concrete form. Priority rules then determine which creditor is to be paid first where multiple security interests exist. The general rule is that first in time prevails, although registration is crucial. Between two fixed charges, priority is ordinarily determined by the order of c