What is it?
A company charge arises when one party (the ‘chargee’) is granted a legal interest in the assets of the other party (the ‘chargor’) as security for the performance of a specific obligation, generally the repayment of a loan.
There are two types of company charges: a floating charge and a fixed charge.
A floating charge occurs when the security given is unspecified or changing assets. Examples of these types of assets may include company stock, work in progress, or unpaid debts owed to the company. The company is able to use or dispose of these assets in its regular course of business.
A fixed charge attaches to specific assets of the company. A mortgage is an example of a fixed charge.
Application for small business people
Small businesses will need to take out loans in order to raise funds to expand or continue business operations. Lenders are generally reluctant to advance funds to small businesses without a guarantee that the loan will be repaid. In some cases, the small business owner will take out a mortgage, whereby property is used as security for the loan. But what if the business doesn’t own any real property? In these situations, other assets of the business can be used as the security for the loan. This is known as a company charge.
It is important to note that some types of company charges must be registered with the Australian Securities and Investments Commission (ASIC). The charge generally has to be registered within 45 days of its creation. Priority over the charges will be given in the order in which they are registered. If a charge has not been registered, then it will be considered to be void.
6 key things to consider
Some of the key points to consider before entering into an agreement to create a company charge are:
- Who is the chargee and who is the chargor?
- What is the amount of the loan?
- What are the repayment terms and conditions?
- What event will make a floating charge turn into a fixed charge?
- Does the charge need to be registered with ASIC?
- Are there any competing charges over the company assets?
Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Small business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
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