Charge (in the context of a security interest)
A charge is a form of security for a loan under which certain property is agreed to “charged”. The types of property that are capable of being charged include all real and personal property. When property is charged the chargor retain ownership of the property but the chargor has the right to utilise the collateral property if the debt is not discharged.
Formerly, there were two types of charges:
- Fixed charge; and
- Floating charge.
A fixed charge is a charge that is granted over specific property and the property may not be disposes of without consent of the chargee. Fixed charges were normally attached to property that that was not bought and sold in regulars business (e.g. plant and equipment).
A floating charge is a charge that is granted over the whole of a company’s undertaking or over a class of assets, such as stock-in-trade or book debts (see Stephen J in United Builders Pty Ltd v Mutual Acceptance Ltd (1980) 144 CLR 673). This type of charge does not attach to specific property and “floats” over all of the company’s assets or class of assets until the occurrence of an event that is specified in the instrument that creates the charge (normally a “General Security Agreement”). The most common event that will “crystallise” a floating charge is the default on a loan repayment. It is at this point in time that a “floating” charge becomes a “fixed” charge and will have priority in the winding up of a company.
The introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) has significantly altered the way that charges operate in Australia. A “security interest” is defined in section 12 the PPSA as:
“an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property”.
Further, section 10 of the PPSA states that personal property means property (including a licence) other than:
- Land
- …
This means that ‘personal property’ is defined to mean virtually all property except land.
The result of the introduction of the PPSA was that the old terminology of “fixed” and “floating” charges no longer have any relevance. The use of the term “charge” over property is taken to be a reference to a security interest that has attached to either a “circulating” or “non-circulating” asset. A security interest in a circulating asset is analogous to a floating charge whereas a security interest in a non-circulating asset is analogous to a fixed charge.