16 Apr Debenture of floating charge is adequate security
Debenture of floating charge is adequate security
by George Coucounis
THE granting of a debenture of floating charge on the assets of a company secures the creditor for a loan or a facility granted to it and gives him the right to appoint a receiver when the company does not meet its obligations. The charge is floating and is different from a fixed charge, since it burdens the company’s assets but allows it to carry on its activities and only when the right to appoint a receiver is exercised, it becomes a fixed charge attached to its assets. The debenture of floating charge is governed by its terms and enables the creditor to act quickly by appointing a receiver in order to liquidate the charged assets of the company for the repayment of the debt. Usually the debenture covers the whole business and assets of the company, present or future and includes the capital which was not paid and its goodwill. From his appointment, the receiver acts as the company’s representative and he is entitled to take possession, liquidate and collect its assets and to make arrangements or settlements as he considers necessary. The receiver, although acting as a representative of a company, has a duty to liquidate its assets to the interest of the debenture-holder and the management of the company is done for this purpose.
Among the powers of the receiver to safeguard the assets of the company to the benefit of the creditor is the right to sue and obtain a relevant order, so that he can take control of the assets of the company charged by the debenture. In a lawsuit brought against a company and its director before the District Court of Nicosia, the receiver obtained orders prohibiting them from preventing him to take possession or manage its assets, taking actions contrary to the debenture, alienating and or encumbering its assets, as well as he obtained orders to deliver to him all the books, records, files, documents and receipts and any amount they received, its movable and immovable property and to allow the receiver to enter and take possession of the premises and movable and immovable property of the company. They objected, alleging that his appointment was invalid and illegal, that he had no right to dispose any property, that his obligation was limited to paying in priority only the amount secured by the debenture and that its terms were unfair and affected the company’s right to repay the amount secured and be released from the charge.
The Court in its judgment did not accept the objections of the company and its director and referred to the principles relating to the appointment, the duties and the powers of the receiver. It emphasized that with his appointment, the receiver takes control of the company’s assets and the powers of the company and its directors to act in relation to the specific asset covered by the debenture cease; however, this does not affect the legal existence of the company as an entity. Moreover, if the debenture covers essentially all or most of the company’s assets, the company’s directors do not carry out any commercial activities. The Court added that by the appointment of a receiver, the floating charge crystallises and it becomes a fixed charge. The company, by giving the debenture-holder the power to appoint a receiver, accepts that its own management powers will be terminated by the appointment.
Moreover, the Court stated that in order to determine which property the charge covers and will be managed by the receiver, the debenture itself is examined under which he was appointed, as well as the intention of the parties. The most common floating charge is the debenture which charges the whole of the company’s assets, as it was the case of the debenture under examination. The Court concluded that the receiver, in order to be able to exercise his duties both under the law and under the debenture