(b) Fixed charge
In this situation a specifi c asset of the company is made subject to a charge in order to secure a debt. Once the asset is subject to the fi xed charge the company cannot dispose of it without the consent of the debenture holders. The asset most commonly subject to fi xed charges is land, although any other long-term capital asset may also be charged. It would not be appropriate, however, to give a fi xed charge against stock-in-trade, as the company would be prevented from freely dealing with it without the prior approval of the debenture holders. Such a situation would obviously prevent the company from carrying on its day-to-day business. If the company fails to honour the commitments set out in the document creating the debenture, such as meeting its interest payments, the debenture holders can appoint a receiver who will if necessary sell the asset charged to recover the money owed. If the value of the asset that is subject to the charge is greater than the debt against which it is charged then the excess goes to pay off the rest of the company’s debts. If it is less than the value of the debt secured then the debenture holders will become unsecured creditors for the amount remaining outstanding. |
