Facts of the Case
A circus company, engaged in entertainment and commercial activities, required financial assistance for its business operations. To meet its financial needs, the company borrowed a sum of money from a lender. As security for the loan, the circus company offered all its assets, including movable properties such as machinery, equipment, tents, and other operational assets. The charge was not confined to any specific asset but extended over the entire undertaking of the company. The company continued to use, manage, and deal with these assets in the ordinary course of business without any immediate interference from the lender.
Issues in the Case
- What is the nature of the charge created when a company borrows money on the security of all its assets?
- Whether the charge is a fixed charge or a floating charge?
- What are the legal consequences of such a charge on the rights of the company and the lender?
- When and how does such a charge become enforceable under Indian law?
Legal Principles Covered to Support Case Proceeding and Judgements
Under Indian law, particularly the Companies Act, 2013, a charge may be classified as either fixed or floating. A floating charge is created over a class of assets that changes from time to time, such as stock, machinery, or circulating capital. The essential feature of a floating charge is that the company is free to deal with the assets until the charge crystallizes.
In this case, since the circus company charged all its assets including machinery and continued to use and manage them in the ordinary course of business, the charge created is a floating charge. This principle is well-established in cases such as Illingworth v. Houldsworth and Re Yorkshire Woolcombers Association Ltd., where courts held that a charge over the whole undertaking of a company that allows free use of assets constitutes a floating charge.
A floating charge crystallizes into a fixed charge upon the occurrence of certain events such as winding up of the company, default in repayment, or appointment of a receiver.
Possible Judgement
Based on the facts and legal principles, the court is likely to hold that the charge created by the circus company is a floating charge. The company retained possession and control over its assets and was allowed to use them in the normal course of business. Therefore, the lender’s security interest remains floating until crystallization occurs. Upon default or winding up, the floating charge would crystallize, giving the lender priority over unsecured creditors, subject to statutory dues and overriding preferential payments under Indian law.
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