Fixed charge

The term fixed charge refers to the mortgage placed on certain fixed asset which ensures that a loan is repaid. An example of a fixed asset could be a building or a portion of land.

Since the concept of a fixed charge is only one of two main classifications of charges, understanding it also requires comprehension of what its counterpart, a floating charge, is.

Charges come about as a result of loans, mortgages, or other forms of debt. They serve as securities for these, and are thus linked with certain assets. Floating charges are those which are associated with assets that are of a changeable nature. Company stocks, for instance, be linked with floating charges. It must be remembered, however, that the connection between a floating charge and the asset itself is not one which is set in stone, hence the term “floating”. The floating charge can be described as something which looms over the asset concerned but is not directly attached to it yet.

A floating charge can be converted to a fixed charge in a process called crystallization. This usually takes place when a default occurs. Other events, however, also trigger the conversion from a floating charge to a fixed charge. In any case, at this point, the charge is “fixed” or firmly attached to the asset in question.

Since charges cannot actually be enforced while they are still floating, the necessary conditions will have to be met first before they become fixed, and thus enforceable.