EXAMINING THE LEGAL AND ECONOMIC INDICES OF PRIORITY OF FLOATING CHARGES: A COMPREHENSIVE ANALYSIS

Abstract

Priority between security interests sets out the legal rules on priority of two security interests. The rules have never been susceptible to precise analysis. The rules are made more complex as the action of the parties often affects their legal positions. A debenture for instance could contain clauses authorising the crystallization of a floating charge into a fixed charge prior to the commencement of a winding up proceedings and could displace the priority of a fixed charge and/or preferential creditors of a company. This paper advances legal reasoning to contextualise the public policy and economic basis of floating charge. It concludes by putting forward the twin reasons why businesses prefer creating floating charge over assets in corporate financing; that is, flexibility and high interest rate.