CHARGES

When a company borrows money from a financial institution it may be required to give security for
the borrowed money and this security may be in form of a charge or a debenture.

The Companies Act Section 2 defines a charge as a form of security for the payment of a debt or for
the performance of an obligation consisting of the right of a creditor to receive payment out of
somespecific fund or out of proceeds of specific property and includes a mortgage.

A charge is a security interest created in or over an asset of a company in favour of a creditor by

which the company agrees that its asset shall be appropriated to discharge a debt in case the
company defaults.

REGISTRATION OF CHARGES

Section 105 of the Companies Act requires every charge created by a company to be registered in
Uganda to be registered with the registrar of Companies within 42 days from the time of its creation.

If the instrument creating the charge is not registered, the charge is void against the liquidator and
creditors. However, the Company remains liable to pay the debt although the debt is unsecured.

In Kashozi Damba v Male Construction a bank advances a loan secured by a debenture to a

judgement debtor, the decree holder obtained a judgement against the judgement debtor and
advertised its property for sale in execution of the decree. The bank challenged the sale on grounds
that it had advanced money to the judgement debtor. Court held that the debenture was void
against a liquidator and creditor as it was not registered in 42 days.

Showind Industries Ltd v Guardian Bank Ltd and another [2002] 1 EA 284

READ PART IV of the Companies Act and Regulation 23 of the Companies (General) Regulations.

TYPES OF CHARGES

Any charge created by a company over its assets may be a legal charge or an equitable charge.

A legal charge is one which is registered per the Companies act and is binding on the company,
liquidator and the company’s creditors.

An equitable charge is a charge created over the company’s assets and not registered as required
under the Act. An equitable charge does not bind a liquidator or the company’s creditors. However
the Company remains liable to pay the debt secured by an equitable charge.

There are two types of charges that may be created:-

 1. A floating charge and
2. A fixed/specific charge.

According to the case of Illingworth v Houldsworth [1904] AC 355, Lord Macnaghten in defining
what floating and fixed charges are noted that:-

‘A specific charge, I think, is one that without more fastens on ascertained and definite property or
property capable of being ascertained and defined; a floating charge, on the other hand, is
ambulatory and shifting in its nature, hovering over and so to speak floating with the property which
it is intended to affect until some event occurs or some act is done which causes it to settle and fasten
on the subject of the charge within its reach and grasp.’

In other words, a fixed or specific charge is taken over identified assets of the company, not used in
the day to day business of the company whereas a floating charge may cover company assets used in
the ordinary course of business.

In Evans v Rival Granite Quarries Ltd [1910] 2 KB 979, Buckley LJ compared a floating charge and a
fixed charge and held that:

’‘A floating security is not a specific security; the holder cannot affirm that the assets are specifically
mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them
without the concurrence of the mortgagee. A floating security is not a specific mortgage of the
assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a
floating mortgage applying to every item comprised in the security, but not specifically affecting any
item until some event occurs or some act on the part of the mortgagee is done which causes it to
crystallise into a fixed security.”

Therefore a floating charge is not fixed on a specific company property but rather hoovers around all
the company’s assets until it crystallizes.

Court in Re: Yorkshire Wool (1903) 2 Ch 284 gave the characteristics of a floating chardge to
include:-

1. It is a charge on a class of assets of a company present and future;

2. The class is one which, in the ordinary course of the business of the company, would be
changing from time to time; and
3. By the charge it is contemplated that, until some future step is taken by or on behalf of
those interested in the charge, the company may carry on its business in the ordinary way as
 far as concerns the particular class of assets. (Company can continue dealing with the assets
in it ordinary course of business)

A floating charge is taken over the entire undertaking of the company or over all the assets of the
company both present and future, including both movable and immovable assets or circulating
assets.

It allows the company to continue dealing with the assets in the ordinary course of business without
need of seeking for the consent of a charge (creditor).

The charge floats or hovers over the assets until some event occurs causing it to crystallize.

In National Westminster Bank plc v Spectrum Plus Ltd and others [2005] 4 All ER 209 it was held
that;- The essential characteristic of a floating charge, distinguishing it from a fixed charge, was that
the asset subject to the charge was not finally appropriated as a security for the payment of the debt
until the occurrence of some future event. In the meantime the chargor was left free to use the
charged asset and to remove it from the security.

Events of crystallization (when does a floating charge crystallize?)

1. If the company goes into liquidation/insolvency.

2. If a receiver is appointed over the company. In Stephen Lubega v Barclays Bank (U) ltd
(1992) 111 KALR 30, Mrs Ssezibwa Estates Ltd, secured a loan from the respondent bank for
purchase of a lorry, and the bank took all assets, debentures plus legal mortgages for the
debtors coffee factory and one residential house. The lorry was subject to a floating charge
created by the debenture from the respondent bank. The bank appointed a receiver,
impounded the lorry and advertised it for sale. It was held that a floating charge crystallises
the moment there is default and a receiver is appointed.
3. If there is cessation of the company’s trade/business RE. WOODROFFES (MUSIC
INSTRUMENTS) LTD LTD (1986) CH 366.
4. If an event occurs which according to the terms of the instrument creating the floating
charge leads to crystallization.
5. Where the company defaults. In Mbarara Coffee Curing Works v Grindlays Bank (1976) HCB
175; the plaintiff company entered into a debenture with the bank to secure an overdraft on
its current account for 500,000/=. It was agreed that the debenture would rank first charge
on all of the property, in the event of unmovable property which as thereby mortgaged to
be a fixed charge and as regards all other property, a floating security, the bank was given
power to appoint a receiver in case of default in payment. The company later entered into
 another debenture, which was an enlargement of the first debenture increasing the level of
the overdraft. The plaintiff owned a factory in Mbarara and the factory was mortgaged
through the debenture with the bank. Later the bank sealed this factory and sold it to realize
the money owing by the company. It was held that at the time the bank realized its security,
the debenture was still valid and operative and the bank was entitled to realize its security
under the debenture in the absence of repayment or discharge.

Upon crystallization the floating charge becomes a fixed charge and the company loses its freedom
to continue dealing with the assets as it wishes.

Diversey Lever East Africa Ltd v Mohanson Food Distributors Ltd and another [2004] 1 EA 43 32

Agnew v Commissioner of Inland Revenue (Re Brumark Investments Ltd) [2001] 2 AC 710

Priority of charges

1. Fixed charges rank in order of the time at which they are created: a fixed charge created first
time takes priority over all subsequent fixed charges over the same property.
2. A fixed charge takes priority over a floating charge even a fixed charge creates after the
floating charge takes priority over an earlier floating charge. Re Castell & Brown Ltd [1898] 1
Ch 315). In this case, a company created a floating charge over debentures but later created
an equitable mortgage over the various properties by deposit of title deeds. It was held that
the mortgage charge had priority over the floating charge. Exception is where the
subsequent fixed charge holder had actual knowledge that the pre-existing floating charge
expressly prohibited the company from creating a subsequent charge with priority, the pre-
existing floating charge will take priority over the subsequent fixed charge as was held in
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds Rep 142. Such a clause is known
as a ‘negative pledge’.
3. Floating charges rank in order of time of creation: the first in time takes priority over all
subsequent floating charges over the same property. In Re Benjamin Cope & Sons Ltd
[1914] 1 Ch 800 it was held that prior general floating charge does, of course, have priority
over a subsequent general floating charge.