On Restrictive Terms In Floating Charges

Floating charges were invented by the British equity in the nineteenth century. The said floating charge means a kind of security that covers all or certain type of the borrower's current and future assets with the borrower's freedom to dispose of the secured assets during the ordinary course of its business. Comparing with a fixed charge, a floating charge shows its most distinctive advantage in that the borrower is free to dispose of the secured assets during the ordinary course of its business until the floating charge crystallizes. However, every coin has two sides. Although the advantage is helpful to promote the quick and efficient operation of the borrower's enterprise, it also makes the lender unable to control the disposal of the secured assets, thus has no way to predict the amount and size of the assets available to pay the debt. As a result, the lender's interest cannot be fully protected. The deficiency has a negative influence on the application and popularization of the floating charge in the international financial practice. The deficiency, if not be successfully overcome, is possible to be a fatal obstacle to the development of floating charge system. One example is the experience of floating charges' introduction into Japan.There are two ways in the international financial practice to overcome the deficiency. One is to create, in addition to a floating charge, a fixed charge over some important assets. The other is to include restrictive terms in the floating charge agreement to prohibit the borrower from taking some actions during the ordinary course of its business, especially to prevent the borrower, without the prior written consent of the lender, from creating a fixed charge which will rank prior to or pari passu with the floating charge. Comparatively, the restrictive terms are used more often in the practice. The author has carried out some fundamental research in this dissertation on the basis of the experience and practice in Commonwealth countries and has focused on the effect of the restrictive terms to a third party. At the end of the dissertation, the author proposed some suggestions on the legal framework of restrictive terms for the introduction of floating charge into China in the future.This dissertation includes four chapters with approximately 36000 Chinese characters:Chapter One: The Concept and Features of A Floating Charge. In this chapter the author mainly illustrates how the floating charge originated and the relevant social economic background. The concept of a floating charge is analyzed based on the statements in the judicial decisions in Britain. Besides, the unique features of a floating charge which make it different from a fixed charge are also specified.Chapter Two: Restrictive Terms – Overcome the Deficiency of Floating Charges. By analyzing the inherent deficiency of the floating charge, and by comparing the two ways adopted in the international financial practice to overcome the deficiency, the author holds the view that the adoption of restrictive terms can not only reasonably protect the chargee's interests, but also reserve the advantages of the floating charge. Then the author further analyses the concept, function and nature of the floating charge.Chapter Three: The Effect of Restrictive Terms to A Third Party. This is a key point of this dissertation. The author firstly analyzes the effect of restrictive terms to a subsequent fixed chargee and specifies the standard of a third party's knowledge, the source of the priority and the automatic crystallization clauses that often accompany with the restrictive terms. The author then provides that we should strictly interpret the application of the restrictive terms. Secondly, by analyzing the effect of the restrictive terms to a creditor in an execution, the author holds the opinion that the restrictive terms only cover the mortgage or charge that is positively created by the borrower, in which the execution on the borrower's assets is excluded. Therefore, the restrictive term...