The Floating Charge In International Finance

In the commercial industry,financiers always take security as a method of protection from the potential credit risk in the debt finance,basically for obtaining at least partial payment in the circumstance where the debtor fails to meet the debt obligations.As a means of security,floating charge becomes increasingly popular in the international finance contributing to its specific advantages.The prominent significance of the floating charge lies in the fact that the debtor company is enabled to continue operation and deal with the charged assets in the ordinary course of business without reference to the charge holder.Undoubtedly,the flexibility of the floating charge dramatically promotes debt financing by accommodating two competing interests,that of the chargee to be secured and that of the secured assets to be used more effectively by the debtor company.As a result,floating charge has been widely adopted by banks and financial institutions especially when they engage in project finance.Under circumstances of project finance,the sponsor always creates security over the project assets.If the assets are subject to ordinary security such as fixed charge,they are not disposable without the consent of the chargor.Obviously,it will impede the construction of the project,the result of which may further impair the profitability of the project.The working mechanism of the floating charge avoids this disadvantage and promotes the project finance to the extreme extent.In consideration of the unreplaceable function of the floating charge,China has adopted it by means of law a decade ago.There are three articles in the Chinese Property Law regulating the floating charge,namely Article 181,Article 189 and Article196.Article 181 focuses on the scope of the chargor,the object of the floating charge(the charged assets)and the formality of its creation.The other two articles reflect the requirements of the registration and the crystallization of the floating charge.Although the floating charge is believed to promote the small and medium entities'(SME)and peasants' ability to make loans,it is riddled with unpleasant uncertainties which affect the floating charge holder and other creditors of the company due primarily to the ambiguous priority rules.Furthermore,the scope of the chargor and the charged assets are problematic,while the floating charge rules under Chinese Property Law lacks legal interpretation of “ordinary course of the business”and explicit rules concerning registration and crystallization and the enforcement of the floating charge.Apparently,these deficiencies deviate from the purpose of promoting international finance and make the floating charge commercially unattractive.Therefore,this essay advances a reform after comparing English law for sake of commercial need,facilitating the free-flow of capital and promoting debt finance more efficiently.This essay firstly introduces the background and the nature of the floating charge as well as the strengths of it in the international finance.The second section discusses the distinction between the fixed charge and the floating charge before analysing potential problems of the floating charge mainly under English law.Based on the lesson of English law,the last part approaches the floating charge under ChineseProperty Law which is proceeded from China's actual situation,including relevant rules,problems and corresponding solutions in a more coherent legal framework,followed by the conclusion.