For background and to better understand circulating security interests under the PPSA, this section explains their predecessor, the floating charge.

Floating charges are charges over fluctuating (circulating) assets, typically stock in trade (inventory under the PPSA) and receivables (accounts under the PPSA). Crucially, a floating charge carries a trading power, which permits the chargor to dispose of assets subject to the charge without the chargee’s consent, typically in the ordinary course of business. The trading power has been recognised as the key distinguishing feature of the floating charge².

On a simple level, a floating charge permits the chargor to keep trading its business by giving the chargor a trading power. At a basic level the trading power gives the grantor the ability to sell stock (or other inventory) subject to the charge, and collect and use as working capital the proceeds of receivables generated from the sale of inventory. The receivables generated from sales of inventory, and their proceeds upon collection, are also typically subject to the floating charge. A floating charge follows the value in inventory and receivables as that value circulates in the grantor’s business.

Floating charges throw up some of the most difficult and interesting legal questions. A long-standing issue in floating charge law is whether the floating chargee (secured party) has a proprietary interest in floating charge property before its crystallisation (see below at paragraph 28.2.6 for discussion of crystallisation).

The issue arises because under common law and equitable assignment law principles, the better view of
the English authorities, and perhaps less certainly but also the Australian authorities¹, is that property must be appropriated to an assignment or charge for a proprietary interest to arise in the assignee or chargee². Appropriation means that the property to be assigned or charged is allocated with finality to the assignment or charge, such that the assignee or chargee knows what they are getting.

Floating charges crystallise and the chargor’s trading power ends, and appropriation of floating charge property arises, upon either (A) the cessation of business of the chargor, (B) the appointment of a receiver to the chargor, or (C) upon other contractual events agreed between the chargor and chargee in the charge agreement to be automatic crystallisation triggers.

It was long thought (until about 1984 in Australia³) that before crystallisation, while a floating chargor (grantor) retained a trading power and the ability to dispose of floating charge property freely, the floating charge property was not appropriated to the charge, and therefore no proprietary interest could arise in the chargee (secured party) in floating charge property. If correct, this would leave the chargee with mere (or near) contractual rights against the chargor until the floating charge crystallised.

There are conflicting lines of authority as to whether appropriation is required to support an equitable proprietary interest in floating charge property in a floating chargee (secured party) prior to crystallisation. Many cases have struggled with this issue⁴.

If a floating chargee (secured party) has no proprietary interest in floating charge property before crystallisation, they can be left toothless in priority contests with other (secured) parties who hold or acquire proprietary interests in the same collateral. This is particularly relevant where circulating assets (floating charge property) are disposed of without the authority of the floating chargee, typically outside the ordinary course of business (trading power) of the chargor.

Upon crystallisation the floating charge makes up for the delay in recognising an equitable proprietary interest in the chargee. Upon crystallisation the equitable principle of relation back operates to give the floating chargee (secured party) an equitable proprietary interest (a fixed charge) in charged assets from the date of creation of the charge (the assignment by way of charge relates back to the date of its creation), not the date of crystallisation⁵.

Collateral disposed of by the chargor while the charge was still floating, and disposed of within the scope of the trading power, is lost. Collateral disposed of outside of the trading power may also be lost, subject to arguments surrounding automatic crystallisation of the floating charge into a fixed charge upon unauthorised disposals of floating charge property⁶, and the ability of an equitable fixed chargee to follow the property disposed.