Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What happens to floating charges during the winding-up process?

1. They are written off

2. They are prioritized after fixed charges

3. They crystallize

4. They become ineffective

The correct answer is: They crystallize

During the winding-up process, floating charges crystallize, meaning they convert into fixed charges. This conversion usually occurs when the company enters into liquidation, as the floating charge no longer sits over the general assets of the company but instead attaches to specific assets that the charge covers at the time of winding up. This process allows the creditor to collect on the debt that the charge secures from the specific assets of the company. Crystallization provides a level of security to the creditor, enabling them to rank in the hierarchy of claims against the company's assets during liquidation. The other choices suggest different outcomes for floating charges. Writing them off would imply that the creditor receives no benefit, which is not the case during winding up. Prioritizing after fixed charges doesn't accurately capture the nature of floating charges, as crystallized floating charges often take precedence in the hierarchy of claims once they have converted. Stating that they become ineffective does not reflect their transition to fixed charges, which hold legitimacy during the winding-up process.