It is a charge created by a contract between the parties. Where a person owes some money, the creditor may obtain what is called a floating charge on all the properties of the debtor as they exist or may be acquired in future. This is called floating charge because the debtor is free to deal with his properties in any manner he likes till the time the final demand is made by the creditor or till such time the creditor has no right to interfere with the properties charged to floating charge. The charge becomes fixed on that day. The creditor is then entitled to take possession of the property in the manner provided by law and sell the property for realization of his debt. If somebody else brings them to sale the person holding floating charge can demand preferential payment. That is what happens in the case of debenture holders where in case of liquidation, the debenture holders having a floating charge can demand preferential payment of the sums due to them from the receiver. This is also the case where creditors holding a floating charge over the properties of the debtor, if they are taken over by Banks under the scheme of Securitisation of Bank debts.
[Ref.: Commissioner of Agricultural Income tax v. Nilambar Rubber Co. Ltd., AIR 1969 Kerala 238; In the matter of Sri Yallamma Cotton Woollen and Silk Mills Company, AIR 1969 Mysore 280; Narendra Kumar Maheshwari v. Union of India, 1990 Supp. SCC 440; Indian Oil Corporation v. NEPC India Ltd. and Others, AIR 2006 SC 2780.]