Financial institutions secure any loans they offer via the use of collateral strengthened with what are called ‘fixed and floating charges.’
These have a number of serious implications for borrowers and are often implicated in insolvency.
We’ll explore what they mean, and how fixed or floating charges relate to your business.
What is a Fixed Charge?
A charge is a legal right to a loan collateral or security.
A fixed charge is the most senior charge any lender can have, ranking above all others in the event of loan default.
Fixed means the loan is secured against one or several assets, giving the lender certainty that they will recoup their money even in the case of default.
Mortgages are perhaps the most common type of loan to carry a fixed charge as standard, usually secured on the property itself.
What is a Floating Charge?
Floating charges, sometimes called a ‘floating lien’ different from fixed because they’re attached to assets which aren’t constant or fixed. These might include stock, or other short term assets which can change in value.
Example
An example of a floating charge might be inventory. Since a business is continuing to trade the value of the inventory is in continual flux and yet it can be valued overall.
What is the Crystallisation of a Floating Charge?
A floating charge crystallises on the events set out in the debenture, which commonly include liquidation, the appointment of a receiver or an administrator, and sometimes a notice from the lender. Insolvency in the abstract is not the trigger — the document says what is. Crystallisation fixes the charge onto whatever is in that class of assets at that moment, so a charge over inventory attaches to the stock then held and the company can no longer deal with it freely. It does not promote the lender to the position of a fixed-charge holder from the outset: a crystallised floating charge still ranks behind the preferential creditors and behind the prescribed part set aside for unsecured creditors.
Fixed vs. Floating Charge Holders
Fixed charge holders have the highest priority if a company becomes insolvent.
The fixed charge holder has the legal right to sell the asset at any time, if the finance arrangement is defaulted upon. The contract itself will specify what ‘enforcement’ a fixed charge holder is entitled to.
Registering a Charge
Both fixed and floating charge status also depends upon certain documents being filed at Companies House using form MR01 ( (form LLMR01 for LLPs) within 21 days of the signed agreement. Registering a charge costs £14 online and £24 on paper. Miss the 21-day deadline and the charge is void against a liquidator, an administrator and any creditor of the company, which usually matters far more than the fee.
Charges over land must also be registered at HM Land Registry to be effective against third parties.