Lenders often secure loans to companies by taking a fixed charge, a floating charge, or both, over the company’s assets.
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 strongest form of security a lender can take. Over the asset it covers, it ranks ahead of floating charge holders, preferential creditors and unsecured creditors, though usually behind any earlier fixed charge over the same asset.
Fixed means the loan is secured against one or several assets, giving the lender priority over the charged asset if the company defaults, although that does not guarantee the asset will realise enough to repay the debt in full.
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 by law when the company goes into liquidation, stops trading or has a receiver appointed under the charge. It also crystallises on any further events the debenture sets out, which commonly include the appointment of an administrator or a notice from the lender. Insolvency on its own is not a trigger. 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
If a company becomes insolvent, fixed charge holders are paid first from the proceeds of the assets their charge covers, after the costs of selling them. For any shortfall they rank as unsecured creditors, unless they also hold a floating charge.
A fixed charge holder has strong rights over the charged asset and may be able to enforce its security following a default, subject to the terms of the security and the applicable enforcement procedure. The charge document usually sets out the lender’s enforcement rights. Where the charge is made by deed, the law gives the lender a power of sale once the mortgage money is due. The lender may appoint a receiver only once it is entitled to exercise that power of sale, which needs one of the conditions in section 103 of the Law of Property Act 1925 to be met, such as notice and three months of non-payment. The deed can vary or exclude these powers.
Registering a Charge
Whether a charge is fixed or floating depends on the terms and legal effect of the security, not on registration. Separately, a company charge must normally be registered at Companies House using form MR01 (form LLMR01 for LLPs) within 21 days of its creation. Registering a charge costs £14 online and £24 on paper. Miss the 21-day deadline, and unless the court extends it the security is void against a liquidator, an administrator and any creditor of the company, which usually matters far more than the fee. The loan itself does not disappear: the money it secured becomes repayable at once.
A legal charge over registered land must also be registered at HM Land Registry to take effect as a legal charge. This is separate from registration at Companies House.