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?
If a company ends up insolvent this is known as a trigger event. The trigger ‘crystallises’ the floating charge into a fixed charge. For example, when the floating charge is over inventory the inventory becomes fixed at the moment of insolvency, meaning it cannot be sold or disposed of.
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. These comes with a cost of £23.
Mortages must be registered at the Land Registry also, in order to be valid against 3rd parties.