fixed and floating charge document

What are Fixed and Floating Charges?

Education

advantages and disadvantages of fixed and floating chargesFixed and Floating charges are when a business borrows money from a lender such as a bank or another financial institution, it is not unusual for the lender to ask for security for the debt. That helps to protect the lender’s position as it can seize and sell the asset that has been given as security if the loan cannot be repaid.

The idea of providing security for a loan is a concept most business owners will be familiar with, after all, it’s something all homeowners do when arranging a mortgage. However, the confusion often comes with the two different types of charge, fixed and floating, that are used to give lenders security over the assets of a business.

In our quick guide, we’re going to explain what fixed and floating charges are and explore the differences between them so you’ll know what you’re signing up for

What is a fixed charge?

A fixed charge is attached to an identifiable asset at creation. Assets can include land, property, machinery, copyright, trademark and much more. The business does not typically sell these fixed assets, and the fixed charge is applied to protect the repayment of the company debt. The simplest way to put it into perspective is to think of a mortgage; you cannot sell your house without your lender’s permission, as you have not yet paid the debt off and own the house.

With a fixed charge, the lender has full control of the company asset. Therefore, should any corporation want to sell that particular asset, they must have the lender’s approval to do so or pay off the debt.

Fixed charge examples

As previously mentioned, fixed charges are over substantial and physical assets. Examples include:

  • Mortgage payments
  • Rent deposits
  • Chattels and leases
  • Bill of sale
  • Factored book debts

It’s important to note that a fixed charge repayment ranks before that of a floating charge repayment in company insolvency.

What is Floating Charge?

A floating charge is held over assets that can change over time in the normal course of business.  Although the assets may be physical, the number of them, or the value, condition, or other properties can change.  So fixtures and fittings can be subject to a floating charge as they are difficult to quantify. A debtor book is constantly changing. It would not be practical to stick a fixed charge over every item of stock or desks and chairs, would it? So, the floating charge allows the lender to recover some money if the assets are sold.

So, a floating charge can be held over the following:

  • Stock, finished or raw material
  • Work in progress
  • Unfactored debtors
  • Fixtures and fittings
  • Cash
  • Vehicles or assets not subject to fixed charges

But the lender does rank behind some other creditors like wages, and the “prescribed part creditors”. This is where it gets complicated

Crystallisation

A floating charge can be seen to be more flexible than a fixed charge, but once it has crystallised, the company can no longer use the associated assets in the course of trade, and they are effectively frozen.

Both types of charge protect the lender should a business fail, as charge-holders have priority over unsecured creditors in a liquidation distribution. The terms and conditions of a floating charge agreement will specify the conditions under which crystallisation occurs – generally default on a loan repayment, and automatically on company liquidation.

Floating charges essentially ‘float’ above changing assets and only become fixed charges, a process known as ‘crystallisation’, in the following circumstances:

  • The company defaults on the repayment and the lender takes action to recover the debt
  • The company is about to be wound up
  • The company appoints the receiver
  • The company will cease to exist in the future

Recording the terms of a security charge

Terms and conditions of the charge should be set out within a debenture, a document which needs to be registered with Companies House within 21 days before it becomes valid. It is also possible that the charge will have to be registered in other ways, such as with Land Registry if land or property is involved. 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.

The same requirement to register a debenture applies to floating charges. In fact, banks sometimes take a fixed charge over specific hard assets, as well as a floating charge over general classes of asset, so the entire asset base of a company is included within a single debenture.

In the event of insolvency

Should your company enter liquidation, there is a designated order when it comes to your outstanding creditors receiving payment. As both fixed and floating charge holders are classed as secured lenders, they will take priority over unsecured creditors who must wait until all other costs and creditors have been paid.

Those holding a fixed charge will be first in line for payment, and will receive their money through the sale of the asset they are holding a charge over. For floating charge holders, they must wait until fixed charge holders, preferential creditors (typically employees), and the insolvency practitioner have been paid before they can take a share of the remaining funds.

Fixed charge holders are first in line for repayment and receive the money they are owed from the sale of the asset they hold a fixed charge over.

Floating charge holders must wait until fixed charge holders, preferential creditors such as employees and the insolvency practitioner have received the money they are owed before they are repaid. By that point, there may not be enough funds to repay the debt in full.

Under the Insolvency Act 1986, the hierarchy for repayment in an insolvency situation is:

  • The liquidator’s fees and expenses
  • Secured creditors with a fixed charge
  • Preferential creditors (typically employees with wage arrears)
  • Secured creditors with a floating charge
  • Unsecured creditor

Frequently asked questions

What is a fixed and floating charge over all assets

The floating charge, or a security interest over a fund of changing company assets, allows for more freedom for a business, than the lender. While a fixed charge protects the lender, the floating charge gives more scope for the company to sell, transfer or dispose of their assets, without seeking approval from the bank.

What are fixed and floating charges

A fixed charge is attached to an identifiable asset at creation. Assets can include land, property, machinery, copyright, trademark and much more. The business does not typically sell these fixed assets, and the fixed charge is applied to protect the repayment of the company debt.

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