Fixed and Floating Charges

Fixed Charges (Debentures)

A fixed charge is a type of security interest that a company can use to secure a loan from a lender.

A fixed charge attaches to specific and identifiable assets, such as land or machinery.

Usually, these can not be removed or sold without the knowledge of the lender and are documented in an asset list or inventory.

Floating Charges

A floating charge covers a group of assets that are constantly changing in value and quantity, This could be anything in the business such as stock, computers, desks or chairs.

A floating charge allows the company to use, sell, or replace those assets in the normal course of business without the knowledge of the lender,

For example, if a company has a fixed charge over its land and a floating charge over its inventory, it cannot sell or mortgage its land without the lender’s permission, but it can sell its goods and restock them as usual.

It allows the company to trade any of its assets and its only condition is that the property must be replaced and that the company must always have valuable and tangible assets within its possession.

Converting a Floating Charge into a Fixed Charge

A floating charge can become a fixed charge if certain events occur, such as the company’s default or liquidation, giving the lender priority over those assets. This is often referred to as Crystallisation.

For example, if the company fails to repay the loan or goes into liquidation, the lender can crystallise the floating charge and seize both the land and the remaining inventory to recover its debt.

Enforcement

When Enforcement Agents attend premises, they are often told by the debtor that the goods can not be removed because they belong to the lender not the creditor.

For goods subject to a floating charge, this is not necessarily the case.

The holder of a floating charge (the bank/ lender) has no right of possession of the assets until one of the events specified in the charge instrument (such as insolvency) causes it to crystallise.

Simply put, the lender cannot assert any proprietary of possessory right of any specific asset (under a floating charge) and as such, providing that there is no other third party claim over the goods, those goods can be taken into control (seized) by the enforcement agent.

Checking the Paperwork

The above information applies to the majority of floating charges, however banks are keen to avoid losing equity and as such attempt to include additional event clauses such as requirement to pay all taxes and rents due promptly.

Breaches in these can cause crystallisation to occur but usually the lender would have to take the drastic step of issuing the Company with a crystallisation notice which could have a far more serious impact on the business than an Enforcement agent attending.