What are fixed and floating charges?
A fixed charge is a charge or mortgage secured on particular property, e.g. land and buildings, a ship, piece of machinery, shares, intellectual property such as copyrights, patents, trade marks, etc.
A floating charge is a particular type of security, available only to companies.
It is an equitable charge on (usually) all the company's assets both present
and future, on terms that the company may deal with the assets in the ordinary
course of business. Sometimes the charge is over just a class of the company's
assets, such as its stock.
The floating charge is useful for many companies, allowing them to borrow even
though they have no specific assets, such as freehold premises, which they can
use as security. A floating charge allows all the company's assets, such as
stock in trade, plant and machinery, vehicles, etc., to be charged.
The special nature of the floating charge is that the company can continue to use the assets and can buy and sell them in the ordinary course of business. It can thus trade with its stock and sell and replace plant and machinery, etc. without needing fresh consent from the mortgagee. The charge is said to float over the assets charged, rather than fixing on any of them specifically. This continues until the charge 'crystallizes', which occurs when the debenture specifies. This will include any failure to meet the terms of the loan (non-payment, etc.), or if the company goes into liquidation, ceases to trade, etc.
When the charge chrysalizes it fixes on the assets then owned by the company,
catching any assets acquired up to that date, but missing any which have already
been disposed of. If the charge was created before 15th. September 2003 the
debenture-holder is then entitled to appoint a receiver an administrative receiver
with powers under the Insolvency Act 1986, sec42 and Sched. 1), whose job is
to collect the assets charged to pay off the loan. This is what is usually meant
when a company goes into receivership. If the charge was created after that
date, the debenture-holder may appoint an administrator.
Most borrowing comes from the High Street banks, whose standard practice is to take an all-monies debenture, secured by fixed charges on any assets the company may have which will carry a fixed charge, and a floating charge on all other assets. This is the best security which can be created over the assets of any particular company. The bank may require other security from the directors and may want their personal guarantees.
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