Fixed And Floating Charges Under Uk Corporate Laws
1. Definition and Key Concepts
Fixed Charge
A fixed charge is a security interest over specific, identifiable assets of a company.
The company cannot deal freely with the asset without the consent of the charge holder.
Commonly applied to: land, buildings, machinery, or significant plant equipment.
Example: A bank lending against a company's factory will typically take a fixed charge on that factory.
Floating Charge
A floating charge is a security interest over a class of assets that changes in the ordinary course of business, such as stock, inventory, or accounts receivable.
The company can deal with the assets freely until the charge crystallizes (usually upon default, insolvency, or specific event).
Floating charges are less secure than fixed charges but more flexible.
Legal Authority
Floating and fixed charges are primarily governed by the Companies Act 2006 and common law principles.
Registration requirements: Under Companies Act 2006, Part 25, charges must be registered with Companies House within 21 days, or they may be void against a liquidator or other creditors.
2. Distinction Between Fixed and Floating Charges
| Feature | Fixed Charge | Floating Charge |
|---|---|---|
| Asset type | Specific, identifiable | Class of assets that fluctuate |
| Control | Company cannot dispose without consent | Company can deal freely until crystallization |
| Crystallization | Already “fixed” | Becomes fixed upon default, insolvency, or other trigger |
| Priority | Generally higher than floating charge | Lower than fixed charge and preferential creditors (like wages) |
Key Case Law Distinctions:
Re Yorkshire Woolcombers Association Ltd (1903)
Established classic floating charge definition: “a charge on a class of assets present and future which the company can use in the ordinary course of business.”
Held that charge over “stock in trade” was a floating charge.
Re New Bullas Trading Ltd (1994)
Attempted to split a charge into fixed over book debts and floating over cash proceeds.
Court held that the lender could not enforce a fixed charge over cash from receivables if the company could freely collect and use them.
Emphasized substance over form in distinguishing fixed vs floating charges.
Agnew v. Commissioners of Inland Revenue (Re Brumark) (2001)
Reaffirmed substance over form principle.
Even if a document labels a charge “fixed,” if the company can deal with the asset freely (like collecting book debts), it is a floating charge.
Re Spectrum Plus Ltd (2005)
House of Lords clarified that the true test for a fixed charge on book debts is whether the company can use the proceeds in the ordinary course of business.
Held that if the company can use the proceeds freely, the charge is floating regardless of wording.
Siebe Gorman & Co Ltd v Barclays Bank Ltd (1979)
Early attempt to create a fixed charge over receivables, but courts later critiqued the ability of companies to freely use proceeds, reinforcing the floating charge principle.
Re Keenan Bros Ltd (1973)
Demonstrated crystallization mechanics: floating charge over stock became fixed when the company went into liquidation.
3. Priority and Insolvency Implications
Fixed charges take priority over floating charges and unsecured creditors.
Floating charges rank below:
Secured creditors with fixed charges
Preferential creditors (employee wages, certain taxes)
Companies Act 2006, Section 874: floating charges created after 15 September 2003 must leave a “prescribed part” for unsecured creditors in insolvency.
Relevant Cases on Priority:
Buchler v Talbot (2004) – reaffirmed priority rules and “prescribed part” allocation.
Re Barleycorn Enterprises Ltd (1970) – floating charges crystallized and affected creditor hierarchy.
4. Practical Considerations for Corporate Law
Drafting: Use clear language distinguishing fixed vs floating; courts focus on control over asset, not terminology.
Registration: Failure to register charges may render them void against liquidators.
Crystallization: Monitor triggers such as insolvency or breach of covenants to convert floating charges into fixed charges.
Enforcement: Fixed charges give lenders direct enforcement rights; floating charges often require court action after crystallization.
5. Key Takeaways
Floating charge flexibility vs. fixed charge security – choice depends on type of asset and lender preference.
Control is critical – even if a charge is labeled “fixed,” courts look at whether the company can dispose of the asset.
Crystallization event – floating charges only become fixed upon specific trigger events.
Priority in insolvency – fixed charges outrank floating charges; floating charges provide limited security for unsecured creditors.
References to Core UK Case Law:
Re Yorkshire Woolcombers Association Ltd (1903) 2 Ch 284
Re New Bullas Trading Ltd [1994] 1 BCLC 485
Agnew v Commissioners of Inland Revenue (Re Brumark) [2001] UKPC 28
Re Spectrum Plus Ltd [2005] UKHL 41
Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142
Re Keenan Bros Ltd [1973] Ch 618
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