Floating Charge Explained

Security over a company's assets comes in two great forms, fixed and floating, and the difference matters most at the worst possible moment: insolvency. A charge that has not been correctly identified and registered at Companies House may prove worthless precisely when it is needed, which is why solicitors treat these instruments with such vigilance.

A floating charge, sometimes called a floating lien, is a security interest over a shifting pool of assets: stock and inventory, trade debtors, movable plant and machinery, furniture, fixtures and fittings. The assets change in quantity and value from day to day, and therein lies the charge's commercial usefulness. A company can borrow against its current assets while continuing to use them, so inventory given as security can still be sold, restocked and replenished while the business trades on. The courts have taken a generous view of the device: in Saw (SW) 2010 Ltd v Wilson [2017] EWCA Civ 1001, the Court of Appeal confirmed that a floating charge is valid even where, at the time of its creation, there were no unencumbered assets for it to attach to.

A fixed charge, by contrast, fastens upon identified assets, typically buildings or equipment. A company that mortgages its premises cannot sell, transfer or dispose of them until the loan is repaid or the conditions of the mortgage deed are met. Distinguishing fixed from floating is not always simple, and the label on the document does not decide the question: the wording of the security documents must be examined to ascertain what has truly been taken, and the lender protected accordingly.

Crystallisation is the bridge between the two: the process by which a floating charge converts into a fixed one. It occurs where the company defaults on the loan or enters liquidation, and can also follow the company ceasing operations or the court appointing a receiver. Once crystallised, the security is frozen in the lender's favour, the company can no longer deal with the assets, and the lender holds the stronger form of security. It is precisely because crystallisation rearranges priorities that, on the sale of a business, the buyer's solicitors will require from the seller's solicitors a letter of non-crystallisation, confirming that a floating charge over the property has not converted into a fixed charge which an insolvency would allow the lender to enforce ahead of other creditors.

The practical discipline has four steps. First, check the mortgage offer for any clause stating whether the security must be registered as a fixed or a floating charge, and where the document is silent, ask the lender before filing anything at Companies House. Secondly, register the charge within twenty one days of its creation, for an unregistered charge is void against the company's creditors, administrators and liquidators. Thirdly, file form MR01 at Companies House together with a certified copy of the deed. Fourthly, see that the certificate of registration issued by Companies House reaches the Land Registry and the lender. Miss the deadline and the lender cannot enforce its security without applying to the court, a subject we address separately on this blog.

About the author: Dr Aamir Nawaz, LLB (Hons), LLM, PhD, Solicitor, Barrister (np) and Notary Public.