What Are Fixed And Floating Charges?

Person counting coins on a table

When a company borrows money from a lender or bank, the lender may attach a charge that will act as a form of security for the debt. These are known as fixed and floating charges. Whether a fixed or floating charge is applied will depend on the type of debt that is borrowed, however both are aimed at protecting the lenders’ position should the company become insolvent. Attaching fixed and floating charges to any loan given out, ensures that the lender will be able to get their money back should the borrower’s finances fail. Before we look at what happens when a company who has borrowed money enters insolvency, let’s take a moment to look at the differences between fixed and floating charges. 

What Is A Fixed Charge?

A fixed charge is applied when a company acquires a specific asset, such as land or property. A fixed charge gives the lender full control of the company asset. This means that they cannot sell the asset without the lender’s permission. Examples of a fixed charge may include:

  • Mortgage payments 
  • Rent deposits
  • Factored book debts

What Is A Floating Charge?

As the name probably suggests, a floating charge gives the company more freedom to sell, transfer or dispose of their assets without seeking approval from the lender. Rather than being attached to a fixed asset, a floating charge places a security charge over a range of changing company assets. Floating charges may include:

  • Stock and inventory
  • Trade debtors
  • Movable plant and machinery
  • Furniture, fixtures and fittings with the business

What Is A Debenture?

A debenture is a document that sets out the fixed and floating charges with the terms and conditions. This will include the interest rate applied, the repayment amount and frequency, the fixed repayment date and the charges that are secured on the loan. It is signed by the company and sent to the Companies House to be registered. This provides security for the lender or bank in the event that the company falls into insolvency. If the debenture is not registered with the Companies House, the administrator or liquidator may ignore the charge and treat the holder as an unsecured creditor. 

What Happens To Fixed And Floating Charges When A Company Becomes Insolvent? 

When a company enters insolvency, any floating charges become ‘crystallised’. This means that they effectively become fixed charges and in some circumstances the assets can no longer be dealt with without the lender’s permission. It’s important to note that where a fixed and floating charge exists over the same asset, the fixed charge always takes priority when it comes to repayment . 

There is an order for repayment which is as follows:

  • holders of fixed charges and creditors with proprietary interest in assets 
  • expenses of the insolvent estate 
  • the insolvency practitioner’s fees 
  • preferential creditors such as employees 
  • secondary preferential creditors such as outstanding VAT or PAYE
  • floating charge creditors (less the ‘prescribed part’ set aside for unsecured creditors)
  • unsecured creditors 
  • Shareholders

For more information on the difference between fixed and floating charges and their role in insolvency, please don’t hesitate to get in touch with our experienced team of licensed insolvency professionals. 


Contact Us

I'm looking for more information on ...


Choose from the options below