2 min read
How a floating charge works
Unlike a fixed charge, which attaches to a specific identified asset, a floating charge covers a changing pool of assets — typically trading stock, book debts, or cash at bank. While the charge is 'floating', the company can deal with those assets in the ordinary course of business: selling stock, collecting debts, and drawing on accounts without needing the lender's consent for each transaction.
This makes floating charges particularly useful for lenders providing working capital or revolving credit facilities, where the underlying assets are constantly turning over.
Crystallisation
A floating charge 'crystallises' — becomes fixed — on a triggering event specified in the debenture. Common triggers include: the company ceasing to trade, a default on the loan, the lender appointing a receiver, or the company entering administration or liquidation. Once crystallised, the charge attaches to specific assets and the company loses the right to deal with them freely.
- Some debentures allow automatic crystallisation on defined events without the lender taking any action.
- After crystallisation, assets subject to the charge rank as if under a fixed charge for priority purposes.
Priority on insolvency
Floating charge holders rank below fixed charge holders and preferential creditors (which include certain employee claims and HMRC debts for certain taxes) on insolvency. A prescribed portion of net floating charge realisations must also be set aside for unsecured creditors under the 'ring-fencing' provisions in the Insolvency Act.
A holder of a 'qualifying floating charge' — one that covers all, or substantially all, of a company's assets — has the right to appoint an administrator, which is a significant control right. Registration at Companies House within 21 days of creation is mandatory; an unregistered charge is void against a liquidator or administrator. Confirm specific priority and registration requirements with your solicitor.
Frequently asked questions
Can a company grant multiple floating charges?
Yes, a company can grant floating charges to multiple lenders, but priority between them is typically governed by date of registration at Companies House and any intercreditor or subordination agreements between lenders.
What is a debenture in relation to a floating charge?
A debenture is the document that creates and records the charge. It typically grants both fixed charges over specific assets (land, intellectual property, plant) and a floating charge over the remaining assets, together providing comprehensive security to the lender.
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