Floating Charge Explained

Dealing with floating charge and negative pledges can be challenging. Law firms need to be diligent in recognising and dealing with each because if a company becomes bankrupt it would make it extremely difficult to recover any security, which has not been registered correctly with the Companies House.

A floating charge, also known as a floating lien, is a security interest over a group of non-constant assets. The means that the assets may change in quantity and value. Typically, a loan might be secured by fixed assets such as property or equipment, but companies may seek to secure a loan with current assets or short-term assets that can change in value.

Current assets are those business possessions that the firm can quickly convert to cash and include the accounts receivable, inventory or goods in stock, and marketable securities, among other items. These assets are usually consumed by a company in one year. A floating charge is useful to companies because it allows them to finance their operations, the floating charge is secured by the current assets while allowing the company to use those assets to run its business operations.

For example, if inventory is used as security for a loan, the company can still sell, restock, and change the value and quantity of its assets.

Courts can be favourable with floating charges being enforced. For example, in Saw (SW) 2010 Ltd and another v Wilson and others [2017] EWCA Civ 1001, the Court of Appeal clarified that a floating charge will be valid even if, at the time it is created, there was no unburdened assets for it to be attached to.

It is also important to protect the lender when the lender is taking security. To do this a solicitor needs to look at the wording of the security documents to ascertain the type of security being taken.

It is not easy to always identify a floating charge from a fixed charge, as it refers to interest applied to company assets that are not constant or changing rather than to a ‘floating charge’ specifically’. Examples of a floating charge feature:

• Stock and inventory

• Trade debtors

• Movable plant and machinery

• Furniture, fixtures and fittings with the business

Where law firms are dealing with a sale of a business, the buyer’s solicitors usually require the seller’s solicitors to provide a letter of non-crystallisation to confirm that a floating charge against a property has not converted into a fixed charge. This is important as if the floating charge has been converted and a company becomes insolvent, the lender can enforce their security and take priority over other creditors which the buyer will not want.

Crystallisation is the process by which a floating charge converts into a fixed charge. If a company fails to repay the loan or enters liquidation, the floating charge becomes crystallised or frozen into a fixed charge. With a fixed charge, the assets become fixed by the lender so the company cannot use the assets or sell them. Crystallisation can also happen if a company ends operations or if the borrower and lender go to court and the court appoints a receiver. Once crystallised, the now fixed-rate security cannot be sold, and the lender may take possession of it. This is beneficial for lenders as a fixed charge is a stronger security.

Typically, fixed charges are secured by tangible assets such as buildings or equipment. For example, if a company takes out a mortgage against a building and the business cannot sell, transfer, or dispose of the building until it repays the loan or meets other conditions outlined in the mortgage deed.

It is crucial to check the documents from the lender to assess what type of charge you are dealing with and how to protect this. The solicitor must deal with floating charges with vigilance.

1. You must check the mortgage offer to see whether there are any clauses within the document that outlines whether the security must be registered as a floating charge or a fixed charge. If the document does not state this information, then you must contact the lender immediately before filing with Companies House.

2. A mortgage must be registered within the time-period from its creation, or it will be void against other creditors, administrators, and liquidators of the company.

3. You must complete the MR01 Form and send this to Companies House with a certified copy of the mortgage deed.

4. The Companies House will then issue a certificate for registration of the Charge which is then sent to the Land Registry and the lender. The consequences of failing to meet the deadline are prodigious as the lender would not be able to enforce its security without applying to the court.