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What Are Fixed and Floating Charges?

17th February, 2023
Keith Steven

Written ByKeith Steven

Managing Director

07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He is the managing director of KSA Group Ltd - a specialist firm of turnaround and licensed insolvency practitioners. Keith was nominated for Turnaround Practitioner of the Year 2014 at the National Insolvency and Rescue Awards in 2014.

Keith Steven
  • What is a Fixed Charge?
  • What is Floating Charge?
  • What is a Debenture?
  • What happens if a company becomes insolvent?

When a company borrows money, the lender / bank usually takes some security for that debt. This is designed to protect the lenders’ position and also to try and get the lenders’ money back if the borrower fails. These types of security are termed fixed and floating charges.

What is a Fixed Charge?

The bank or lender may have provided money to acquire specific asset(s) like property, printing press, car, etc. The company cannot sell this without the lenders permission. The debt must be repaid as per the loan agreement or facility letter.

Examples of a Fixed Charge

  1. A Mortgage you borrow money to buy a house and you cannot own the house outright until the debt is repaid, nor can you sell it without the lenders permission. The mortgage is a form of fixed charge, thus you become a fixed charge holder.
  2. Assignment of a company’s debtor book through factoring or invoice discounting. This means the bank buys the outstanding invoices and lends money against them. The debtor book is then subject to a FIXED charge. In effect, the book debts belong to the bank or factoring company, NOT the company. The factoring or discounting charge is the most common fixed charge, other than property.
  3. Goodwill payment in administration. For example, if the business fixed assets, sold by an administrator, are worth £20,000, but the buyer pays £100,000 for the business, the databases, the customers and so forth, then £80,000 is a goodwill payment. This is usually paid to the bank or lender.

What is Floating Charge?

A floating charge (sometimes called a floating lien) is held over assets that can change over time in the normal course of business.  Although the assets may be physical, the number of them, or the value, condition, or other properties can change.  So fixtures and fittings can be subject to a floating charge as they are difficult to quantify. A debtor book is constantly changing. It would not be practical to stick a fixed charge over every item of stock or desks and chairs, would it? So, the floating charge allows the lender to recover some money if the assets are sold.

So, a floating charge can be held over the following:

  1. Stock, finished or raw material
  2. Work in progress
  3. Unfactored debtors
  4. Fixtures and fittings
  5. Cash
  6. Vehicles or assets not subject to fixed charges

But the lender does rank behind some other creditors like wages, and the “prescribed part creditors”. This is where it gets complicated!  As of December 2020 HMRC now rank ahead of the floating charge holders. A factored debt is subject to a fixed charge as the debt is assigned to the factor and as such does not change.

What is a Debenture?

This is the document that sets out the FIXED and FLOATING charges and the attached terms and conditions. When signed by the company, the lender sends a form to Companies House to register that charge. This prevents other people getting security against the assets in question, unless a Deed of Priority is created (see below).

What happens if a company becomes insolvent?

This is where things get a bit more complex so we explain here by a simple example:

Suppose a software company has a debtor book of £400,000 against which the Royal Bank has provided factoring facility of £300,000 and an overdraft of £20,000. The company has £50,000 of fixed assets and 15 people. It owes £100,000 to trade creditors and £50,000 to HMRC. It loses a big client and enters liquidation. The debtor book would be collected (usually by lender and directors who have provided personal guarantees). BUT debtors don’t always get recovered in full, of course!

After insolvency costs, a total of £250,000 is collected in from debtors. The business is sold to a buyer for £30,000 goodwill and £25,000 for the assets like work in progress, PCs, equipment etc but not debtors. So a total of £305,000 is available.

The bank, as a FIXED and FLOATING charge holder would be paid out as follows; debtor proceeds of £250,000 go to pay the fixed charge off. The Goodwill element is also a fixed charge “collection” and is paid to the bank as well. Thus, the bank has a shortfall of £15,000 on the fixed charge.

There are arrears of staff salaries and holiday pay of £20,000. That is paid next, to the ex-staff from the £25,000 received for the assets and the tax man is owed £50,000 as preferential. That leaves nothing available for the bank under the floating charge collection. It is still owed £15,000 under the fixed charge and also the overdraft of £20,000 remains.

In this very simple example the bank would lose c.£35,000. The preferential (staff and HMRC) creditors are paid in full and unsecured creditors get nothing.

Insolvency ranking – prefer to see a picture flowchart (click here)?

What is a Deed of Priority?

If there are a number of lenders and loans, a pecking (ranking) order is drawn up and the Deed lays out the order of priority if a default occurs. In essence, it specifies who the preferential creditors are, so the most highly ranked are paid first.

What is a Deed of Postponement?

Often a director will introduce money to a company and the bank will require his loans to be frozen until their debt is serviced and or paid.


So, I hope this little guide helps your understanding, suffice to say in practice is much more difficult.

When a bank sees a shortfall looming, it will want a practical solution that ensures the best recovery of its debt obviously, but with asset values falling many banks will see losses ahead.

If you want to ask questions about fixed and floating charges please email us or call Iain Campbell on 08009700539.

If you are interested in creating a fixed charge over assets or want to make a loan to a company then you may be interested in some standard templates of letters and agreements.  We are experts in business rescue, corporate rescue and company rescue and can help sole traders, partners and directors.

Worried Director What Will Happen To Me After Liquidation?

in Company Liquidation What is …?

"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director.  If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020.  Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly.  I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim.  This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork".  It isn't worth the risk.  If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP)  or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important.Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back LoansWe are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at 

Worried Director What Will Happen To Me After Liquidation?

Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

Notice of Intention To Appoint Administrators
Man with umbrella

What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

What Is A Winding Up Petition By HMRC or Other Creditor

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