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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 has expert knowledge on the company voluntary arrangement (CVA) mechanism

Keith Steven
Assets
  • 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.

Summary

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.

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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.

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What Is A Winding Up Petition By HMRC or Other Creditor
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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.

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Notice of Intention To Appoint Administrators
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What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

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What Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

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What is Receivership?

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