Fixed v floating charges – a brief recap

A floating charge sits above a fluctuating pool of assets. Its hallmark characteristic is that it gives the chargor the freedom to carry on its business in the ordinary course in relation to that pool of assets without the consent of the chargeholder, until a future step is taken by, or on behalf of, the chargeholder.

In contrast, a fixed charge attaches immediately to the asset in question and the consent of the chargeholder is required to release the asset from the charge. The key characteristic of a fixed charge is that the chargeholder has control over the secured asset.

It follows that the inherent weakness of a floating charge from a lender’s perspective is that the chargor can dispose of the floating charge assets. Consequently, lenders often prefer to take fixed charges over specific assets, in addition to a floating charge to sweep up all other assets not subject to a fixed charge.

The distinction is an important one, as a fixed charge confers significant advantages on a chargor’s insolvency. A fixed chargeholder will get paid out of the proceeds of sale of the fixed charge assets before all other creditors, whereas a floating chargeholder is only paid after (i) fixed chargeholders (ii) expenses of the insolvent estate and (iii) preferential creditors (e.g. employees).