What is a floating charge and why are they important ? – Gannons Solicitors explain the basics.
A floating charge is an interest over an asset that is not due or attached to the asset (yet). This is different from a fixed charge, which the floating charge becomes once it attaches to the asset. This conversion from floating to fixed is known as crystallisation.
Floating charges are only available to companies and limited liability partnerships (LLPs).
Floating Charges & Crystallisation
Floating charges crystallise following trigger events such as defaults under loan agreements. What constitutes a default will be defined under the debenture but will usually include events such as non-payment or the start of insolvency proceedings. Upon the happening of an event of default the chargeholder may be entitled to appoint either an administrative receiver or an administrator.
When a charge crystallises it fixes itself to the assets owned by the company at the time of crystallisation.
Floating Charges On Assets
Companies and LLPs usually offer floating charges over all the company’s assets by way of a debenture as collateral for loans and other borrowing without actually offering up a particular asset. The benefit of a floating charge is that it permits the company to deal with the asset during the ordinary course of business without interference; which means the company can buy and sell assets without obtaining consent from the owner of the charge.
A floating charge can hover over any company asset including: stock, work in progress, unfactored debtors, fixtures and fittings, cash and vehicles. Floating charges can be placed over all assets or a class of assets.
Floating charges (and fixed charges) over company assets such as property must be registered at Companies House and may also have to be registered at the Land Registry.
Deeds of Priority
Where a company has a number of loans a Deed of Priority is used to draw up a priority list for who gets paid out first and in which order in the event that a default occurs.
Floating Charges Over Book Debts
A company can create a floating charge over its book debts although how this operates in practice can be quite complex. The rules on charges and books debts were previously set out in the case of Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyd’s Rep 142, in which it was held that where book debts are paid into separate accounts they became fixed charges.
The case of Spectrum Plus Ltd [2005] UKHL 41 is a landmark case that challenged the established principles. Spectrum Plus Ltd was a company that made painting products. Under an agreement with National Westminster Bank PLC, Spectrum Plus Ltd offered a charge over book debts in order to secure a £250,000 overdraft.
Under the terms of the charge Spectrum was not permitted to charge or assign debts and proceeds were paid into a separate NatWest account that was unrestricted. When Spectrum went into liquidation it was argued by the bank that it had a fixed charge over the assets, whilst Her Majesty’s Revenue and Customs (HMRC) as the largest creditor, argued that the bank only had a floating charge which meant that the unpaid tax took priority.
The House of Lords ruled that as Spectrum was permitted to use the proceeds during the course of its ordinary business it must have been a floating charge. The consequence of this ruling is that the standard form bank debentures, used since the 1970s, which only created a floating charge over book debts had to be revised.
Further Information
Further information on floating charges is available from www.companylawclub.co.uk and www.companyrescue.co.uk. If you would like further information about drafting notes on debentures then this is available from www.ukpracticallaw.com.
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