Part 2 – Forms of security

October 2013  

56.2.9 Fixed charge

A “fixed charge” or “mortgage” is a direct charge over a specific asset or category of assets and ensures that the company is not free to deal or dispose of the charged asset(s) without the consent of the chargee or mortgagee (the creditor).

56.2.10 Fixed charge over book debts

It is possible to obtain a fixed charge over a company’s book debts [Note 1]. However the court have ruled that if the book debts can be used to assist  cash flow the fixed charge does not apply as the company is free to deal or dispose of the charged assets (see paragraph 56.2.9) [Note 2]. The book debts must be placed in a blocked account, or otherwise controlled by the chargee, for a fixed charge to be considered valid. Where the book debts are not under the control of the charge the fixed charge will be treated as a floating charge and the book debts may be used to pay any preferential creditors and the liquidation expenses, if any.

56.2.11 Fixed charge over book debts – official receiver

Following the court decisions on fixed charges over book debts (see paragraph 56.2.10) it is likely that a significant number of such charges should be treated as floating charges. The official receiver, when dealing with book debts subject to a fixed charge should determine whether the chargee (creditor) has control over the collection and disposition of the book debts. Where this is absent the official receiver should treat the charge as a floating charge and follow the guidance given in paragraph 9.98.

56.2.12 Floating charge

A floating charge gives flexibility to the chargor (company) and the chargee (creditor). The company is free to deal with its assets in the ordinary course of business and the chargee (creditor) is protected when a “crystallising event” (see paragraph 56.2.13) takes place. A floating charge has three elements;

• it is a charge on a class of the assets of a company, present and future,
• the class of assets may change from time to time, and
• the company may carry on business without restrictions until action is taken by the chargee (creditor).

Further information on the definition of floating charges can be found in paragraph 40.130.  A further advantage of a floating charge is that it allows the charge (creditor) to appoint a receiver and to sell the business as a going concern without the need for court involvement.

56.2.13 Crystallisation of a floating charge

A floating charge is said to have crystallised if; 

• the company is wound up,
• a receiver is appointed, or
• the company ceases trading [Note 3].

56.2.14 Contractual crystallisation of a floating charge

The chargee and chargor can agree, by a contractual amendment to the charge document, that a floating charge may be crystallised into a fixed charge by the appointment of a receiver or by a notice issued by the creditor converting the floating charge into a fixed charge in respect of specified assets [Note 4]. After issuing the notice  the chargee has to take control of the assets covered by the fixed charge for it to become effective (see paragraphs 56.2.09 and 56.2.10).

56.2.15 Debenture

There is no legal definition of a debenture. A debenture is best described as a written acknowledgement of a debt owed by the company, usually under seal. The debenture may cover past debts, current debts and/or future debts. The debenture will contain provisions as to payment of interest and the repayment of the principal. A company may create more than one debenture which, unless specified otherwise, rank in order of priority according to the dates on which they were created.

56.2.16 Assets covered by a debenture

A debenture may cover a fixed charge on identifiable assets, such as freehold property, owned now or in the future. It may cover a floating charge which applies to all of a company’s assets (without a precise definition) or a combination of the two, referred to as a fixed and floating charge.

56.2.17 Registration of charges with the registrar of companies

A company is required to provide details to the registrar of companies of any charge created [Note 5] within 21 days of its creation to enable the charge to be registered [Note 6]. If the company fails to register the charge it becomes void against a liquidator, an administrator or a creditor of the company [Note 7].

56.2.18 Particulars to be registered with the registrar of companies

The particulars of a charge are provided on Companies House form 395. The document shows; 

• the date of the charge,
• the type of charge, fixed, floating debenture, etc.,
• the amount secured, and
• details of the security.

In the case of a debenture or floating charge the document may confirm the creditor’s right to appoint an administrator.

56.2.19 Power to appoint a receiver or administrator

The debenture or charge may give an express power to the charge-holder to appoint a receiver without the need for a court order. However an administrative receiver cannot be appointed by the holder of a floating charge created on or after 15 September 2003. In this instance the floating charge or debenture may give an express power to the charge-holder to appoint an administrator. The debenture or charge document will set out the circumstances under which an appointment may be made. A debenture holder who contractually enforces their security does not owe a duty to the company or to any guarantors to do so in any particular way [Note 8]. 

56.2.20 Charges and the official receiver

The official receiver should ensure that any charges have been correctly created and registered by the company. Further details on dealing with charges and debentures are covered in Part 6.

[Back to Part 1 Types of receiver] [On to Part 3 Administrative receivership]