Types of security: fixed & floating charges

Question 1

what can a fixed charge be taken over and by whom?

Answer 1

attached to specific, identifiable existing or future tangible + intangible assets

if the lender wants security over multiple assets, they will need a separate charge for each asset. However, an asset can have more than one charge over it.

Can be created by:
o A company
o LLP
o Partnership
o Individual

Question 2

what are the chargor’s obligations in relation to assets subject to a fixed charge?

Answer 2

The chargor cannot dispose of the asset without consent + must keep it in good condition

Question 3

why would a lender prefer a fixed charge?

Answer 3

because fixed charge holders have priority over other creditors on liquidation

Question 4

what can a floating charge be taken over and by whom? explain the operation of a floating charge

Answer 4

charge over a group of assets which may change (could be the whole company)

Can be created by companies & LLPs.

The borrower has freedom to deal with the assets subject to the charge unless the charge crystallises. A floating charge will crystallise and become a fixed charge if the chargor:
o Goes into liquidation or receivership
o Ceases trading
o Any other event specified in the charge agreement

Question 5

what are the advantages (3) and disadvantages (2) of a floating charge?

Answer 5

Advantages:
o More flexible than a fixed charge
o Can inc. assets a fixed charge cannot be taken over (i.e. stock, cash)
o Gives the lender rights as a qualifying charge holder on insolvency

Disadvantages:
o Fixed charges take priority over floating charges
o A floating charge is capable of being set aside

Question 6

if there is dispute as to whether a charge if fixed or floating, what will the court look at?

explain this in relation to book debts

Answer 6

If the lender has control over the asset, it will be fixed.

If the borrower has control over the asset, it will be floating.

Book debts (unpaid invoices) fluctuate so are better suited to a floating charge but can be a fixed charge if the lender has control of the book debt + proceeds i.e. borrower could draw down into account invoices were paid = floating charge