Call us on: 0333 939 80 40

Email us: Ask@BusinessRescueExpert.co.uk

CONTACT US

fixed or floating

Security is important. 

In the olden days we relied on window bolts and latches, door locks, deadbolts and door chains or if you want to go even further back - no castle would look complete without a moat and drawbridge to cross it!

New school solutions include video doorbells or CCTV systems to help secure your home and anti-virus software and firewalls to make sure that your devices are protected too.

Even when it comes to money, there’s watermarks and other anti-forgery measures to make sure that you can trust and rely on the notes in your purse or pocket. 

But the security protection we’re talking about today comes from borrowing and lending money. Specifically, the security lenders rely on when deciding whether or not to advance money to borrowers and that they can access if, for whatever reason, the borrower is unable to repay the agreed amount at the agreed time. 

So what security can lenders rely on? 

Mainly it’s a charge - in other words a legal claim over some of the borrower’s property or other assets that can be redeemed in the event of non payments or the company closing down and being liquidated. 

Fixed or Floating?

Charges can either be fixed or floating depending on what they’re being secured against and the lender will be treated differently depending on the type of charge they hold.

Fixed Charges

A fixed charge is the strongest security any lender can attach to an asset. 

It can be levied against physical property like a mortgage but can also be set against other items of value including static machinery and land or intellectual assets such as trademarks, copyrights, digital code and more. 

An important point to bear in mind is that these assets give the lender temporary ownership protection until the debt is repaid. 

If, for whatever reason, the borrower wants to sell any assets with a fixed charge attached to them, they would need to secure the permission of the charge holder to do so.

Another reason why fixed charges are so important is that if the company does undergo an insolvency event then the holder of the charge is first in line to be repaid above other charge holders.  

It adds guaranteed priority to the security. 

Floating charges

A floating charge is not as secure as a fixed charge but it still provides an element of repayment protection for lenders that other creditors don’t have.   

They can usually be attached to assets such as stock, inventory, fixtures, fittings, furniture and moveable machinery or equipment owned by the borrowing business. 

One difference from a fixed charge is that the borrower can sell items with a floating charge attached without express permission from the lender but they are still liable to repay any amounts borrowed.

If they miss any repayments or are unable to service the debt for any other reasons then the lender can issue repayment proceedings against them including statutory demands - which is the first step towards a winding-up petition

Ultimately, if a business cannot pay its debts then it will become insolvent which would automatically count as a default against any floating or fixed charges.

If a company does undergo an insolvency event such as entering administration, it will be one of the jobs of the administrator overseeing the company’s affairs to identify and establish contact with all fixed and floating charge holders to inform them. 

Once insolvency has been declared, there is a definitive order in which creditors will be repaid from any funds that the administrator can realise. These are:-

You can see why it’s more preferable for lenders to hold charges then taking the chance of being an unsecured creditor. 

If your company is struggling to juggle repayments to fixed or floating charge holders every month then getting in touch with us might be a sensible first step to take

We offer a free initial consultation to discuss what issues you’re facing and we can objectively let you know what your options are. 

Helping a business get through tough times and survive is nearly always in the creditors’ interests. 

We’ll be happy to see if we can help find a way back for you.

Company receivership is increasingly in decline. From the most recent high of 1,468 receivership appointments at the peak of the recession in 2009, according to the ONS statistics there was only a single administrative receiver appointed in the whole of 2018. Whilst a company having “gone into receivership” is still a common colloquial term, more often than not the company will have actually gone into voluntary liquidation or administration. There to remain several different forms of receivership and this article will cover off the different types to offer clarity on this term.

Administrative receivership

Administrative receivership, colloquially known as company receivership, is considered a formal insolvency process, unlike the other forms of receivership. The main reason for the decline in appointments of such a receiver is the Enterprise Act 2002. An administrative receiver can only be appointed by the holder of a floating charge over the company assets. Under the Enterprise Act 2002, this floating charge must have been created before 15 September 2003. As a result under floating charges created in the last 15 years these appointments are no longer possible, hence the massive decline.

One of the reasons for the changes is an administrative receiver is only appointed over the assets of a company and acts purely for the floating charge holder. An administrative receiver must be a licenced insolvency practitioner. After the receiver has completed their work, this still leaves the shell of the company, which will likely need to be liquidated before it can be dissolved. The above changes in legislation also improved the accessibility to the administration proceed, and this is now the more likely action the holder of a floating charge will take, if you business defaults on such a charge.

Fixed charge receiver

A fixed charge receiver is appointed by the holder of a fixed charge, properly registered at companies house. Unlike a an administrative receiver, a fixed charge receiver does not need to be a licenced insolvency practitioner, and is more likely to be a chartered surveyor. Where a floating charge covers substantially all the assets of a company, a fixed charge is specific in what it covers, therefore this type of receiver will only be appointed to realise one of more particular assets within the company.

An appointment as a fixed charge receiver can cover:

In the event you have defaulted on a fixed charge and a receiver has been appointed, if you are an SME, this can effectively cripple your business, forcing you to sell the remaining assets to pay off creditors. In order to achieve the maximum value for the assets, you may be able to work with the receiver to arrange a sale of the business as a whole entity. This may at least leave you with sufficient funds to pay your remaining creditors. If however the value of the assets is significantly less that the total value of your creditors, making your company insolvent, it may be necessary to place the company into formal insolvency such as voluntary liquidation or administration, in order to protect your position.

LPA Receiver

A Law of Property Act receiver, commonly referred to as an LPA receiver, is a type of fixed charge receiver, in that they do not need to be an insolvency practitioner, but will more commonly be a chartered surveyor, generally 2 surveyors who are jointly appointed. There are again less instances of when a LPA receiver can be appointed, being that they can only be appointed over land or buildings.

Once an LPA receiver is appointed, they have specific powers which are set out in the Law of Property Act 1925:

As the legislation is closing on being 100 years old, and yet is still a commonly used recourse, additional powers can be delegated under the charge or mortgage the appointment is made under. These powers generally include:

One of the more unusual rights which is also worth being aware of is the power to cut down any appropriate trees on the property so they can be sold for timber. A LPA receiver being appointed over an orchard therefore could yield serious consequences.

The appointment of a receiver

Regardless of whether the charge holder is commencing the process for company receivership, or simply appointing an LPA receiver, the main appeal of the process to them is how quickly the appointment is made. The main warning the action is imminent will be receipt of a default letter, demanding the full balance due under the charge. Once this period has expired, which may be as little as 48 hours, to make the appointment there is a simple passing of correspondence between the charge holder and the receiver confirming acceptance of the appointment.

Due to the speed of this process, the first you will generally be aware a receiver of any kind has been appointed is when they attend the premises to secure the assets in question. Whilst it is possible to liaise with the charge holder, when your business is in financial difficulties, to request they appoint a receiver, may not be the best solution as it will only deal with secured liabilities. You should take your own advice to find a solution that suits your business as a whole, dealing with all of its creditors. Our business rescue experts can be contacted to discuss the best solutions for you, creating a solution to suit your business as a whole, not just a single creditor.

[liquidation_calculator]

As mentioned above, this article will outline what is a debenture and the interests for both companies and investors.

What is a debenture?

A debenture refers to a document that explicitly details the terms and conditions of a loan to a company. The primary aim of a company debenture is to provide security and reassurance to the lender and usually contains a fixed and floating charge. If the business were to enter insolvency, they would recover their money ahead of unsecured creditors.
The company debenture outlines the terms and agreements between the lender and subsequent business, and is filed with the Registrar of Companies at Companies House. The debenture loan should be registered as soon as it is taken out or within 21 days of doing so.
The debentures document will specify the terms, including:

Money - debentures

Charges on debentures

As mentioned above, the debentures document will also detail if there are any charges attached to the loan. A lender may choose to further protect their money by securing a fixed or floating charge to the debenture. Attaching a charge to the debenture loan also enables the lenders to move higher up the pecking order in terms of repayment, placing them above unsecured creditors.
It’s commonplace for many directors to invest their own money into the business - especially in the current economic climate - and attaching a fixed or floating charge to the debenture provides them with a degree of protection. However directors should ensure they avoid falling fowl of the debenture being a preference or an invalid floating charge.
Fixed charges attached to a debenture involve tangible assets, such as the property, land or business premises. Should the company ever look to sell these assets, they must receive explicit consent from the debenture holder.
Floating charge assets are more flexible when compared to fixed. For instance, these assets can refer to stock. Unlike the above, the business can sell these assets without the consent of the debenture holder.
More information on fixed and floating charges can be found here.

Debentures: advantages and disadvantages

There are many advantages and disadvantages of debentures, both from the point of view of the company and investors.

Advantages for the company

Debentures provide long-term funds for the company, with the interest, generally, lower than that of the rate of unsecured lending. The funds can also boost growth and prove cost-effective when compared to other lending options.
A company debenture does not result in less control, as the debenture holders do not have voting rights over the business they are investing. Profit sharing also remains the same with the addition of a debenture loan.

Advantages for the lender

The primary advantage to debentures is the protection of lenders - particularly in the case of insolvency. Without a debenture, the loan is unsecured, meaning the lender would be placed at the bottom of the hierarchy of creditor payment. If you are positioned as an unsecured creditor, it’s unlikely you will recoup all money. However, a debenture places lenders above that of unsecured creditors.
The fixed rate interest on the debenture has to be paid before any dividends, further benefiting the lenders.

Disadvantages for the company

The interest payments for the lender - outlined in the debenture document - are obligatory. Should the company face financial difficulties, it could further contribute to their losses. In many cases, this can stunt the expansion and objectives of the business.
If the debenture has a fixed charge attached, the control of the asset is lost as the company must receive permission to sell from the lender. Therefore, there is a slight loss in management freedom / financial flexibility.

Disadvantages for the lender

Many lenders do not find debentures attractive as holders do not carry any voting rights with regards to the company. Also, interest on debentures is taxable, providing further reductions.
Ultimately, there are many things to consider with debentures, both for the company and investors. If you are currently experiencing financial difficulties, and wondering which is the best way forward for your business, our business rescue experts can provide debt management advice, and offer the best solution for your current financial situation.

Difference between fixed and floating charge - Bank of London

What is a fixed charge?

A fixed charge is attached to an identifiable asset at creation. Assets can include land, property, machinery, copyright, trademark and much more. The business does not typically sell these fixed assets, and the fixed charge is applied to protect the repayment of the company debt. The simplest way to put it into perspective is to think of a mortgage; you cannot sell your house without your lender’s permission, as you have not yet paid the debt off and own the house. With a fixed charge, the lender has full control of the company asset. Therefore, should any corporation want to sell that particular asset, they must have the lender’s approval to do so or pay off the debt.

Fixed charge examples

As previously mentioned, fixed charges are over substantial and physical assets. Examples include:

It’s important to note that a fixed charge repayment ranks before that of a floating charge repayment in company insolvency. You can find out more about the legislation of business insolvency with our What is Insolvency Law article.

What is a floating charge?

The term floating charge is apt, as a floating charge ‘floats’ by its very nature. While a fixed charge is attached to an asset that can be easily identified, a floating charge is a charge that floats above ever-changing assets.
The floating charge, or a security interest over a fund of changing company assets, allows for more freedom for a business, than the lender. While a fixed charge protects the lender, the floating charge gives more scope for the company to sell, transfer or dispose of their assets, without seeking approval from the bank. From the lender’s point of view, it leaves them exposed - particularly as floating charge repayments typically recoup less than the fixed charge. However, it’s impossible to attach a fixed charge on all company assets, hence the use of floating charge assets.

Floating charge examples

A floating charge differs from a fixed charge, as it refers to interest applied to company assets that are not constant, or changing. Examples of a floating charge feature:

Lenders may attempt to classify certain items on the above list as being subject to a fixed charge, however they will in reality only hold a floating charge over the specific company assets. Trade debtors are commonly miscategorised in this regard which can only be subjected to a fixed charge if they are factored and therefore in the control of the charge holder.

What is a debenture in relation to fixed and floating charge?

The definition of a debenture is a document that sets the terms of a loan and, thus, the types of charges - whether they are fixed or floating charges. This document sets out the amount borrowed, interest, when it needs to be repaid, charges securing the loan and insurance, etc. Debentures must be registered at companies house in order to create a valid floating charge and the lender will send that to be recorded once the company has agreed to the respective terms and conditions. A debenture provides security for the lender or bank, should the company fall into insolvency.

Default of a floating charge

If a borrower defaults on repayments to the lender, they will have discretion to issue a demand for repayment against the floating charge. This allows the bank to enforce the charge. This was previously commonly dealt with by appointing an administrative receiver, however it is much more usual for an administrator to be appointed. If the company gives notices of a liquidation or otherwise this will also generally be a default on the floating charge.

Examples of defaults on a floating charge

The fixed and floating charge differences are significant as much as the ways they can be enforced are. If you need to speak to an expert about the charges, or fear your company could be heading for the early stages of insolvency, get in touch with one of our experts to discuss your options.

Business Rescue Expert is part of Robson Scott Associates Limited, a limited company registered in England and Wales No. 05331812, a leading independent insolvency practice, specialising in business rescue advice. The company holds professional indemnity insurance and complies with the EU Services Directive. Christopher Horner (IP no 16150) is licenced by the Insolvency Practitioners Association

FOLLOW US

©2021 Business Rescue. All Rights Reserved.