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United Kingdom

English law distinguishes between fixed and floating charges. The essential distinction is that, unlike the holder of a fixed charge, on an insolvency the floating charge-holder ranks behind preferential creditors (consisting principally of the claims of the government for unpaid taxes and of employees for unpaid salary). For this and other reasons, the creditor of an insolvent company will usually try to establish a fixed charge over the relevant assets of the insolvent company.

The mere description of a charge as 'fixed' is neither necessary nor sufficient to make it fixed. Where the assets subject to the charge are ordinarily used or consumed in the course of a business (eg receivables), it is often difficult for the chargee to establish a fixed charge. However, it is not impossible. It generally requires both a contractual right in the chargee to control how the chargor deals with the assets and the exercise of that right in practice.

In the recent decision of In re Double S Printers (in liquidation), March 26 1998, a director of an insolvent company claimed he had a fixed charge over book and other debts of the company. It is true that the charge instrument described the charge as 'fixed', but there was no contractual provision entitling the director to prevent the company dealing with the proceeds of the debts in the ordinary course of its business. The director claimed that in practice he exercised actual control over the company's bank accounts and therefore how the company dealt with the proceeds of its debts. The argument did not succeed.

Failure in practice to exert the contractual control given to you might convert your fixed charge into a floating charge, but it is not possible through methods not contemplated by the charge instrument to exert de facto control and in so doing successfully claim you have a fixed charge. This is because the control is exerted not in your capacity as chargee, but in some other capacity (eg as a director).

Mark Evans

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