Fixed and floating charges explained
A fixed charge is security over a specific, identifiable asset, such as property, plant or machinery, which the company cannot sell without the lender's consent. A floating charge is security over a shifting pool of assets, typically stock, debtors and cash, which the company is free to use day to day until the charge "crystallises", normally on insolvency. The distinction decides who gets paid first when a company fails. Insolvency Act 1986; Companies Act 2006 s859A
- Fixed charge
- Security over a specific asset the company cannot freely sell
- Floating charge
- Security over changing assets (stock, debtors) until crystallisation
- Registration
- At Companies House within 21 days of creation (CA 2006 s859A)
- Prescribed part
- 50% of first £10,000 plus 20% of the rest, capped at £800,000
- HMRC status
- Secondary preferential for VAT, PAYE and employee NIC since 1 Dec 2020
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At a glance
| Feature | Fixed charge | Floating charge |
|---|---|---|
| Attaches to | A specific asset (property, machinery) | A changing pool (stock, debtors, cash) |
| Company can sell the asset? | Only with the charge holder's consent | Yes, in the ordinary course, until crystallisation |
| Priority on insolvency | First call on that asset | Paid after preferential creditors and the prescribed part |
| Typical holder | Mortgage or secured lender | Bank under a debenture covering the whole business |
How a floating charge crystallises
While the company trades normally, a floating charge hovers over the asset pool without attaching to anything specific, which is what lets the company buy and sell stock and collect debtors freely. On a crystallising event, usually the appointment of an administrator or liquidator, or an event named in the debenture, the charge fixes onto whatever assets are then in the pool. From that point the company cannot deal with those assets, and the charge holder's claim is measured against them. Most bank debentures take a fixed charge over everything that can validly be fixed and a floating charge over the rest, so in a real insolvency the argument is often about which assets fall on which side of the line.
The order of payment in a liquidation
Once a company is in liquidation, realisations are applied in a strict statutory order. This waterfall is why unsecured trade creditors often receive little in an insolvent liquidation.
- Fixed charge holders, from their own secured asset
- The costs of the insolvency process
- Ordinary preferential creditors, mainly employees for arrears of wages (capped at £800 per employee, a limit set in 1986) and holiday pay
- Secondary preferential creditors, since 1 December 2020, HMRC for VAT, PAYE income tax, employee National Insurance and CIS deductions (Finance Act 2020)
- The prescribed part, carved out of floating charge realisations for unsecured creditors
- The floating charge holder
- Unsecured creditors, including HMRC for Corporation Tax and employer National Insurance, which are not preferential
- Shareholders, if anything remains
The prescribed part: the unsecured creditors' ring fence
Section 176A of the Insolvency Act 1986 requires a slice of net floating charge realisations to be set aside for unsecured creditors: 50% of the first £10,000, plus 20% of everything above that, up to a cap. The cap is £800,000 where the floating charge was created on or after 6 April 2020 (raised from £600,000 by the Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020); the £600,000 cap still applies to older charges. It only bites where there is a floating charge and net property to share.
Why this matters to a director
Three practical reasons. First, if your bank holds a debenture, the bank usually controls the timing and route of any insolvency, so talk to a practitioner before the bank acts. Second, if you gave a personal guarantee, the size of the shortfall after the waterfall determines what the lender chases you for. Third, a floating charge granted shortly before insolvency to secure pre-existing debt can be invalidated under section 245 of the Insolvency Act 1986 (within 12 months of insolvency, or 2 years for connected persons), which liquidators check as a matter of routine. Check the company's registered charges free on the Companies House register.
Related data
Our UK company insolvency tracker: The latest monthly figures for companies entering insolvency, from the Insolvency Service. Every page on our data hub names its official source.
Common questions
Who gets paid first when a company goes into liquidation?
Fixed charge holders are paid first from their secured asset, and shareholders come last. In between come insolvency costs, preferential creditors, the prescribed part, the floating charge holder and unsecured creditors, in the order set out in the payment waterfall above.
Is HMRC a preferential creditor?
Partly. Since 1 December 2020 HMRC is a secondary preferential creditor for taxes the company collected from others: VAT, PAYE income tax, employee National Insurance and CIS deductions. Corporation Tax and employer National Insurance remain unsecured claims.
What does crystallisation of a floating charge mean?
It is the moment a floating charge stops hovering over a changing pool of assets and fixes onto the specific assets the company holds at that time, usually when an administrator or liquidator is appointed. After crystallisation the company can no longer deal with those assets freely.
What happens if a charge is not registered at Companies House?
A charge must be registered within 21 days beginning the day after it is created (Companies Act 2006, section 859A). An unregistered charge is void against a liquidator, administrator and creditors, so the lender drops to unsecured, although the debt itself remains owed.
Can a floating charge be challenged in a liquidation?
Yes. Under section 245 of the Insolvency Act 1986, a floating charge created in the 12 months before insolvency (2 years for connected persons) is invalid except to the extent new money or value was given for it. Liquidators review recent charges as standard.