Fixed and floating charges explained

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.

Once a company is in liquidation, realisations are applied in a strict statutory order: first, fixed charge holders from their own asset; then the costs of the insolvency process; then ordinary preferential creditors, mainly employees for arrears of wages (capped at £800 per employee, a limit set in 1986) and holiday pay; then secondary preferential creditors, which since 1 December 2020 means HMRC for VAT, PAYE income tax, employee National Insurance and CIS deductions under the Finance Act 2020; then the prescribed part is carved out of floating charge realisations for unsecured creditors; then the floating charge holder; then unsecured creditors, including HMRC for Corporation Tax and employer National Insurance, which are not preferential; and finally, if anything remains, shareholders. This waterfall is why unsecured trade creditors often receive little in an insolvent liquidation.

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.

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.