When a director looks at the Companies House register and sees that the bank has a debenture, the natural reaction is often:
“The bank is secured over everything, so there’ll be nothing left for anyone else.”
That may be true.
But often it isn’t.
A debenture commonly contains both fixed and floating charges. They attach to different assets, give the lender different rights and produce very different outcomes when the company becomes insolvent.
The wording on the document matters. But so does what actually happened in practice.
What is a charge?
A charge is security granted by a company over its assets.
It gives a lender rights against those assets if the company fails to repay what it owes.
Charges should normally be registered at Companies House within 21 days beginning the day after they are created. Failure to register a charge in time can affect its enforceability against a liquidator, administrator and other creditors.
A typical bank debenture may cover:
- land and buildings;
- machinery;
- vehicles;
- stock;
- customer debts;
- cash;
- intellectual property;
- the company’s general undertaking.
The important question is whether the security over each asset is ‘fixed’ or ‘floating’.
What is a fixed charge?
A fixed charge attaches to a specific asset, or a clearly identifiable category of assets, over which the lender exercises meaningful control.
Common examples include:
- freehold or leasehold property;
- large items of machinery;
- investments;
- certain bank accounts;
- sometimes book debts.
The company cannot normally sell or dispose of an asset subject to a fixed charge without the lender’s consent.
If the asset is sold during insolvency, the lender is generally paid from the net proceeds after only the direct costs of preserving and realising that asset.
Imagine a company property sells for £500,000.
The direct selling costs are £20,000 and the bank is owed £400,000 under a valid fixed charge.
The bank may receive £400,000, leaving £80,000 for the wider insolvency estate.
What is a floating charge?
A floating charge usually covers a changing pool of business assets.
Examples include:
- stock;
- work in progress;
- raw materials;
- vehicles;
- general plant and machinery;
- trade debtors;
- other circulating assets.
The company is normally allowed to use, sell and replace those assets during ordinary trading, without reference to the chargeholder.
Stock is sold. New stock arrives. Customer invoices are collected. New invoices are raised.
The charge “floats” over the changing pool until an agreed event causes it to crystallise.
Official Receiver guidance describes the distinguishing feature as the company remaining free to deal with the asset until crystallisation.
What does crystallisation mean?
Crystallisation is the point at which a floating charge attaches to the assets then within its scope.
This may happen as a consequence of:
- liquidation;
- the appointment of a receiver;
- cessation of the company’s business;
- another event specified in the debenture.
After crystallisation, the company’s ability to deal freely with the relevant assets is restricted.
But crystallisation does not simply turn the lender into a fixed-charge creditor for insolvency distribution purposes.
The security remains subject to the statutory rules applying to floating charges.
Why does the difference matter?
A fixed-charge lender is generally paid from the charged asset before the wider insolvency expenses and preferential claims.
Floating-charge proceeds are dealt with differently.
Before the floating-charge lender is paid, the available funds may have to meet:
- certain insolvency expenses;
- preferential creditors;
- HMRC’s ‘secondary’ preferential claims;
- the ‘prescribed part’ for unsecured creditors.
For example, PAYE, employee National Insurance deductions and VAT can rank as secondary preferential debts ahead of the floating-charge holder.
So a lender with a floating charge over £250,000 of assets may receive materially less than the £250,000 they are secured upon.
Book debts… fixed or floating?
This is one of the most disputed areas.
A debenture may describe the security over book debts as a fixed charge.
That label is not conclusive.
The real question is how much control the lender had over the company’s ability to collect and use the money.
If the company collected customer debts into its normal account and freely used the proceeds to pay wages and suppliers, the charge may in substance be floating.
If collections had to be paid into a blocked account which the company could not use without the lender’s consent, the argument for a fixed charge is stronger.
The substance must be examined, including the company’s control over collection and use of the proceeds.
Can a floating charge be challenged?
Yes, potentially.
Section 245 of the Insolvency Act 1986 can invalidate a floating charge created during the relevant period before insolvency, except broadly to the extent that it secured new money, goods or services, or reduced an existing debt.
The relevant period can extend to:
- two years for a connected person;
- 12 months for an unconnected person, subject to the statutory insolvency conditions.
The purpose is to stop a creditor improving its position shortly before insolvency by converting an old unsecured debt into secured debt without providing fresh value.
Fixed charges are not covered by section 245 in the same way, although they may be challenged on other grounds, including as preferences in appropriate circumstances.
What should directors check?
When financial difficulty emerges, directors should obtain:
- every debenture and charge document;
- Companies House charge records;
- facility letters;
- loan agreements;
- deeds of priority;
- asset finance documents;
- bank account mandates;
- correspondence about restrictions on asset sales;
- details of how customer receipts were controlled;
- current balances owed to each secured lender;
- redemption figures for charged property.
Do not rely solely on the brief description shown at Companies House.
The full documents and the practical arrangements need to be reviewed.
Takeaway checklist
- What charges are registered against the company?
- Which assets are specifically charged?
- Which assets fall under the floating charge?
- Were the charges registered on time?
- Is there more than one secured lender?
- Is there a deed of priority?
- Did the company freely use customer receipts?
- Has any recent charge secured old debt?
- How much is owed to each lender?
- What preferential and prescribed-part claims may rank ahead of the floating charge?
- Has professional advice been taken before selling charged assets?
Final thought
“Secured creditor” is not a complete answer.
You need to know:
- what the security covers;
- whether it is fixed or floating;
- whether it was properly registered;
- whether it is legally valid;
- who ranks ahead of it;
- what the assets will actually realise.
Two charges in the same debenture can lead to completely different results.
That difference may determine whether the lender is paid in full, whether employees and HMRC receive money, and whether ordinary suppliers see any return at all.
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For more support call Paul on 07813 102014 or email paul@midlandsbusinessrecovery.co.uk