An issue of distinguishing a fixed and a floating charge has considerable significance particularly for the parties involved in commercial relationships. It follows from the fact that under English law a fixed charge has a priority over a floating charge that means the former will prevail over the latter even though the company has granted a floating charge to the creditor prior to the creation of a fixed security.
Another reason is that under the provisions of Insolvency Act 1986 holders of a floating charge are placed in a less favourable position than the holders of a fixed charge particularly due to sec.
176 of the Act which prevents the distribution of a certain portion of the company’s net property to the holder of a floating charge unless the claims of unsecured creditors are satisfied in full. Furthermore, general expenses incurred during administration can be covered by the assets which are granted to the holder of a floating security.
In order to attribute a particular charge to one of the above categories no straightforward exercise can be applied.
Despite the fact that the parties are free to decide what rights and obligations to grant each other, it is a question of law whether a charge is fixed or floating and certain rules developed by the English courts must be taken in consideration (Agnew). This essay will examine the criteria of distinguishing the fixed and floating charge as well as discuss in which cases a charge over book debts should be regarded as a floating or fixed charge.
The foundation of establishing differences between the above charges is the Yorkshire Woolcombers case where Romer LJ delivered his speech in defining a floating charge which depended on three criteria: 1) if the charge on a class of assets of a company present and future 2) if that class is one which in the ordinary course of the business would be changing from time to time 3) if until some future step is taken by or on behalf of those interested parties in the charge the company may carry on its business in ordinary course.
Lord Millet in the Agnew case emphasized the last characteristic formulated by Romer LJ which he named as a hallmark of a floating charge. Lord Scott in Re Spectrum went further by saying that the first two criteria are not often material for every floating charge. When providing the distinction between the above charges the two stage process of legal characterization developed in Agnew must be applied by the English courts.
The object of the first stage of the process is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the Court can then embark on the second stage of the process, which is one of categorization and designed to attribute the correct legal label to the package of rights and obligations.
Lord Millett’s reasoning has been approved by the House of Lords in Re Spectrum in which emphasis was given to the freedom of the company to deal with the assets in the ordinary course of business rather than the two first criteria focusing on the nature of the secured assets. The breakthrough decision on the distinction of charges over book debts became the Siebe Gorman case where Slade J held that the restrictions placed on the company’s power to deal with the proceeds of the debts gave the bank a degree of control which was inconsistent with a floating charge and therefore the debenture given to Barclays was a fixed charge.
The case caused a significant effect to commercial practice as it gave control over book debts to the creditors and access to the secured assets to the chargors. In another case the Court of Appeal held that a fixed and floating charge could be combined (New Bullas Trading) in a way of setting a fixed charge over the company’s uncollected book debts and floating one once they were credited to a designated account so that the company could use them in the ordinary course of business.
This structure was advantageous both for the company, due to the freedom to deal with the proceeds, and for the bank, because the charge over the uncollected book debt is fixed (priority). It was a decision inspired by the principle of freedom of contract. Shortly after this case Lord Millet in Agnew critically assessed the decision in New Bullas and argued that this separation was inconsistent with the nature of a fixed charge. Both Siebe Gorman and Re New Bullas were overruled by the House of Lords in Spectrum.
Following the Re Spectrum reasoning if the company was free to deal with the assets without the approval of the creditor, the charge should be categorised as a floating security regardless of how it was described in the agreement between the parties. However if the company has to obtain the specific approval of the creditor before disposing of any of the charged assets then the charge is fixed. It was explained that where the chargor is free to deal with the charged assets or their proceeds without first obtaining the chargee’s permission, the charge must be floating.
Cite this Floating Charge
Floating Charge. (2016, Nov 13). Retrieved from https://graduateway.com/floating-charge/