Court Debenture
Establishing Whether A Charge Is Fixed Or Floating
An issue of considerable practical significance is that of distinguishing between fixed and floating charges. Both are consensual securities created by agreement between the parties. It is for the parties themselves to determinethe form of security for a loan. It is not essential for them to label the security as a 'fixed' or, as the case may be, 'floating' charge, though it is common practice to do so. The parties' designation, if any, is a factor, but not a conclusive factor, in determining the proper classification of the charge. If, looking at the terms of the security generally, the agreement is inconsistent with the label attached to it by the parties, that description will not prevail.
Whether a charge is fixed or floating is relevant to the question of its priority against competing securities. It is also relevant for the purposes of the provisions of the Insolvency Act 1986 and the Companies Act 1985 concerning preferential debts. Preferential debts are debts which, by statute, rank before debts secured by a floating charge but behind debts secured by a fixed charge in the event of the debtor company going into liquidation or receivership or possession being taken of property subject to the charge by or on behalf of the holders of debentures.
The provisions of the Insolvency Act 1986 concerned with administration procedure provide further reasons why it is important to know whether a charge is fixed or floating. Administration is a collective insolvency procedure and, once an administra tor has been appointed, no one creditor, or group of creditors, is entitled to control him in the exercise of his powers. An administrator may not be appointed where an administrative receiver has been appointed to the company unless the appointor of the administrative receiver consents.15" An administrative receiver is defined by the Insolvency Act 1986, s 29 (2) as a receiver or manager of the whole (or substantially the whole) of a company's property appointed by or on behalf of the holders of any debentures of the company secured by a charge which, as created, was a floating charge, or by such a charge and one or more other securities.
Lenders that want to be able to block the appointment of an administrator must thus ensure that their security includes an appropriately drafted floating charge. When an administrator is appointed, he has power to dispose of property which is subject to a floating charge as if it were not secured notwithstanding that the charge may have crystallised, but his power to dispose of assets which are subject to a fixed charge is dependent upon satisfying the court that the disposal would be likely to promote one or more of the purposes for which the administration order was made.
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