Everything you have to understand

Security is important. 
 
In the olden days we relied on window bolts and latches, door locks, deadbolts and door chains or if you want to go even further back – no castle would look complete without a moat and drawbridge to cross it!
 
New school solutions include video doorbells or CCTV systems to help secure your home and anti-virus software and firewalls to make sure that your devices are protected too.
 
Even when it comes to money, there’s watermarks and other anti-forgery measures to make sure that you can trust and rely on the notes in your purse or pocket. 
 
But the security protection we’re talking about today comes from borrowing and lending money. Specifically, the security lenders rely on when deciding whether or not to advance money to borrowers and that they can access if, for whatever reason, the borrower is unable to repay the agreed amount at the agreed time. 
 
So what security can lenders rely on? 
 
Mainly it’s a charge – in other words a legal claim over some of the borrower’s property or other assets that can be redeemed in the event of non payments or the company closing down and being liquidated. 

Fixed or floating?

Charges can either be fixed or floating depending on what they’re being secured against and the lender will be treated differently depending on the type of charge they hold.

Fixed charges

A fixed charge is the strongest security any lender can attach to an asset. 
 
It can be levied against physical property like a mortgage but can also be set against other items of value including static machinery and land or intellectual assets such as trademarks, copyrights, digital code and more. 
 
An important point to bear in mind is that these assets give the lender temporary ownership protection until the debt is repaid. 
 
If, for whatever reason, the borrower wants to sell any assets with a fixed charge attached to them, they would need to secure the permission of the charge holder to do so.
 
Another reason why fixed charges are so important is that if the company does undergo an insolvency event then the holder of the charge is first in line to be repaid above other charge holders.  
 
It adds guaranteed priority to the security. 

Floating charges

A floating charge is not as secure as a fixed charge but it still provides an element of repayment protection for lenders that other creditors don’t have.   
 
They can usually be attached to assets such as stock, inventory, fixtures, fittings, furniture and moveable machinery or equipment owned by the borrowing business. 
 
One difference from a fixed charge is that the borrower can sell items with a floating charge attached without express permission from the lender but they are still liable to repay any amounts borrowed.
 
If they miss any repayments or are unable to service the debt for any other reasons then the lender can issue repayment proceedings against them including statutory demands – which is the first step towards a winding-up petition. 
 
Ultimately, if a business cannot pay its debts then it will become insolvent which would automatically count as a default against any floating or fixed charges.
 
If a company does undergo an insolvency event such as entering administration, it will be one of the jobs of the administrator overseeing the company’s affairs to identify and establish contact with all fixed and floating charge holders to inform them. 
 
Once insolvency has been declared, there is a definitive order in which creditors will be repaid from any funds that the administrator can realise. These are:-

 

  • Fixed charge creditors – anybody holding a fixed charge 
  • Preferential creditors including HMRC and employees owed wages, holiday or pension contributions
  • Floating charge creditors – anybody holding a floating charge
  • Unsecured creditors including suppliers, contractors and customers  
  • Shareholders

 
You can see why it’s more preferable for lenders to hold charges then taking the chance of being an unsecured creditor. 
 
If your company is struggling to juggle repayments to fixed or floating charge holders every month then getting in touch with us might be a sensible first step to take. 
 
We offer a free initial consultation to discuss what issues you’re facing and we can objectively let you know what your options are. 
 
Helping a business get through tough times and survive is nearly always in the creditors’ interests. 
 
We’ll be happy to see if we can help find a way back for you.