ACADEMIA Letters

The Comparative Advantages and Disadvantages of a

Floating Charge vis-à-vis other Security Claims in the UK
Law
Samuel Maireg Biresaw, Debre Tabor University School of Law

1. Definition
A floating charge can be described as a charge on a class of assets of the borrower, which
would be changing from time to time in the ordinary course of business, and in due course,
the borrower may continue its business until the lender takes some steps to crystalize or enforce
the security.[1]

2. The Advantages of a Floating Charge to the Parties Relative to

other Security Claims
The following are the major advantages of a floating charge to the parties compared with other
fixed securities:

a. A floating charge, similar to a ‘fixed charge’ is a security, which results in

neither the transfer of ownership nor possession to the lender. It merely gives the
lender rights over a class of assets identified by a generic description, which are
not fixed.[2]
b. Unlike the case of ‘mortgage’ (also non-possessory security) that results in
the transfer of ownership in the secured assets to the lender, a floating charge

Academia Letters, September 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Samuel Maireg Biresaw, samregfen@gmail.com

Citation: Biresaw, S.M. (2021). The Comparative Advantages and Disadvantages of a Floating Charge vis-à-vis
other Security Claims in the UK Law. Academia Letters, Article 3544. https://doi.org/10.20935/AL3544.

1
 provides a chance to the borrower to give security without the risk of transferring
ownership of the charged assets.[3]
c. Unlike the case of ‘pledge’ which results in the transfer of possession (actual or
constructive) to the lender, which is a ‘possessory security’ that halts the produc-
tivity of the pledge, a floating charge as a ‘non-possessory security’ enables the
borrower to keep possession of the charged asset and deal with it in the ordinary
course of business thereby augmenting the productivity of the assets.[4]
d. A floating charge, as a ‘non-possessory security’, also provides an opportunity
to lenders to lend only by taking some rights over classes of assets in cases where
it becomes impractical or impossible to take possession of security over some
type of property that is inappropriate for other forms of security.[5]
e. Unlike the case of a ‘fixed charge’ (which is also a ‘non-possessory security’
that only confers a right over the charged assets to the lender and prohibits the
borrower to sell the charged thing), a floating charge specifically allows the char-
gor to sell the charged things as a going concern (as if no charge is imposed) until
crystallization (certain enforcement event) occurs.[6] Accordingly, such flexibil-
ity and trading freedom provided by a floating charge to the borrower can also be
argued as advantageous to the lender because it makes the borrower more pro-
ductive with its current assets to increase its ability to repay the secured loan.

3. The Disadvantages of a Floating Charge Relative to other Secu-

rity Claims
The following are the major disadvantages of a floating charge relative to the other security
claims, including in the context of the debtor going into administration or liquidation:

a. Unlike a fixed charge, the freedom to deal with the assets provided to the
borrower in case of a floating charge, if not used properly, results in the borrower
disposing of all its current assets or re-securing the assets to unsuspected third
party before crystallization, leaving the charged assets empty (diluting its value),
a situation devastating for the chargee. [7]
b. On crystallization, a floating charge effectively becomes a fixed charge.[8]
However, such a fixed charge ranks behind any fixed security (such as a mortgage
or a fixed charge constituted later on) created before it crystallized.[9] However,
the lender secured by the floating charge can protect its priority by using a clause

Academia Letters, September 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Samuel Maireg Biresaw, samregfen@gmail.com

Citation: Biresaw, S.M. (2021). The Comparative Advantages and Disadvantages of a Floating Charge vis-à-vis
other Security Claims in the UK Law. Academia Letters, Article 3544. https://doi.org/10.20935/AL3544.

2
 of ‘negative pledge’[10] and by valid registration of the floating charge, which
serves as a constructive notice to other later fixed charge holders.[11] Therefore,
a wise lender would cause valid registration of its floater charge on the assets of
the borrower to defeat the rule in Dearle v Hall.[12]
c. A lien created or arising before a floating charge has crystallized will take
priority over the charge. Hence, third parties cannot be required to return the
assets encumbered by a lien right until charges have been paid.[13]
d. The floating charge will be subject to set off and other third-party rights,
including legal or equitable rights, which accrued before crystallization of the
charge.[14]
e. The floating charge also ranks behind the costs and expenses of an appointed
administrator. The administrator can sell any of the assets encumbered by the
floating charge and use the proceeds to fund the cost of administration.[15]
f. All liquidation expenses (other than litigation expenses) have automatic prior-
ity of payment over floating charge holders. However, a validly registered floating
charge is valid against a liquidator.[16]
g. Claims based on a floating charge also rank behind ‘preferential debts’ of an
insolvent borrower. All the proceeds realized from assets secured by a floating
charge must be used to pay any preferential debts in priority to claims under the
floating charge.[17] Similarly, where a company is in liquidation, preferential
debts incurred before crystallization of the charge will also enjoy priority.[18]
h. Where a company has gone into liquidation, administration, or receivership,
the value of the proceeds of the borrower’s asset (which would otherwise go to
floating charge holders) up to the maximum amount of 600,000 GBP must be set
aside to pay claims of unsecured creditors.[19]
i. A floating charge can be set aside by the court if it is created in favor of a creditor
within 12 months of the onset of the borrower’s insolvency (‘suspect period’)
unless it is constituted in return for a valuable consideration.[20] Alternatively, it
can still be set aside within 2 years of the onset of the insolvency of the debtor if
it is created for connected persons.[21]
j. A floating charge can also be set aside by the court if it amounts to a ‘trans-
action under value’ if it was entered into within 2 years of the winding up of the
borrower company in which case the borrower received either no consideration
or less consideration than it provided.[22]

Academia Letters, September 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Samuel Maireg Biresaw, samregfen@gmail.com

Citation: Biresaw, S.M. (2021). The Comparative Advantages and Disadvantages of a Floating Charge vis-à-vis
other Security Claims in the UK Law. Academia Letters, Article 3544. https://doi.org/10.20935/AL3544.

3
4. Conclusion
In conclusion, although a floating charge has some advantages when compared to other forms
of fixed security (such as a mortgage, pledge, lien, and a fixed charge); its disadvantages are
too many and very detrimental to its holders. Therefore, creditors should be wise enough to
use the other forms of fixed securities in due course of lending.

References
[1] Re Yorkshire Woolcombers Association Ltd [1903] 2Ch 284; Charles Proctor, The Law and
Practice of International Banking (2nd edn., Oxford University Press 2015), para 28.06;
David Adams, Banking and Capital Markets (The University of Law 2015), para 14.7.2.

[2] Re Cosslett (Contractors) Ltd [1998] Ch 495 (CA); Charles Proctor, supra note 1, para
28.06; David Adams, supra note 1, para 12.3.1.

[3] David Adams, supra note 1, para 12.4.1, p 149.

[4] Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 (Ch); David Adams, supra
note 1, para 12.5.1.

[5] David Adams, supra note 1, para. 12.3.2.1, a good example of such assets is a Stock in
trade.

[6] Government Stock and Other Securities Investment Co Ltd v Manila Railway Co [1897]
AC 81; Charles Proctor, supra note 1, para 28.06.

[7] NW Robbie & Co Ltd v Witney Warehouses Co Ltd [1963] 3 All ER 613, ‘Crystallization’
converts the ‘floating charge’ into a ‘fixed charge’. In addition to the automatic grounds of
crystallization, to avoid the disposal of charged assets by the borrower, lenders are advised
to incorporate mechanisms through which the borrower’s freedom to deal with the assets
can be frozen.

[8] Illingworth v Houldsworth [1904] AC 355 (HL); Charles Proctor, supra note 1, para 28.06,
a floating charge is ambulatory and shifting in its nature, hovering over the property which
it is intended to affect.

[9] Wheatley v Silkstone and Haigh Moor Coal Co (1885) 29Ch D 715; Charles Proctor,
supra note 1, para 28.22.

Academia Letters, September 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Samuel Maireg Biresaw, samregfen@gmail.com

Citation: Biresaw, S.M. (2021). The Comparative Advantages and Disadvantages of a Floating Charge vis-à-vis
other Security Claims in the UK Law. Academia Letters, Article 3544. https://doi.org/10.20935/AL3544.

4
[10] Griffiths v Yorkshire Bank plc [1994] 1 WLR 1427; David Adams, supra note 1, para
14.3.1.

[11] The UK Companies Act 2006, ss 859 (A – Q), 860; The registration document must be
delivered before 21 days beginning with the day after the date of creation of the charge
(CA 2006, s 859 A (4)); Crystallization does not automatically result in registration, Re
Manurewa Transport Ltd [1971] NZLR 909; David Adams, supra note 1, para 12.3.2.3.

[12] Dearle v Hall (1828) 3 Russ 1; The rule applies to all assignments or charges of equitable
interests and any legal or equitable interest in debts; The UK Companies Act 2006, s 885
(3).

[13] Wiltshire Iron Co Ltd v Great Western Railway Co [1910] 2 KB 979 (CA); George Barker
(Transport) Ltd v Eynon [1925] 1 KB 655; Charles Proctor, supra note 1, para 28.32.

[14] Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93 (CA); Business Computers Ltd v Anglo-
African Leasing Ltd [1977] 2 All ER 741; See also, The UK Insolvency (Amendment)
Rules of 2005.

[15] The UK Insolvency Act 1986, s 15 (2), however, the administrator cannot sell the sub-
jected assets if the floater is validly registered. Not to mention, the administrator also
needs a court order or consent of the creditor in case of the sell of an asset encumbered by
a fixed charge.

[16] The UK Insolvency (Amendment) Rules 2008 (SI 2008/737).

[17] The UK Insolvency Act 1986, s 40; ‘Preferential debts’ are defined in the IA, s 386,
Schedule 6 & The UK Enterprises Act 2002, s 251, as outstanding employees’ wages &
pension contributions.

[18] The UK Insolvency Act 1986, s 175 (2).

[19] The UK Insolvency Act 1986, s 176 A; IA Order 2003 (SI 2003/2097); See also, the UK
Enterprise Act 2002, s 252.

[20] The UK Insolvency Act 1986, s 239, 245, such transactions amount to ‘preference’.

[21] The UK Insolvency Act 1986, s 249.

[22] The UK Insolvency Act 1986, s 238.

Academia Letters, September 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0

Corresponding Author: Samuel Maireg Biresaw, samregfen@gmail.com

Citation: Biresaw, S.M. (2021). The Comparative Advantages and Disadvantages of a Floating Charge vis-à-vis
other Security Claims in the UK Law. Academia Letters, Article 3544. https://doi.org/10.20935/AL3544.