Floating Charge

A floating charge is a security interest that hovers over a class of assets a company owns from time to time, rather than attaching to specific identified items. The charge floats over the pool as assets change through ordinary trading. Your company can sell inventory, collect receivables, and spend cash from operating accounts without triggering the security. Only when the charge crystallizes does it fix onto whatever assets exist at that moment and become a fixed charge over those specific items.

Think of it like a net suspended above a school of fish: the fish swim freely until the net drops and traps whatever is underneath it.

What Triggers Crystallization

Crystallization converts the floating charge into a fixed charge attached to a specific set of assets. It freezes your company's ability to deal with those assets without the secured creditor's consent.

Standard crystallization triggers include the following events.

• Appointment of a receiver or administrator over your company
• Your company entering liquidation or ceasing business operations
• A specific contractual trigger defined in the charge document, such as a breach of a financial covenant

Some floating charge agreements include automatic crystallization provisions that fire the moment a covenant is breached, even without a formal insolvency appointment.

Why Floating Charges Exist in Corporate Finance

Fixed charges work well for identifiable assets like real estate or equipment. They do not work for circulating assets like inventory and trade receivables, which constantly change in composition and value. A lender who tried to take a fixed charge over inventory would need to re-document the security every time the stock changed, which is impractical.

A floating charge solves that problem. Your lender gets security over the whole class of assets without needing to identify each item. You keep the freedom to trade normally. Both sides benefit from the structure.

Priority in Insolvency Tells You What a Floating Charge Is Actually Worth

In the United Kingdom and most Commonwealth jurisdictions, floating charge holders rank below fixed charge holders, certain preferential creditors such as employee wage claims and HMRC tax arrears, and the prescribed part fund carved out for unsecured creditors under the Insolvency Act 1986.

This ranking means the broad coverage of a floating charge is less valuable than it first appears. By the time floating charge assets are available for distribution, preferential creditors have already taken a share. A creditor holding both a fixed charge and a floating charge recovers the fixed charge assets first, then competes for what remains.

Sources

• https://www.legislation.gov.uk/ukpga/1986/45/contents
• https://www.gov.uk/guidance/companies-house-guidance-for-charge-registration