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Part E Guarantees and Security, 28 Types of Security

From: The Law and Practice of International Banking (2nd Edition)

Charles Proctor

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Regulation of banks — Credit risk — Security interest — Claims

(p. 579) 28  Types of Security


28.01  The foregoing chapter has set the scene in establishing the framework for the registration of security over corporate assets. But, as there noted, the registration process merely prevents an otherwise valid security from becoming void against the liquidator, administrators, and creditors of the chargor. It does not otherwise dictate the nature, form or content of the security interest created as between the parties, nor does it determine whether or not a security is intrinsically valid in the first place.

28.02  It therefore remains to consider three points, namely:

  1. (a)  What is the nature of the security which the borrower creates?

  2. (b)  What are the specific characteristics of security created over particular types of asset?

  3. (c)  In the case of competing layers of security on the same asset, which lender is entitled to priority?

Fixed Charges

28.03  A valid and effective fixed charge over an asset assures to the charge the benefit of the entire proceeds of sale following enforcement, subject only to such marketing and other incidental costs as may be associated with that process. It creates a greater degree of security for the creditor, for the security conferred by a merely floating charge is subject to the rights of certain preferential creditors and may also be subject to dilution to create a prescribed pool of funds for the unsecured creditors.1 The distinction can therefore be one of some importance.

(p. 580) 28.04  What, then, are the indicia of a fixed charge? The language of the security document will provide a starting point, but the mere fact that the parties have referred to a ‘fixed charge’ will by no means be conclusive.2 Recent case law3 suggests that the lender must enjoy a sufficient degree of control over the charged assets.4 What amounts to a sufficient degree of control must in large measure depend upon the nature of the asset and the type of supervision which may be exercised.

28.05  Nevertheless, since they are now a relatively common occurrence, it is perhaps appropriate to comment on the effect of security substitution clauses, which allow a borrower either (i) to require the release of any security which exceeds a pre-set security ratio or (ii) to withdraw assets for the security package on the basis that they are replaced by other assets meeting stated valuation and other stated criteria.5 It has formerly been argued that a lender still has a degree of control over the security and such arrangements do not amount to an authority to the borrower to deal with its assets in the ordinary course of business.6 However, it would appear that this view can no longer be sustained in the light of the decision in Re Lehman Brothers International (Europe) (in administration),7 where it seems to have been conceded that a right of substitution of this kind must lead to the conclusion that the security is of a floating character.8

Floating Charges


28.06  The most frequently cited description9 of a floating charge is that provided by Romer LJ in Re Yorkshire Woolcombers Association Ltd,10 where he identified the three core characteristics as follows:

(p. 581)

  1. (a)  it is a charge on a class of assets11 of the company;12

  2. (b)  that class of assets is one which would be changing from time to time in the ordinary course of business;13 and

  3. (c)  the charge contemplates that the company may continue its business in the ordinary course until the lender takes some step to crystallize or enforce the security. As a result, the company can continue to sell its stock in the ordinary course, and buyers will thus obtain a good title to the stock, free of any security interest. To express matters in a different way, the company retains authority to deal with its assets in the ordinary course of business14 so long as the operation of the charge remains suspended. Or, in other words, the charge retains a degree of control over the assets to the extent necessary to negative the existence of a fixed charge.15

28.07  When the case reached the House of Lords, it was noted that a floating charge moves with the class of assets to which it relates until some event occurs or the lender takes some action which causes the charge to crystallize and to fasten on the assets to which it relates.16 A floating charge thus applies to a fluctuating class of assets, but the company retains control of the assets so that it can continue to carry on its business in the ordinary way. To express matters in a different way, a floating charge is an equitable security which remains dormant until the creditor takes action to enforce it.17 The chargor thus remains in control of the charged assets so that it can continue to operate its business as a going concern.

28.08  As already noted, it is this element of control which, in recent times has received a greater degree of emphasis from the courts; if a chargee wishes to establish the existence of a fixed security, then he must show that the chargor lacks this element of control which is indicative of a floating charge.18

28.09  Given that the security only finally attaches to the company’s assets at the point of enforcement, and that the borrower remains in control of its assets up to that point,19 it may readily (p. 582) be imagined that there is scope for conflict between the holder of the floating charge and other creditors—both secured and unsecured—dealing with the company. These questions of priority are more conveniently dealt with at a later stage.20

Importance of the Characterization

28.10  Why is the characterization of a charge as ‘fixed’ or ‘floating’ important? The most obvious consequence is that a floating charge is subject to various priority and other matters which may have the effect of diluting the value of the security and, as already noted, those issues will be considered at a later stage. However, there may also be other consequences. In particular, if the security takes effect as a floating charge, then an administrator will have authority to sell the relevant assets in the course of the performance of his duties. If, however, the security operates as a fixed charge, then the consent of the creditor or the court will be required for that purpose.21


28.11  A floating charge usually crystallizes and becomes attached to the chargor’s assets on the appointment of an administrative receiver, in the limited cases in which such an appointment remains possible.22 The commencement of winding up also results in crystallization, because the borrower’s authority to deal with the charged assets in the ordinary course of business must plainly terminate at that point, even if the winding up is on a voluntary basis.23 It would appear that crystallization should also occur when the company ceases to carry on its business as a going concern,24 for the chargor’s authority to deal with the assets is limited to that objective. At least in the absence of some express contractual term, however, the appointment of an administrator under the terms of the Insolvency Act 1986 will not lead to the crystallization of the security since, in many cases, the very object of his appointment is to continue the company’s business.25

28.12  Crystallization has the effect of converting the formerly floating security into a fixed, equitable charge.26 Crystallization has no real benefit for the charge in terms of his statutory position, because his security will continue to be categorized as ‘floating’ and, hence, will remain subject to those provisions of the Insolvency Act dealing with preferential creditors, the prescribed pool of assets for unsecured creditors, and similar matters.27

(p. 583) 28.13  In other respects, however, the point of time at which crystallization occurs may be of some importance. For example since, as noted above, crystallization has the effect of creating a fixed equitable charge over the formerly floating charge assets, the crystallized charge will take priority over any security subsequently created by the company.28 The precise point of time at which crystallization occurs may thus occasionally be a matter of some moment as between competing chargees. As a result, and in an effort to bolster the position of the floating charge holder, it became the practice to provide for automatic crystallization of the floating charge if certain events occurred (eg if the chargor attempted to create a first ranking security over any of the relevant assets). Alternatively, the lender may be entitled to give notice of crystallization if it believed any of the security to be in jeopardy (eg as a result of impending action by other creditors). Such case law as is available suggests that provisions of this kind are valid as between chargor and charge, and that crystallization under such provisions will also be effective as against other creditors who have notice of them.29



28.14  Given that a floating charge ‘hovers’ over the assets of the chargor company and that the charge does not take control of the assets concerned—thus giving the chargor the ability and authority to trade in its assets in the ordinary course—it is perhaps unsurprising that its status as a first ranking security is somewhat tenuous when compared to a fixed charge.

Categories of Priority Claims

28.15  It is therefore necessary to consider the extent to which the priority of a floating security is diluted in the event of an insolvency of the chargor. Such dilution occurs in essentially three ways. The first form of dilution is created by various statutory provisions designed to strike a balance between the charge and employees/unsecured creditors of the chargor. The second category involves the resolution of priority issues with holders of other charges (whether fixed or floating). The final set of issues arises from claims by unsecured creditors who may have asserted their rights in the period leading up to the formal insolvency process. Each of these categories will be considered in turn.

Statutory Priorities

28.16  The starting point for the statutory regime of priorities is provided by sections 40 and 175 of the Insolvency Act 1986.

28.17  Section 40 applies where an administrator is appointed in respect of a charge which, as created, was a floating charge.30 In such a case, the funds coming into the hands of the receiver with reference to the floating charge are to be applied first in payment of preferential debts,31 (p. 584) in priority to payments to the holder of the floating charge. Likewise, where a company is in liquidation, preferential debts incurred before the crystallization of the floating charge will also enjoy priority.32

28.18  Where a bank holds a standard form debenture over the entire assets and undertaking of an insolvent borrower, it will thus be necessary to distinguish carefully between fixed and floating charge assets, since only the floating charge assets are available to meet preferential debts.33 As has already been noted,34 the distinction is not always a straightforward matter.

28.19  What, then is the nature of the claims which may enjoy a statutory priority over a floating charge?

The Prescribed Part

28.20  One of the innovations introduced by the Enterprise Act 2002 was the creation of the so-called ‘prescribed part’, a portion of the assets to be set aside for the unsecured creditors out of assets which would otherwise be available to the holder of the floating charge. Where a company has gone into liquidation, administration, or receivership, under section 176A of the Insolvency Act 1986,35 the relevant insolvency official must set aside a prescribed part of the floating charge assets36 for the benefit of unsecured creditors. The court may order that the ‘prescribed part’ rules need not be applied where the cost involved in the process would be disproportionate to the benefits.37

28.21  It should be appreciated that the prescribed part is intended for the benefit of creditors who have been unsecured throughout. Hence, if the assets are insufficient to pay the floating charge holder himself, he cannot claim a share of the prescribed part as an unsecured creditor.38

Occupational Pension Schemes

28.22  Amounts owing by the company in respect of contributions to its occupational pension scheme constitute a preferential debt and are thus payable in priority to a floating charge. There is no specified limit or cap on the amount which qualifies for priority under this heading.39 However, where a financial contribution or similar notice is issued by the Pensions Regulator under the terms of the Pensions Act 2004, the amounts due under it are not entitled to this priority and will rank pari passu with the claims of other unsecured creditors.40

(p. 585) Employees

28.23  Amounts due to employees in respect of remuneration owing for the four month period leading up to insolvency, together with accrued holiday pay for any employees who are dismissed, likewise rank in priority to a floating charge.41 A lender who funds payments which would otherwise qualify for this priority (eg by making a loan to the administrator for that purpose) is effectively subrogated to the employees and thus enjoys the same, preferential creditor status in respect of those amounts.42

Priority as against other Secured Creditors

28.24  As will be seen,43 fixed charges usually rank in priority according to the date of their creation. However, since the floating security only attaches to assets at the point of enforcement, it is perhaps unsurprising that this rule does not extend to floating charges.

28.25  As a result, and whilst successive floating charges will rank according to the order of the date of their creation,44 a fixed charge would rank in priority to a floating charge even though the fixed charge was executed at a later date.45 The application of this rule would, of course, very seriously undermine the value of the floating charge as a security interest. As a result, standard forms of debenture will prohibit the creation of any further security over assets which are subject to the floating charge. Since a disposal of assets can likewise be detrimental to the interests of the chargee, they will also prohibit such disposals, except in relation to the sale of stock in trade in the ordinary course of business.

28.26  Provisions of this kind are effective as between the parties, but how are they to be made effective against a subsequent chargee? In practice, details of the restrictions are usually included on the form lodged with the Registrar of Companies under section 859A of the Companies Act 2006.46 If the subsequent chargee has actual or constructive notice of the restriction, then it will be unconscionable for him to claim priority and the fixed charge will be postponed to the interests of the floating charge.47 Whilst the mere registration of the required particulars of charge does not constitute constructive notice to any person dealing with the company,48 it is submitted that this does amount to notice to any person who might reasonably be expected to undertake a search of the register.49 This category would plainly include any person intending to lend money to the company on the security of its assets; any security taken by such a person would thus be postponed to a prior floating charge, provided that notice of the restriction against the creation of further security had been included on the forms lodged with the Registrar.50 Indeed, it is submitted that a (p. 586) lender who discovers (or ought to have discovered) the existence of an existing floating charge through his search at Companies House is put on notice that there may be a restriction against the creation of any later security, largely because the existence of such restrictions in the modern context is virtually a matter of course; the subsequent, fixed chargee should not be able to benefit from turning a blind eye to a state of affairs which ought to have been obvious, given the information available to him.51

28.27  Of course, it is open to secured creditors to enter into an agreement to record the intended priorities between their respective security positions.52

Priority as against Unsecured Creditors

28.28  The object of taking security is, of course, to obtain priority over unsecured creditors. Nevertheless, the particular nature of the floating charge does mean that the holder of the security can find himself in competition with unsecured creditors who have attempted to take enforcement action against the company.

Rights of Set-off

28.29  A floating charge generally has no impact upon any rights of set-off enjoyed by third parties dealing with the company.

28.30  The debtor will thus not have notice that the debt due from him to the company has been the subject of an assignment or charge to the holder of the floating security, and he will accordingly be able to continue to exercise any rights of set-off which he may have in respect of transactions effected before he receives actual notice that the floating charge has crystallized.53 As a consequence, rights of set-off arising in the normal course of business will take priority over the security created by a floating charge. The position is essentially similar even where the document seeks to create a fixed charge over book debts,54 at any rate until the debtor receives actual notice of the security.


28.31  A lien will usually arise where assets of the company are delivered to a third party for the provision of a service, such as repair or storage. The third party will be under no obligation to redeliver the asset until the relevant charges have been paid.

28.32  Once again, a lien created or arising55 before a floating charge has crystallized will take priority over the charge, in the sense that the third party cannot be required to return the asset (p. 587) until charges have been paid. This is so even though the floating charge had been created before the lien arose. This is a reasonable result, in that warehousemen, repairers, and others who are likely to become the beneficiaries of such liens cannot reasonably be expected to search their customer’s register at Companies House, and so would not be affected by constructive notice of the floating charge. Even if they were aware of the existence of the charge, there is no reason why they should be affected by it unless they also have actual knowledge of its crystallization.

Execution Creditors

28.33  Priority as between an execution creditor and the holder of a floating charge depends upon the date on which the floating charge crystallizes.56

28.34  If an execution creditor has seized goods and completed the sale—or accepted a payment in lieu of sale—before crystallization of the floating charge, then the execution creditor may retain the proceeds.57 If, however, goods have been seized but remain unsold at the point of crystallization, then the chargee may claim those goods in priority to the execution creditor.58

28.35  A third-party debt order does not have the effect of transferring ownership of the debt to the judgment creditor. It follows that the chargee takes priority over the applicant for the order unless the debtor has actually made payment to the judgment creditor before crystallization occurs.59

Distress for Rent

28.36  Consistently with the rules discussed above, the landlord who levies distress by seizing goods prior to crystallization will have priority over the charge.60 In some cases, it seems that the landlord may enjoy priority even if distress is completed after crystallization.61(p. 588)


On these points, see para 28.20 below.

On the other hand, if the parties use the expression ‘floating charge’, then this would seem to be conclusive that the creditor intended to content himself with a floating charge, or the lesser form of security. In such a case, there would seem to no reason for the court to ‘look behind’ the language employed by the parties.

See, in particular, Agnew v Commissioner of Inland Revenue [2001] 710 (PC) and Re Spectrum Plus Ltd [2005] 2 AC 680 (HL). These cases arose specifically in the context of fixed charges over book debts, and they are therefore considered in more depth at para 30.04 below.

At the risk of a very significant over-simplification, this in many ways means that the arrangement must not be a floating charge which involves a sufficient authority for the chargor to deal with the assets in the ordinary course of its business: see para 28.06 below.

Such provisions are often seen in the context of real estate finance, or security over portfolios of listed or rated securities.

See for example, Re Queens Moat Houses plc [2004] NPC 67.

[2012] EWHC 2997.

See para 70 0f the judgment, and the further discussion of this case in the context of financial collateral arrangements at para 35.24 below.

The word ‘description’ is used rather than ‘definition’. It has been observed that the nature of a floating charge does not lend itself to an exhaustive definition: see Re Brightlife Ltd [1986] 3 All ER 673, at p 677. The present discussion naturally focuses on the security aspects of a floating charge. But it should be appreciated that the distinction between a fixed and a floating charge may have other consequences. For example, a building society may be able to create a fixed charge over its assets but a security interest classified as a floating charge (whether involving all of the assets of the society or part only) will be void: see Building Societies Act 1986, s 9B (as inserted by Building Societies Act 1997, s 11). Equally, a fixed charge over shares and certain other assets will not be subject to registration under Companies Act 2006, s 680(7), but if the arrangement is characterized as a floating charge, then registration would be required under s 860(7)(g). On that subject, see para 28.10 below. In addition, a floating charge is subject to various preferential and other claims: see paras 28.14–28.23 below.

10  [1903] 2 Ch 284, at p 295 (CA).

11  In practice, security documents will frequently seek to take a floating charge over the entire assets and undertaking of the company, in addition to a list of specific, fixed charge assets.

12  Although some writers have occasionally put forward a different view, it is generally thought that a floating charge can only be created by a limited company.

13  The obvious example would be the stock in trade and finished goods of a manufacturing company.

14  This limitation should be carefully noted—the chargor’s authority is by no means unfettered, although it should be said that the expression ‘ordinary course of business’ was given a fairly extended meaning in Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 (Ch).

15  See the discussion at n 4 above. The fact that the right to deal with the assets may in some way be restricted does not necessarily mean that the chargor has insufficient control over them for these purposes: see Re Cosslett (Contractors) Ltd [1998] Ch 495 (CA).

16  Illingworth v Houldsworth [1904] AC 355 (HL). A floating charge was vividly described (at p 358) as ‘…ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect…’.

17  Government Stock and Other Securities Investment Co Ltd v Manila Railway Co [1897] AC 81. The security nevertheless comes into existence at the point of time when the security is created—the charge does not amount to a contract to create security at a future date or as at the point of crystallization: Evans v Rival Granite Quarries Ltd [1910] 2 KB 979.

18  Agnew v Commissioner for Inland Revenue [2001] 2 AC 21 (PC); Re Spectrum Plus Ltd [2005] 2 AC 680 (HL). As a result of these decisions, it has been suggested (eg by Lingard, para 8.56) that cases such as Re Atlantic Computers plc [1992] Ch 505 and Arthur D Little (in administration) v Ableco Finance LLC [2002] EWHC 701 (Ch) may require reconsideration because they were based primarily upon the view that the key characteristic of a floating charge was its ambulatory nature.

19  Again, note the contrast with the fixed charge which attaches to the asset from the date of creation and, form that date, the lender must exercise a sufficient degree of control.

20  See paras 28.14–28.36 below.

21  See Insolvency Act 1986, s 15(2).

22  On the few cases in which it remains possible to appoint an administrative receiver, see Insolvency Act 1986, ss 72A–72G, as inserted by the Enterprise Act 2002, s 250(1). The exceptions include (i) security created in respect of capital markets transactions in excess of £50 million, (ii) security given by a project company in respect of a public-private partnership, (iii) security given by certain railway and utility companies and urban regeneration projects, and (iv) certain financial collateral arrangements of the kind described in Chapter 36 below.

23  Re Compton & Co Ltd [1914] 1 Ch 954.

24  See Government Stock and other Securities Investment Co Ltd v Manila Railway Co [1897] AC 81 (HL) and Robson v Smith [1895] 2 Ch 118.

25  In any event, a provision in a floating charge to the effect that crystallization will occur when a moratorium is sought or obtained is void: see Insolvency Act 1986, Sch A1, para 43.

26  NW Robbie & Co Ltd v Witney Warehouses Co Ltd [1963] 3 All ER 613.

27  For the purposes of the Insolvency Act 1986, a charge originally created as a floating charge will continue to be treated as such, notwithstanding crystallization: see the definition of ‘floating charge’ in Insolvency Act 1986, s 251.

28  Save that, in accordance with ordinary principles, a mortgagee who takes a legal charge in good faith, for value and without notice of the crystallization will enjoy priority: see Ellinger, Lomnicka, and Hare, p 792, citing Business Computers Ltd v Anglo-African Leasing Ltd [1977] 2 All ER 741.

29  See Re Brightlife Ltd [1987] Ch 200, approving the New Zealand decision in Re Manurewa Transport Ltd [1971] NZLR 909, and the discussion in Lingard, para 9.28.

30  In consequence of the use of the words ‘as created’, the section will apply even if the floating charge has subsequently crystallized.

31  On the definition of ‘preferential debts’, see Insolvency Act 1986, s 396 and Sch 6.

32  Insolvency Act 1986, s 175(2); Re Christonette International Ltd [1992] 3 All ER 225.

33  On this point, see Lewis Merthyr Consolidated Collieries Ltd [1929] 1 Ch 498 and Re GL Saunders Ltd [1986] 1 WLR 215.

34  See paras 28.03–28.10 above.

35  As inserted by Enterprise Act 2002, s 252.

36  On the calculation of the prescribed part, see The Insolvency Act (Prescribed Part) Order 2003 (SI 2003/2097). The maximum amount of the prescribed part is £600,000.

37  Insolvency Act 1986, s 176A(5). This power would presumably be exercised where the deficiency is so great that each unsecured creditor would receive only a very nominal recovery.

38  See Re Airbase (UK) Ltd [2008] EWHC 124 (Ch).

39  Insolvency Act 1986, s 386, read together with para 8 of Sch 6 to that Act.

40  Re Nortel GmbH [2013] UKSC 52.

41  Insolvency Act 1986, s 386, read together with paras 9 and 10 of Sch 6.

42  Insolvency Act 1986, s 386, read together with para 11 of Sch 6.

43  See, for example, the discussion in relation to competing security over shares at para 29.25 below and, in relation to mortgages over land, at paras 32.37–32.38 below.

44  Re Benjamin Cope & Sons Ltd [1914] 1 Ch 800.

45  Wheatley v Silkstone and Haigh Moor Coal Co (1885) 29 Ch D 715.

46  On registration under s 859A, see paras 27.18–27.26 above.

47  Wilson v Kelland [1910] 2 Ch 306; English and Scottish Mercantile Investment Co Ltd v Brunton [1892] 2 QB 700 (CA).

48  Manchester Trust Ltd v Furness Withy & Co Ltd [1895] 2 QB 539.

49  Lingard, para 9.15.

50  The present discussion ignores the effect of Companies Act 1985, s 711A (inserted by the Companies Act 1989) because this provision has not been brought into force.

51  In order to reach such a conclusion, a court would have to circumvent the decision in Wilson v Kelland [1910] 2 Ch 306, where the court held that registration of the charge involved notice of its existence but not notice of its contents. In the modern context, this approach seems unrealistic, especially where the chargee is a bank whose own standard forms of floating charge would include precisely the kind of restrictions at issue.

52  On intercreditor agreements of this kind, see the discussion at paras 21.57–21.58 above.

53  Biggerstaff v Rowatts Wharf Ltd [1896] 2 Ch 93 (CA); Business Computers Ltd v Anglo-African Leasing Ltd [1977] 2 All ER 741

54  On this subject, see Chapter 30 below.

55  A possessory lien arises when the person claiming it has provided services in relation to the goods entrusted to him, whilst a contractual lien is created on the date on which the parties entered into the contract: Lingard, para 9.9, citing Wiltshire Iron Co Ltd v Great Western Railway Co [1910] 2 KB 979 (CA); George Barker (Transport) Ltd v Eynon [1925] 1 KB 655; and Mac-Jordan Construction Ltd v Brookmount Erostin Ltd [1992] BCLC 350 (CA).

56  On the identification of this date, see paras 28.11–28.13 above.

57  Evans v Rival Granite Quarries Ltd [1910] 2 KB 979; Heaton & Dugard Ltd v Cutting Bros Ltd [1925] 1 KB 655.

58  Re Opera Ltd [1891] 3 Ch 260 (CA).

59  Cairney v Back [1906] 2 KB 746.

60  Re Roundwood Colliery Co Ltd [1897] 1 Ch 373. For an exceptional case, see Herbert Barry Associates v Inland Revenue Commissioners [1977] 1 WLR 1437 (noting that the landlord may be deprived of priority if he has been guilty of fraud or unfair dealing).

61  On this point, see Rhodes v Allied Dunbar Pension Services Ltd [1989] 1 All ER 1161, discussed by Lingard at para 9.11.