Understanding floating chargeholder rights and floating charges
A floating charge is when a group of company assets that are always changing are used as security for borrowings by a floating chargeholder, i.e., a creditor. If the company defaults on the loan or becomes insolvent, the qualifying chargeholder will have a right to appoint an administrator and obtain payment according to a hierarchy.
When a company obtains borrowing it has to provide security for the lender to protect them from the risk of default. Lenders, and potentially other parties, can hold a fixed or floating charge over the assets of a business, with floating charges covering all the company’s assets or a certain class of asset, such as stock or work-in-progress.
Because they’re assets used in day-to-day operations they may be sold or otherwise put to use in the normal course of business. A floating charge is essentially a written record that documents the terms of the charge, and this must be registered at Companies House.
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What ‘qualifies’ a floating charge?
Banks typically hold a fixed charge over one or more specific assets when they lend, such as the company’s premises, but they may also be qualifying floating chargeholders over the company’s other assets as this provides additional security.
For a floating charge to be regarded as ‘qualifying’ certain criteria must be met, including:
Specific wording in the charge document
The document or debenture incorporating the floating charge must also secure “the whole or substantially the whole” of the company’s property
Floating chargeholders and their rights
Qualifying floating chargeholders have rights if the charge is ‘crystallised’ - this means that an event such as default or insolvency has occurred, the loan terms have been breached by the company, and the company’s use of the assets concerned is then severely restricted.
So what are the rights of a qualifying chargeholder in these instances?
Appointing an administrator
For corporate insolvencies that occurred before 15th September 2003, qualifying floating chargeholders had the right to appoint an administrative receiver without having to apply to the court.
In the case of company insolvencies after that date, qualifying floating chargeholders have the right to appoint an administrator without the need to obtain a court order. Once appointed the administrator can take control of the company from its directors, and works in the interests of all the company’s creditors.
Position in the repayment ‘hierarchy’
A hierarchy of repayment set out in the Insolvency Act 1986 states the order in which each class of creditor should be paid when a company is liquidated. Qualifying floating chargeholders fall below fixed chargeholders, administrator’s fees, and preferential creditors in this hierarchy, but above unsecured creditors.
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Who are qualifying floating chargeholders?
The most common type of qualifying floating chargeholder is the company’s bank, but other parties and individuals may also be qualifying floating chargeholders, including but not limited to creditors, landlords, and other lenders.
Directors may also hold the position of qualifying floating chargeholder if they’ve lent money to the company via their directors’ loan account and require additional security against the loan.