Charge (Floating)

HMRC's Debt Management and Banking Manual describes the distinguishing feature of this type of security: 'The floating charge provides a charge over a class of assets that will change in the ordinary course of business. These tend to be the smaller, often less expensive, items such as stock and raw materials, which are regularly turned over in the normal course of business.' The manual explains why these assets are treated differently from those under a fixed charge: including them in a fixed charge 'would render it almost impossible to operate the business effectively: the business would have to obtain the debenture holder's permission every time an item was sold, replaced or disposed of.'

Until the charge crystallises, the chargor retains freedom to trade with the charged assets: 'Provided they pay the loan in accordance with the terms of the debenture, the chargee can sell, replace or otherwise dispose of assets under the floating charge in the normal course of business.' That freedom ends when specified trigger events occur: 'in order to protect the debenture holder in the event of any default, a floating charge 'crystallises' (effectively it becomes a fixed charge) when certain events or acts specified in the debenture occur. Usually the events relate to failure to pay debts and normally result in the appointment of an administrative receiver by the debenture holder.' The manual also flags a timing point relevant to enforcement: 'Debenture holders may only appoint an administrative receiver for charges created prior to 15th September 2003. The holder of a qualifying charge created on or after this date will usually take the option of administration.'