1. Introduction: What Are Charges in Banking Law?
In commercial lending, a charge is a type of security interest created over a borrower’s assets to secure a debt. Unlike a mortgage (usually on land) or a pledge (which requires transfer of possession), a charge allows the borrower to retain both possession and use of the asset.
But charges are not all the same. Banking law recognises two main categories:
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Fixed charges
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Floating charges
These two forms determine (1) how much control the borrower keeps, (2) what the lender can do on default, and (3) the lender’s priority over other creditors. They are the backbone of corporate lending structures.
2. Core Concept: Control vs. Flexibility
The distinction between fixed and floating charges revolves around one central issue:
➡️ Does the borrower have the freedom to use and deal with the asset in the ordinary course of business?
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If no, the lender has a fixed charge.
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If yes, the lender has a floating charge.
This simple rule influences everything from insolvency priority to regulatory capital treatment.
3. Fixed Charges: The Tight Grip Security
3.1. What Is a Fixed Charge?
A fixed charge attaches to a specific identified asset (or group of assets) from the moment the charge is created.
Key features:
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The asset is clearly defined.
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The borrower cannot dispose of it without lender consent.
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The lender exercises a high degree of control.
3.2. Common examples
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Buildings and land
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Heavy machinery or equipment
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Intellectual property
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Bank accounts (sometimes, if lender control is strong)
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Shares and financial instruments
3.3. Legal consequences
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Strongest form of security after mortgages
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Highest priority in insolvency
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Harder to challenge by liquidators
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Easier to enforce through sale or appointment of a receiver
In essence, a fixed charge is the bank’s “anchor.” It locks down strategic assets essential for repayment.
4. Floating Charges: The Flexible, Business-Friendly Security
4.1. What Is a Floating Charge?
A floating charge hovers (“floats”) over a shifting pool of assets. The borrower can continue to use, sell, or replace those assets in the ordinary course of business until an enforcement event happens.
The floating charge only becomes “fixed” (crystallises) upon default or certain triggers.
4.2. Common examples
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Stock and inventory
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Raw materials
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Trade receivables
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Cash flow
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Future assets
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“All assets” debentures
4.3. Why floating charges exist
Businesses need flexibility. A company cannot run if it must ask the bank’s permission every time it wants to sell a product or collect an invoice. Floating charges allow companies to function normally while still giving the bank security.
4.4. Legal consequences
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Weaker than fixed charges
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Often outranked by preferential creditors (employees, tax authorities)
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Can be invalidated if created shortly before insolvency
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Enforceable only after crystallisation
Floating charges are essential but inherently more vulnerable.
5. Crystallisation: The Turning Point
A floating charge crystallises into a fixed charge when:
Once crystallised:
Crystallisation is the key transition from flexibility to enforcement.
6. The Control Test: Modern Legal Approach
Courts (especially in the UK, Commonwealth, and jurisdictions influenced by common law) use a control test to distinguish the two charges:
Fixed charge = lender has genuine control
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Asset cannot be disposed of freely
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Lender approves sales or withdrawals
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Proceeds may need to go into a controlled account
Floating charge = borrower controls asset day-to-day
Cases like Re Spectrum Plus emphasise real control over the asset—not just contractual wording.
7. Priority Rules: Fixed Wins, Floating Follows
General ranking
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Fixed charges
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Preferential creditors (wages, taxes – jurisdiction dependent)
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Floating charges
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Unsecured creditors
This matters massively in insolvency. Even a single misclassification—from fixed to floating—can move a bank from the top of the waterfall to second or third place.
8. Why Not Use Fixed Charges Only?
Banks would love all security to be fixed. But business reality prevents it.
Problems with fixed charges:
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Too restrictive: companies cannot operate efficiently
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Administrative burden: constant lender approvals
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Not suitable for assets that change regularly
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Impossible for “future assets” unless tightly controlled
Floating charges solve these problems by offering security and operational freedom.
9. Documentation: How They Appear in Practice
Banks often use debentures (in the UK/Commonwealth) or general security agreements (in PPSA jurisdictions).
These documents include:
It is common to see hybrid structures: fixed charges for valuable static assets + floating charges for circulating assets.
10. Comparative Law Perspective
Common Law Systems
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Clear distinction between fixed and floating
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Priority heavily influenced by categorisation
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Floating charges widely accepted
Civil Law Systems
Do not usually recognise floating charges in the traditional sense. Instead:
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Use pledges, hypothecs, non-possessory security
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Some modern reforms introduce “enterprise charges” similar to floating charges (e.g., in Romania, Czech Republic)
PPSA and UCC Article 9 Systems
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Do not use the fixed/floating terminology
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Use the concept of “security interests in present and after-acquired collateral”
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Functionally similar to floating charges but with clearer statutory rules
11. Regulatory and Practical Importance
For banks:
For borrowers:
For insolvency practitioners:
12. Real-World Example
A manufacturer borrows €5 million.
The bank takes:
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Fixed charge over factory and machinery
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Fixed charge over trademarks
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Floating charge over stock, raw materials, accounts receivable
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Assignment of receivables for large customer contracts
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Controlled account for loan repayments
This structure gives the borrower operational flexibility while protecting the bank’s position across all asset classes.
13. Key Takeaways
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Fixed charges = control + priority + stability
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Floating charges = flexibility + business continuity
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Both are essential tools in corporate finance
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The legal classification impacts priority, enforceability, and regulatory treatment
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Crystallisation is the bridge between the two
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Modern case law focuses heavily on real control, not just drafting
