Charges over goods can be either fixed or floating. It is the substance of the charge, rather than how it is labelled, that will determine in which camp it sits. As there are no clear statutory definitions, a number of factors will be considered when deciding whether the substance of a charge is fixed or floating. Classification of charges has great importance to lenders as during insolvency proceedings it will affect their entitlement to receive repayments towards their loan when assets are realised.
For a charge to be fixed, it must be granted over a definable asset over which the lender has sufficient control. Think of a lender's control over a mortgaged property. In practice the borrower is free to use the property and benefit from its shelter and sanctuary day to day but will be prohibited from selling or making structural alterations without the consent of the lender. For the lender to have sufficient control, the asset must be fixed and identifiable.
To be considered floating, a charge must have the following characteristics:
1. The charge floats over a class of assets present and future;
2. The class of assets will be changing from time to time;
3. The borrower will be free to control this pool of assets in the ordinary course of its business until a crystallisation event occurs fixing the charge to those assets.
A charge granted by an individual over "personal chattels" is subject to the Bills of Sale Acts 1878 – 1882 (the Acts). Most goods are considered personal chattels but ships or aircraft are excluded. Unless a charge over personal chattels falls within one of a number of statutory exemptions it must be registered in line with the following requirements:
- The registered security documents must list each secured asset;
- The registration is renewed from time to time in respect of the secured asset; and
- No future acquired asset can be secured.
These requirements are impractical for a fluctuating pool of assets which is what a floating charge is used to secure.
Shares and cash are excluded from the definition of "personal chattels" in the Acts, so it has been argued that an individual can in theory grant a floating charge over these goods but in practice it is common for lenders to take fixed charges over shares. Under current law charges will be construed as fixed even if the borrower is free to use the dividends or other income generated from the shares. Much like the property example, the borrower will be free to benefit from the fruits of the shares but will be prohibited from selling the shares. Whether an individual borrower with a share portfolio could create a floating charge over those shares and have freedom to trade remains a relatively untested area of law and so a floating charge over shares offered by an individual is unlikely to represent good and valuable security from a lender's perspective.