Fixed Charge

What is Fixed Charge exactly?

‍A fixed charge is a type of security interest that attaches to specific, identifiable assets owned by a company. When you grant a fixed charge to a lender, you are effectively giving them a proprietary right over those particular assets. This means you cannot sell, lease, or otherwise dispose of the charged assets without the lender's express permission. The assets become "fixed" as security for the loan, providing the creditor with considerable reassurance and a strong position if your company faces financial difficulties.

‍In practice, a fixed charge is most commonly used for high-value, stable assets that are not meant to be traded regularly. Typical examples include real estate (your company's office or factory), large pieces of machinery, or even intellectual property like a registered trademark. Because the charge is attached to specific property, the lender has a clear and enforceable claim over those items, making it a preferred form of security for banks and institutional investors providing long-term financing.

‍The creation of a fixed charge is a formal legal process. It is typically established through a debenture or a specific charge document. This agreement must then be registered with the Companies Registration Office (CRO) within 21 days to be legally enforceable against other creditors and potential buyers. Failure to register the charge renders it void against a liquidator or any other creditor, severely weakening the lender's position.

How does a Fixed Charge differ from a floating charge?

‍The fundamental difference between a fixed charge and a floating charge lies in the nature of the assets they cover and the company's ability to deal with them. A fixed charge attaches to specific, identifiable assets that the company cannot freely dispose of. In contrast, a floating charge 'hovers' over a class of assets that change in the ordinary course of business, such as stock, raw materials, or debtors.

‍Under a floating charge, the company retains the freedom to buy, sell, and use those assets until an 'event of crystallisation' occurs, such as the company defaulting on the loan or entering administration. At that point, the floating charge crystallises, converting into a fixed charge over the assets within its scope at that moment. The fixed charge holder always has priority over a floating charge holder when it comes to the specific fixed assets and the proceeds from their sale.

‍This distinction is crucial in insolvency. A creditor with a fixed charge is a secured creditor with first claim on the proceeds from the sale of the specific charged asset. A floating charge holder, while still secured, ranks behind the fixed charge holders and certain preferential creditors like employees, making their recovery less certain.

What types of assets can a Fixed Charge cover?

‍A fixed charge can cover any specific, identifiable asset that has a stable existence and is not intended to be consumed or sold in the company's normal trading cycle. The most common assets are immovable property like land and buildings. It can also cover significant items of plant and machinery, ships, aircraft, and registered intellectual property rights such as patents or trademarks.

‍Importantly, a charge can only be considered 'fixed' if the company's freedom to deal with the asset is substantially restricted. Courts will look at the substance of the agreement, not just its label. If a company retains the ability to sell an asset and use the proceeds freely in its business, a court may reclassify what was called a 'fixed charge' as a 'floating charge', with serious consequences for the lender's security.

How is a Fixed Charge created and registered?

‍Creating a fixed charge is a formal process that begins with a legal document, usually a debenture or a specific charge agreement. This document will clearly identify the secured assets, the amount of the loan, and the terms of the security. Both the company and the lender must execute this document for it to be valid.

‍Once created, the charge must be registered with the Companies Registration Office (CRO) within 21 days. This is done by filing a Form C1, which includes details of the charge, the property charged, and the persons entitled to it. Registration serves as public notice to the world that the asset is encumbered. If registration is missed, the charge becomes void against a liquidator, administrator, and any other creditor, meaning the lender would become an unsecured creditor—a potentially catastrophic outcome for their investment.

What happens to a Fixed Charge if a company becomes insolvent?

‍If a company enters liquidation or administration, the fixed charge becomes critically important. The holder of a valid fixed charge is a secured creditor. They have the right to take possession of the charged asset, sell it, and use the proceeds to repay the debt owed to them before most other creditors see any money.

‍In practice, the appointed insolvency practitioner (liquidator or administrator) will typically sell the asset. The proceeds from the sale are first used to pay the costs of the sale, then to discharge the debt owed to the fixed charge holder. Only after the fixed charge holder is paid in full do any remaining funds become part of the general pool of assets available to pay floating charge holders, unsecured creditors, and finally, if anything is left, shareholders.

What are the advantages and disadvantages of a Fixed Charge?

‍For a lender, the primary advantage of a fixed charge is the high level of security and priority it provides. It gives them control over a key asset and ensures they are first in line for repayment from its sale, significantly de-risking their loan. For a company, agreeing to a fixed charge can make it easier to secure financing, often at a lower interest rate, because it reduces the lender's risk.

‍The main disadvantage for a company is the loss of operational flexibility. You cannot sell or refinance the charged asset without the lender's consent, which can hinder your ability to adapt your business or seize new opportunities. It also ties up your most valuable assets, which could otherwise be used as security for additional borrowing. For the lender, the disadvantage is that the value of the fixed asset may depreciate over time, potentially leaving them under-secured if the loan is not repaid.

Can a Fixed Charge be removed or discharged?

‍Yes, a fixed charge can be removed or discharged once the underlying debt is fully repaid. The process involves the lender issuing a formal document called a "Deed of Release" or "Certificate of Satisfaction." This document states that the charge is no longer in effect. The company must then file this document with the CRO using a Form C4 to update the public register and clear the charge from the company's record.

‍It is crucial to complete this administrative step. Until the discharge is registered, the charge remains on the public file, which can create problems if you try to sell the asset or use it as security for another loan, as potential buyers or new lenders will see the old charge and be wary.

How does a Fixed Charge affect your ability to run your business?

‍A fixed charge imposes significant restrictions on your managerial freedom. Whilst you retain legal ownership and can usually still use the asset in your business (like operating a machine or occupying a building), you lose the power to dispose of it. This means you cannot sell it, lease it to a third party, or grant another charge over it without obtaining a formal release or consent from the existing charge holder.

‍This can impact strategic decisions. For example, if you need to relocate your business, you cannot simply sell your charged premises. You would need to negotiate with the lender, who may agree only if the loan is repaid from the sale proceeds or if alternative security is provided. It is essential to factor these constraints into your long-term business planning and joint venture agreement considerations where asset ownership is shared.

What happens if you breach a Fixed Charge?

‍Breaching the terms of a fixed charge is a serious event of default under the loan agreement. Typical breaches include attempting to sell the charged asset without consent, damaging the asset, or failing to maintain adequate insurance on it. Upon a breach, the lender has several powerful remedies.

‍They can demand immediate repayment of the entire loan (acceleration). They can also apply to the court for an injunction to prevent any further dealing with the asset. Most significantly, they can appoint a receiver over the charged asset. A receiver has the power to take possession of the asset, manage it, and sell it to recover the money owed, often without needing a court order. This can severely disrupt your business operations and damage your company's reputation with other creditors and partners.