In an insolvency, a lender with a fixed charge is paid from the sale of its charged asset before almost anyone else. A lender with a floating charge waits behind the costs of the insolvency, the preferential creditors (including HMRC for certain taxes) and the prescribed part set aside for unsecured creditors. The Insolvency Act 1986 decides which group a charge belongs to by what it was when it was created, so the type of security largely determines how much the lender recovers.

What is the difference between a fixed and a floating charge?

A fixed charge attaches to a specific, identified asset, such as a freehold building, a piece of plant or a particular investment. The company cannot sell or deal with the asset without the lender’s agreement, which is what gives the lender its strong position.

A floating charge covers a changing pool of assets, typically stock, trade debtors, cash and other assets bought and sold in the ordinary course of business. The company can trade with those assets freely until the charge crystallises, for example when the lender enforces or an insolvency procedure begins. Most bank debentures combine the two: fixed charges over property and equipment, and a floating charge over everything else.

Either type should be delivered to Companies House for registration within 21 days beginning with the day after it is created (Companies Act 2006, section 859A). If it is not, section 859H makes the security void against a liquidator, an administrator and other creditors. See registering a charge and satisfying a charge for the filing side.

Why does it matter what the charge was when it was created?

Section 251 of the Insolvency Act 1986 defines a floating charge as a charge which, as created, was a floating charge. The same wording appears in the rules on preferential debts in receivership (section 40) and in the definition used for the prescribed part (section 176A(9)). In practice this means that crystallisation before the insolvency does not turn a floating charge into a fixed one. Its holder still ranks behind the insolvency costs, the preferential creditors and the prescribed part.

In what order are creditors paid?

HMRC’s policy paper on its preferential status sets out the broad order in which realisations are paid in a formal insolvency:

  1. secured creditors with a fixed charge, after the costs of realising their asset;
  2. insolvency practitioners’ fees and expenses;
  3. preferential creditors (mainly employee claims);
  4. secondary preferential creditors (certain HMRC debts);
  5. the prescribed part for unsecured creditors;
  6. secured creditors with a floating charge;
  7. non preferential (ordinary unsecured) creditors;
  8. shareholders.

The order really applies to two separate pools. Fixed charge assets pay the fixed charge holder, and any surplus joins the general pool. Floating charge assets pay the expenses, preferential debts and the prescribed part before the floating charge holder receives anything.

How do expenses and preferential debts reach floating charge assets?

Several provisions do this. Section 176ZA says that in a winding up in England and Wales, the expenses of the winding up take priority over floating charge claims to the extent the free assets cannot cover them. Section 175(2)(b) does the same for preferential debts. Under section 40, where a receiver is appointed for debenture holders under a charge that was floating when created, and the company is not being wound up, preferential debts must be paid from the assets the receiver collects before the debenture holders.

In an administration, the administrator’s remuneration and expenses are charged on the property in their control and paid ahead of any floating charge security (Schedule B1, paragraph 99(3)). None of these rules reach fixed charge assets, which is why lenders prefer fixed security where the asset allows it.

Since 1 December 2020, certain HMRC debts (VAT and amounts deducted from employees such as PAYE income tax, employee National Insurance and student loan repayments) have ranked as secondary preferential debts. This was a significant change for floating charge lenders, covered in HMRC as a secondary preferential creditor.

What can an administrator do with charged assets?

The difference shows clearly in administration. Under Schedule B1, paragraph 70, an administrator can sell or deal with floating charge property as if it were not charged. The lender keeps the same priority over whatever represents the sale proceeds.

Fixed charge property is different. Under paragraph 71, the administrator needs a court order to sell it free of the security, and the court must think the sale is likely to promote the purpose of the administration. The net proceeds, plus any shortfall against market value as decided by the court, must go to the fixed charge holder. The administrator must send a copy of the order to Companies House within 14 days. See company administration for the procedure as a whole.

Who can enforce each type of charge?

A lender holding a qualifying floating charge over the whole or substantially the whole of a company’s property can appoint an administrator out of court (Schedule B1, paragraph 14). Under section 72A, the holder of a qualifying floating charge created on or after 15 September 2003 cannot appoint an administrative receiver, subject to limited exceptions. Fixed charge holders still commonly appoint a receiver over the charged property itself. See fixed charge receivers.

Can a floating charge be set aside?

Yes. Section 245 makes a floating charge invalid if it was created in the run up to insolvency, except to the extent of new value given at the same time or later (money paid, goods or services supplied, or debt discharged, plus agreed interest). The look back period is:

  • 2 years before the onset of insolvency for a charge in favour of a connected person, such as a director;
  • 12 months for anyone else, but only if the company was unable to pay its debts when the charge was created or became unable to as a result.

A director who takes a floating charge to secure an existing loan to a struggling company therefore gains little protection. The charge will usually fail for the old debt and stand only for fresh money lent afterwards. Related challenges are covered in preferences.

How does this work with numbers?

Illustration only. A company in liquidation owes its bank £400,000 under a debenture with a fixed charge over its building and a floating charge over everything else. The building sells for £300,000 after selling costs, and the bank takes all of it. Other assets realise £150,000. Liquidation expenses are £30,000, preferential employee claims are £10,000 and secondary preferential HMRC claims are £20,000, leaving net property of £90,000.

The prescribed part on £90,000 is 50% of the first £10,000 (£5,000) plus 20% of the remaining £80,000 (£16,000), giving £21,000 for unsecured creditors. The bank receives the remaining £69,000 under its floating charge, recovering £369,000 in total. It can prove for its £31,000 shortfall as an unsecured creditor. Had the bank held only a floating charge, its £300,000 from the building would also have been exposed to the expenses, preferential claims and the prescribed part.

What mistakes do companies and lenders make?

  • Relying on the label. A lender that calls its charge over stock or debtors fixed, but lets the company use those assets freely in trading, invites the office holder to argue that the charge is really floating.
  • Forgetting the as created rule. Crystallising a floating charge just before insolvency does not lift it above the preferential creditors.
  • Taking security for old debt late in the day. Section 245 can strip a floating charge back to the new money advanced.
  • Not registering the charge. Missing the 21 day window leaves the lender unsecured against a liquidator or administrator.
  • Overlooking HMRC. Floating charge lenders and directors sometimes forget that VAT and PAYE arrears now rank ahead of the floating charge.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.