Who gets paid first in UK insolvency: fixed vs floating for directors

A fixed charge locks down a specific asset (property, plant, identifiable IP) so the company cannot sell or move it without the lender’s consent; a floating charge sits over a shifting pool of assets like stock and book debts, letting the business trade freely until something triggers crystallisation. The practical split is control versus flexibility, and in insolvency it decides who gets paid first. UK case law, not the label on the document, ultimately decides which one you actually have.

TL;DR:

• Fixed charges attach to identifiable assets like property or machinery, giving lenders control and priority over proceeds in insolvency.
• Floating charges cover a changing pool of assets like inventory and receivables, allowing trading until crystallisation triggers fixed control.
• Crystallisation occurs automatically or by notice, fixing the floating charge onto assets at that moment and restricting the company’s ability to deal with them.
• In insolvency, fixed charge holders are paid first from specific asset proceeds, while floating charge holders recover only after fixed creditors and liquidation costs.
• Proper drafting and control verification, especially over book debts and intangible assets, are essential to ensure charges retain their intended character and priority.

Table of Contents

• What is a fixed charge: assets, control and enforcement
• What is a floating charge: how it covers a changing pool of assets
• When does a floating charge crystallise?
• Priority and insolvency consequences: where fixed and floating charges sit
• Drafting and re-characterisation risks: control, ‘all-or-nothing’ and practical checks
• Practical structuring for property and development finance
• How James William & Co Capital applies these principles in practice
• What directors should actually do about this
• Get your security package structured properly
• Key statutes and practice notes
• Sources
• FAQ

What is a fixed charge: assets, control and enforcement

A fixed charge attaches immediately to a specific, identifiable asset. The moment it’s granted, the company loses the right to sell, lease, or dispose of that asset without the lender’s sign-off. That’s the whole point: the lender wants certainty over one thing, not a claim over a moving target.

Typical assets carrying a fixed charge include:

• Freehold or leasehold property
• Major plant and machinery that stays put
• Identifiable intellectual property, where the lender actively restricts its use or transfer
• Shares in subsidiary companies

Lenders prove control isn’t just theoretical through mechanisms like blocked accounts, where proceeds from a charged asset must be paid into an account the borrower can’t touch without permission, and contractual restrictions on disposal. This evidence of real control matters enormously, because courts have repeatedly re-characterised charges as floating when that control turned out to be illusory. When enforcement happens, fixed charge holders go straight to the proceeds of their specific asset before general creditors see a penny, which is exactly why lenders fight for fixed status wherever they can get it.

What is a floating charge: how it covers a changing pool of assets

A floating charge is an equitable security over a changing pool of assets rather than one fixed item. Three features define it: it covers a class of assets (not a single named one), that class changes constantly as the business trades, and the company keeps the freedom to buy, sell, and use those assets in the ordinary course of business until something stops it.

Assets typically caught by a floating charge include:

• Stock-in-trade and inventory
• Book debts and receivables not yet collected
• Future assets the company hasn’t acquired yet
• Cash at bank, where no fixed control is exercised

The advantage is coverage: a lender can secure against an entire trading business rather than a handful of static items, which matters hugely for companies whose real value lies in stock turnover or a receivables ledger rather than bricks and mortar. The disadvantage sits on the other side of the same coin. Floating charge holders rank behind fixed charge holders, certain liquidation costs, and preferential debts when the money finally gets divided up, so the wider net comes at the cost of a weaker claim.

When does a floating charge crystallise?

Crystallisation is the moment a floating charge stops floating and fixes onto whatever assets sit within its scope at that instant. From then on, it behaves like a fixed charge, and the company loses its freedom to deal with those specific assets.

Common triggers include:

1. Contractual notice served by the lender, often following a breach of covenant
2. Appointment of a receiver or administrator
3. The company entering winding up
4. Cessation of trading, which many debentures treat as an automatic trigger

Some events crystallise the charge automatically, without any notice needed, which catches out directors who assume they’ll get a warning. Partial crystallisation, where only certain assets are caught, creates real complexity because a receiver or administrator then has to work out exactly what fell within scope at the trigger moment and what didn’t. Lenders should document the trigger event precisely; administrators need that same timestamp to establish which assets are fixed and which are still available to the general estate.

Priority and insolvency consequences: where fixed and floating charges sit

Insolvency is where the fixed versus floating distinction stops being theoretical and starts deciding who actually gets paid. The order under the Insolvency Act 1986 runs roughly like this:

• Costs of the insolvency process itself, paid first
• Fixed charge holders, from the proceeds of their specific charged assets
• Preferential debts (certain employee claims and HMRC amounts)
• The prescribed part, a slice of floating charge realisations ring-fenced for unsecured creditors
• Floating charge holders, from what’s left of the floating charge assets
• Unsecured creditors, last in line

Fixed charge holders recover directly from their asset’s proceeds before anyone else touches that pot. Floating charge holders, by contrast, watch their recoveries reduced by liquidation expenses, preferential debts, and the prescribed part before they see a return. For directors negotiating a lending package, this is the single fact worth understanding properly: a lender who insists on fixed charges over your key assets isn’t being difficult for the sake of it. They’re protecting a priority position that a floating charge simply can’t match.

Drafting and re-characterisation risks: control, ‘all-or-nothing’ and practical checks

Courts look at substance, not the label on the page. Call something a “fixed charge” in the debenture, and a judge will still call it floating if the lender never actually exercised control over the asset in practice.

The ‘all-or-nothing’ principle makes this sharper still: if a single charging clause bundles several different asset types together intending fixed treatment, and the lender can’t demonstrate control over all of them, the whole clause can be read down to floating. You cannot get fixed treatment over the parts you controlled and floating over the rest from one generic clause.

Practical checks worth building into any debenture:

• Draft separate provisions for each distinct asset category rather than one bundled clause
• Route payments from charged receivables into a blocked account the borrower cannot access freely
• Document monitoring steps in writing, not just in the loan agreement’s wording
• Review IP and intangible asset clauses separately, since these attract particular scrutiny

A classic failure pattern: a charge over book debts is drafted as fixed, but the borrower keeps collecting and spending the money freely with no blocked account in place. Courts have consistently found these arrangements to be floating in substance, regardless of what the document says.

Pro Tip: If your debenture describes book debts as “fixed” but nobody actually monitors the account they’re paid into, assume a court will treat that charge as floating the day it matters most.

Practical structuring for property and development finance

Most development and bridging lenders don’t choose between fixed and floating; for investors and developers, using a holding company for property in Spain can also provide specific tax benefits and risks to consider. They use both, in what’s usually called a blended debenture: fixed charges over assets that won’t move (the site, the completed units, major plant) and a floating charge sweeping up everything else the business needs to keep trading.

This structure gives lenders the certainty they want over the assets that actually secure their exposure, while leaving the borrower room to manage day-to-day working capital without needing sign-off for every transaction. In a typical development finance stack, negotiation tends to focus on:

• How tightly the fixed charge definitions are drawn, and whether they capture partially built units
• Whether the floating charge triggers automatic crystallisation on covenant breach or requires formal notice
• What operating headroom the borrower keeps for supplier payments and site costs

Directors negotiating these terms should push for clear, narrow crystallisation triggers rather than broad automatic ones, protecting cashflow for as long as reasonably possible. Where a deal involves multiple layers of debt, mezzanine tranches, JV equity, or offshore vehicles, specialist structuring advice earns its fee quickly.

How James William & Co Capital applies these principles in practice

Development and bridging packages arranged through James William & Co Capital typically pair fixed charges over land, units under construction, and plant with a floating charge over trading assets, giving lenders certainty without strangling a borrower’s cashflow. Multi-layered stacks, mezzanine debt, offshore vehicles, and bespoke covenants demand this kind of granular, asset-by-asset thinking rather than a one-size debenture.

What directors should actually do about this

Check the control terms before you sign anything, not after a dispute starts. Ask exactly what triggers crystallisation, whether book debts are genuinely blocked-account controlled, and whether specialist structuring advice has reviewed the full debt stack. Insolvency priority isn’t an abstract legal point; it decides who actually gets repaid when things go wrong.

— James William Dawes

Get your security package structured properly

James William & Co Capital is the alternative to piecing together security documentation with a generalist adviser: we structure bridging, development, and commercial finance security packages daily, so fixed and floating charge drafting gets the same scrutiny as the funding terms themselves. For property developers and investors running multi-layered debt stacks, offshore vehicles, or bespoke covenant packages, getting the charge characterisation right from day one avoids expensive disputes later.

Our capital concierge approach gives you one point of contact across structuring, lender negotiation, and execution rather than juggling separate advisers for each layer of debt. Outcomes we regularly deliver: rapid turnaround on complex bridging and development structures, and bespoke debt packages matched to how your specific deal actually trades. If you’re negotiating a debenture on a development or acquisition and want the fixed and floating elements structured properly from the outset, get in touch with our specialist property finance team to discuss your deal.

Key statutes and practice notes

• Insolvency Act 1986 — governs priority order, preferential debts, and the prescribed part on insolvency
• Insolvency (England and Wales) Rules 2016 — qualifying floating charge holder appointment rights
• HMRC technical manual — official guidance on fixed and floating charge characterisation
• LexisNexis practice notes — crystallisation and priority commentary
• Latham & Watkins — re-characterisation risk and drafting analysis

This article is general information, not a substitute for advice from a qualified lawyer. Consult a qualified legal professional about your own circumstances before acting on anything here.

Sources

• HMRC technical manual — fixed and floating charge guidance
• Insolvency (England and Wales) Rules 2016 (re: qualifying floating charges)
• LexisNexis practice note — fixed and floating charges
• Latham & Watkins — Charging ahead: characterisation of fixed and floating charges

FAQ

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

A fixed charge attaches to a specific asset immediately and stops the company dealing with it freely; a floating charge covers a changing pool of assets and lets the company trade until crystallisation fixes it in place.

What is a floating charge in the UK?

It’s an equitable security interest over assets like stock and book debts that the company can still buy, sell, and use in the ordinary course of business, as HMRC’s technical manual sets out, until a crystallisation event fixes the charge.

Why would a company have a floating charge?

Floating charges let lenders secure value in assets that change constantly, such as stock and receivables, which cannot practically be pinned down with a fixed charge at the outset.

Can you give me an example of a floating charge?

A retailer’s stock-in-trade is a classic example: the company keeps selling and replenishing inventory freely, and the lender’s security simply floats over whatever stock exists at any given moment until crystallisation.

Does a qualifying floating charge give special rights?

Yes. A qualifying floating charge holder can typically appoint an administrator out of court, a significant strategic lever in an insolvency scenario that fixed charge holders don’t have.