Fixed charge

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A word about credit risk mitigation

Legal security: MortgagePledgeLienBailment
Equitable security: Chargefixedfloating | ABWOS | Equitable lien
Credit risk mitigation: Title transfer | Guarantee | Letter of credit | Netting
Friends and relations: Rehypothecation | Equivalent
Documents: 1994 ISDA CSA (NY law) | 1995 ISDA CSA | 1995 ISDA CSD (English law)
Regulation: LPA 1925 | Financial Collateral Regulations | LPMPA 1994

Index: Click to expand:

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See also: Assignment by way of security

A fixed charge is a type of charge. That is fixed. It doesn’t, so to say, float.

A fixed charge encumbers asset it secures from day one. To benefit from a fixed charge you need to have control over the assets - if the debtor can deal with the secured assets as it pleases without your knowledge and control, your fixed charge may fail - see Re Spectrum Plus. On a good day it might get recharacterised as a floating charge — but don’t bank[1] on it and note that there are certain formal requirements to perfect a floating charge which you are likely not to have done, seeing as you were thinking what you had was a fixed charge which didn’ require them[2].

Why take a fixed charge?

A fixed charge is better than its poor relation the floating charge:

  • practically, because you do (right?) keep control over the asset and can prevent the debtor salting it away, and
  • legally, because it ranks ahead of a floating charge in the debtor’s insolvency (well - it would do: the first in time prevails, and by definition, a floating charge only fixes when it crystallises, meaning a floater is always last to the party). The converse is that the holder of a floating charge remains subject to the theoretical risk that another creditor will take a fixed charge over the same assets, and this will take priority over the floating charge when it subsequently crystallises.

However, it does require the security holder to have control of the charged asset. If she doesn’t[3], her fixed charge conceivably fail, in which case it would, most likely, be recharacterised as a floating charge.

And “control” means?

Well, thereby hangs a tale. Recent case law — especially obiter dicta in the extended liens case, has thrown the area into confusion and now sainted legal counsel are scrambling to caveat views they might in gladder days have issued in bare-knuckle fashion. But even if you have delivered your collateral to a custodian and impressed with a fixed security interest in favour of a creditor, an generalised right to substitute that collateral might interfere with the control analysis.

Fixed charges are good for

  • Buildings
  • Plant
  • immovable forces
  • Custody assets (where the charge holder is the Custodian)

In more recent times intangible legal rights:

Important case law

Just because you say you have a fixed charge doesn’t mean you do. Practical, factual considerations will apply. There are two important recent cases:

Fixed charges are not so good for

  • Stock in trade
  • Consummables that are in the debtor’s possession

See also


References

  1. This gag comes to you direct from our “here all week, folks!” store of corking one-liners.
  2. Unless it qualified under the Financial Collateral Directive (2002/47/EC (EUR Lex)
  3. If, in Ian Curtis’s words, she’s lost control