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In order to raise money for future investment and to grow a business or sustain their home life, companies and individuals (respectively) borrow funds from banks, financial institutions and other companies in the form of loans to fulfil their monetary requirements.
The lender may demand security against the loan and so, the borrower creates a charge over the assets or lien on the property. This loan becomes ‘secured’.
A secured creditor is one who has loaned money to a company or individual, and secured their lending, either by a ‘fixed charge’ (one which, like a mortgage, is fixed on specific and named property or other assets) or a ‘floating charge’ (one which is not attached to specific property, but which floats above an asset of the business, such as stock or the directors’ loan account or book debtors). A floating charge will only attach to a specific asset once it has ‘crystallised’.
A lender with a fixed charge has no right to deal with the charged property (but will often allow the borrower to use the property to carry on business, or to live in, etc.). The legal title to the property passes to the lender (mortgagee/chargee) and the property cannot be sold without their full permission.
A lender with a floating charge has no right to stop any activity on the charged asset(s), as legal title remains with the borrower (mortgagor/charger). The company can use or deal with the asset until ‘crystallisation’. A floating charge may crystallise over all the assets subject to it (which is most common), or just some of them if the lender so decides (but this is rare).
A company can take out both types of secured lending (and often they offer the security of a ‘fixed and floating charge’). An individual can only take out a fixed charge – such as a mortgage over their personal or business property.
The document evidencing the charge is called a ‘debenture’, but can be called a ‘mortgage deed’. It contains detailed clauses citing exactly what is charged, the terms of the lending, the interest rate, the duration of the charge and what constitutes breach of the charge (for example, non-payment of capital and interest for three consecutive months).
If there are two charges, a fixed charge and a floating charge, the fixed charge will have priority when it comes to being repaid (because the fixed chargee owns the
