While both need to be registered, the distinction between a fixed and a floating charge matters greatly because floating charges are subordinated by the Insolvency Act 1986 to insolvency practitioners' expenses under section 176ZA,[59] preferential creditors (employees' wages up to £800 per person, pension contributions and the EU coal and steel levies) under section 175 and Schedule 6 and unsecured creditors' claims up to a maximum of £600,000 under section 176A. The floating charge was invented as a form of security in the late nineteenth century, as a concept which would apply to the whole of the assets of an undertaking. The leading company law case, Salomon v A Salomon & Co Ltd,[10] exemplified that a floating charge holder (even if it was the director and almost sole shareholder of the company) could enforce their priority ahead of all other persons. As Lord MacNaghten said, "Everybody knows that when there is a winding-up debenture-holders generally step in and sweep off everything; and a great scandal it is." Parliament responded with the Preferential Payments in Bankruptcy Amendment Act 1897, which created a new category of preferential creditors - at the time, employees and the tax authorities - who would be able to collect their debts after fixed charge holders, but before floating charge holders. In interpreting the scope of a floating charge the leading case was Re Yorkshire Woolcombers Association Ltd[60] where a receiver contended an instrument was void because it had not been registered. Romer LJ agreed, and held that the hallmarks of a floating charge were that (1) assets were charged present and future and (2) change in the ordinary course of business, and most importantly (3) until a step is taken by the charge holder "the company may carry on its business in the ordinary way".[61] A floating charge is not, technically speaking, a true security until a date of its "crystallisation", when it metaphorically descends and "fixes" onto the assets in a business' possession at that time.
Businesses, and the banks who had previously enjoyed uncompromised priority for their security, increasingly looked for ways to circumvent the effect of the insolvency legislation's scheme of priorities. A floating charge, in order for its value to be ascertained, must have "crystallised" into a fixed charge on some particular date, usually set by agreement.[62] Before the date of crystallisation (given the charge merely "floats" over no particular property) there is the possibility that a company could both charge out property to creditors with priority,[63] or that other creditors could set-off claims against property subject to the (uncrystallised) floating charge.[64] Furthermore, other security interests (such as a contractual lien) will take priority to a crystallised floating charge if it arises before in time.[65] But after crystallisation, assets received by the company can be caught by the charge.[66] One way for companies to gain priority with floating charges originally was to stipulate in the charge agreement that the charge would convert from "floating" to "fixed" automatically on some event before the date of insolvency. According to the default rules at common law, floating charges impliedly crystallise when a receiver is appointed, if a business ceases or is sold, if a company is would up, or if under the terms of the debenture provision is made for crystallisation on reasonable notice from the charge holder.[67] However an automatic crystallisation clause would mean that at the time of insolvency - when preferential creditors' claims are determined - there would be no floating charge above which preferential creditors could be elevated. The courts held that it was legitimate for security agreements to have this effect. In Re Brightlife Ltd[68] Brightlife Ltd had contracted with its bank, Norandex, to allow a floating charge to be converted to a fixed charge on notice, and this was done one week before a voluntary winding up resolution. Against the argument that public policy should restrict the events allowing for crystallisation, Hoffmann J held that in his view it was not "open to the courts to restrict the contractual freedom of parties to a floating charge on such grounds." Parliament, however, intervened to state in the Insolvency Act 1986 section 251 that if a charge was created as a floating charge, it would deem to remain a floating charge at the point of insolvency, regardless of whether it had crystallised.
‘A company has not the restraint which the fear of bankruptcy imposes on an individual trader... [For] directors of a company... little or no personal discredit falls upon them if their company fails to pay a dividend to its trade creditors. It is, therefore, all the more important that the amount and manner of borrowing by a corporation should be upon a satisfactory basis... We do not consider that a company should have any greater facility for borrowing than an individual, and we think that while a company should have unrestricted power to mortgage or charge its fixed assets and should be allowed to contract that other fixed assets substituted for those charged should become subject to the charge, and the company should also be capable of charging existing chattels and book debts or other things in action, it ought to be rendered incapable of charging after acquired chattels, or future book debts, or other property not in existence at the time of the creation of the charge.’
Minority of the Loreburn Committee, Report of the Company Law Amendment Committee (1906) Cd 3052, 28
