Floating charges are common features of finance transactions both in Scotland and in England, and share some characteristics, but these securities have different origins and other key differences. Lindsay Lee, Louise Laing and Tayeeba Chowdhury of Brodies LLP explain.

What is the difference between a floating charge in Scotland and England?

Both in Scotland and in England the attraction of a floating charge, as opposed to a fixed security, is that it allows the borrower to use its business assets in its day-to-day operations without the permission of the security holder. As its name suggests, a floating charge "floats" or hovers over the assets until it crystallises or is discharged.

In both jurisdictions, however, floating charge holders rank after fixed security holders and certain preferential creditors (including HMRC), and the rights of a holder of a floating charge will also be subject to the prescribed part reserved for unsecured creditors.

How a floating charge is documented

In Scotland, currently, there are fewer types of assets over which fixed security can be taken than in England, making floating charges the only available security for certain types of assets. Generally, a Scottish floating charge, sometimes also called a bond and floating charge to reflect the personal bond (obligation to repay) included in the security document, will be drafted to cover the whole property of the grantor from time to time, and any fixed security, for example, a standard security over land in Scotland, or security over shares in a Scottish company, will be set out in separate standalone documents.

In England, on the other hand, it is commonplace for a floating charge to be included in a debenture which includes fixed charges and assignments. In that scenario the floating charge will cover any assets not secured by the fixed charges and assignments either because it is not possible to create a fixed charge over those assets or because the requirements to create a fixed charge are not satisfied.

How a floating charge is registered at Companies House

A uniform registration regime for registration of floating charges exists across the UK; floating charges must be registered within 21 days of execution by filing a certified copy of floating charge/debenture and a Form MR01 at Companies House.

Unlike in England, certain types of alteration to the terms of a Scottish floating charge trigger the requirement to file a Form 466 at Companies House within 21 days of the date of execution of the relevant alteration document. This is an important difference between the two jurisdictions as it requires ranking or inter-creditor agreements affecting Scottish floating charges to be filed at Companies House.

When the floating charge crystallises

Like England a floating charge in Scotland can specify events upon which enforcement may occur (that is, events of default). In Scotland a floating charge only crystallises (attaches) on the occurrence of four specific events, whereas an English floating charge will typically provide for automatic and voluntary crystallisation.

In England crystallisation provisions in the floating charge automatically transform the floating charge into a fixed charge and allow the lender to convert the floating charge into a fixed charge by serving notice on the chargor. These provisions are not recognised in Scots law or in relation to Scottish assets.

In Scotland a floating charge only crystallises when the holder of that floating charge appoints a receiver, the chargor goes into liquidation (ie either the chargor passes a resolution for voluntary winding up or the court makes a winding up order), or in administration where the court gives permission to an administrator to make a distribution (other than via the prescribed part) to a creditor who is neither secured or preferential or on delivery to the registrar of companies of a notice by the administrator that he thinks that the company has insufficient property to enable a distribution to unsecured creditors other than by virtue of the prescribed part.

How enforcement action is taken

Generally, where a Scots law floating charge charges all of the assets of the chargor an administrator will be appointed to the chargor.

In England, whilst there is also the option to appoint an administrator, Law of Property Act (LPA) receivers can be appointed over only a particular asset of the chargor. In Scotland, LPA receivers are not recognised.

Summary

The Moveable Transactions (Scotland) Act 2023, when it comes into force, will introduce a new form of fixed security - the statutory pledge – which will simplify the way security is taken over Scottish assets, including, shares in Scottish companies.

This is expected to lead to lenders taking fixed security more frequently alongside floating charges, and, depending on the rules applicable to the new registers to be created pursuant to the Act, it is possible that we may see the adoption in Scotland of a Scots law security document containing both certain fixed securities and an all assets floating charge, in closer alignment with practice in England.

About the authors

Lindsay Lee is a Senior Associate within the banking and finance team at Brodies LLP. She has experience and a specialist interest in regulated finance, including consumer lending and banking, and regulatory issues affecting financial services clients. Lindsay has worked inhouse at several banks.

Louise Laing is a Senior Associate at Brodies LLP. She specialises in corporate restructuring and insolvency and advises clients on a wide range of corporate recovery, restructuring and insolvency matters with experience in a variety of sectors including real estate, housebuilding, engineering, leisure (hotels, public houses and sports clubs), fish farming, retail and manufacturing.

Tayeeba Chowdhury is a Solicitor in the banking and finance team at Brodies LLP. She advises a variety of borrowers and lenders on a broad range of banking and finance matters including project finance, real estate finance and other general banking transactions.

See also

Place an insolvency notice

Monthly UK insolvency statistics - May 2023

Company insolvency statistics - Q1 2023

Find out more

Register particulars of a charge (MR01) (GOV.UK)

Register particulars of an instrument: alteration to floating charge created by company registered in Scotland (466) (GOV.UK)

Moveable Transactions (Scotland) Act 2023 (Legislation)

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Publication date: 13 July 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.