Enforcement action: distraint: general considerations: debentures held under fixed and floating charges
General definition of debenture
A debenture provides a charge over a debtor’s assets as security for money loaned by debenture holder, usually a bank or other financial institution. The most common type of debenture comprises both a ‘fixed’ and a ‘floating’ charge. You can seize goods covered by a floating charge, but not goods covered by the fixed charge. The debenture will identify which assets are subject to each type of charge so you may need to ask for a copy of the debenture.
Assets subject to a fixed charge
The fixed charge usually attaches to specific assets that a company cannot dispose of without the consent of the debenture holder even in the normal course of business. They tend to be the larger and more durable items including property and book debts and are often listed in a schedule. However a fixed charge may also extend to ‘all plant, machinery and vehicles’.
Assets subject to a floating charge
The floating charge provides a charge over a class of assets that will change in the ordinary course of business. These tend to be the smaller, often less expensive, items such as stock and raw materials, which are regularly turned over in the normal course of business.
This is partly because including these in the fixed charge would render it almost impossible to operate the business effectively: the business would have to obtain the debenture holder’s permission every time an item was sold, replaced or disposed of.
Provided they pay the loan in accordance with the terms of the debenture, the chargee can sell, replace or otherwise dispose of assets under the floating charge in the normal course of business.
But in order to protect the debenture holder in the event of any default, a floating charge ‘crystallises’ (effectively it becomes a fixed charge) when certain events or acts specified in the debenture occur. Usually the events relate to failure to pay debts and normally result in the appointment of an administrative receiver by the debenture holder.
For more information where an administrative receiver is appointed after you have levied distraint see DMBM656160.
In addition to the exact wording of a debenture the chargeholder’s intention of how it was meant to relate to the goods covered is relevant.
Note: Debenture holders may only appoint an administrative receiver for charges created prior to 15th September 2003. The holder of a qualifying charge created on or after this date will usually take the option of administration (DMBM656190).