Fixed And Floating Charges In United Kingdom

Fixed charges are the charges that are held against some specified, tangible assets. The charges are raised immediately after it makes a deal with a bank, especially when it gets a loan. These assets act as security for the loan and the company is not allowed to sell them or exchange them with a third party. Such a contract is binding for as long as the loan has not been fully paid though the company may continue to use it for its internal affairs. The bank has the right to take the asset and use it for retrieving the missing amount usually through auction of the property if the company fails to adhere to the contract binding for the loan terms hence resulting to defaulting of the agreement. Therefore, such a charge can only result to the loss of the specific asset used as security.

The type of collateral that the fixed charges extends to includes any form of company property that is tangible and which has a financial value such that its sale could raise income for the bank if the company is unable to clear its debts or defaults the loaning agreement.

This charge involves a high level of protection to the creditor as it allows the creditor to associate the credit offered to a specific tangible asset in the company. It also forces the debtor to ‑­hold the asset without selling it until the fulfillment of the agreement hence ensuring a fixed form of security.

This form of charge holds a high level of priority in the insolvency law and is the mostly used form of charge for most of agreements involving securities. It is also used in some of the non-insolvency laws though rarely.

Floating Charges

A floating charge is a charge that is held over some company properties as security for a loan from a bank and the company is only allowed to trade the property and then replace it with new one. The company is not allowed to sell the property to a point of exhaustion where it does not have any more tangible assets. If this happened, the bank may sue the company. Incase the company defaults the agreement for the loan facility from the bank, the bank is allowed to choose some of the assets from the company property and take it into its possession as charge for the loan.

Hence, in this for m of charge, there is no specific asset that is used as security and the company may lose any of its property incase of a default. This charge therefore involves the type of collateral that is not specific and the form of agreement is binding on any of the company property. The company is always free to sell its property but incase of a default, the charge changes to as fixed one where the company places its charge on specific company assets which the company may not be able to sell and acts as the compensation for defrauded amount.

This charge involves a low level of protection to the creditor as it does not allows the creditor to associate the credit offered to a specific tangible asset in the company. It allows the company to trade any of its assets and its only condition is that the property must be replaced and ‑­that the company must always have valuable and tangible assets within its possession. Since the charges are not associated with any specific assets, then there is no fixed form of security and hence the creditor is only assured on defrauld of the company when certain assets are chosen as security interest for the creditor. The risk with this is that creditors with a fixed charge are given a higher priority over the ones with a floating charge. This means that incase the valuable assets have already been used as a fixed charge, then a floating charge may not be apply on such an asset. Hence, protection is only dependent on assets that are not covered by the fixed charges.

This form of charge holds a low level of priority in the insolvency law since it comes after consideration of fixed charges and payment of the liquidator. It is not usually used for most of agreements involving insolvency charges. However, it is very commonly used in the non-insolvency charges (Westbrook et al., 2010).

(B.) Security Interests in the US as Compared to Fixed And Floating Charges in the UK Law

A security interest includes the charges raised by a creditor against a debtor incase of defraud of the initial security agreement after borrowing from a creditor. The creditor hence usually has a right to possession of the assets used as a security interest for a given amount of money given that the company has been unable to clear the amount as agreed upon. The security interest may be used to raise money through sale of the property so as to redeeem an amount that covers the unpaid debt.

In the UK, there are many forms of security interests which may be used for redemption of the unpaid debts incase of company insolvency. However, the law does not allows the holders of security interests exclusive rights to the property of the debtor and hence the creditor usually has to get the ruling of a court so as to be able to use the assets of the creditor as a form of regaining the amount that has not been returned by the debtor. Hence, the creditors may not find the interests favorable since the process of activation of the charges is usually not easy. In addition, with floating charges, the process of accessing the debtor’s assets for security is even harder since it involves a low level of protection duc to priority offered to fixed charge holders. Only assets not used for fixed charges may apply as security interests for holders of floating charges incase of defraud by the debtor.

On the other side, the security interests in the USA usually associate personal or real property to a given debt and that property may be used by the creditor to raise money to cover an unpaid debt incase of company insolvency. The security interests in the country are hence more favorable to the creditors since they allow the creditor to get full access to the creditor’s assets used as security for a debt ‑­and hence the creditor can regain the amount not gotten as agreed upon by the debtor more easily and conveniently. The whole process of implementation of the charges is simpler and hence the creditors in the US find the environment more conducive for carrying out their business since they feel more secure.

2. How Asset Management Companies (AMC's) are used as mechanisms to assist with bank and corporate restructuring.

The Asset Management Companies (AMC’s) are companies that are involved in the management of securities that are offered for a debt or when a company wishes to borrow from a debtor. They usually work as the intermediate phase between the borrowers and the lenders and hence act as the bridge between a company and a creditor. The AMC’s are usually useful since they help ensure that both sides of an agreement that involves crediting facilities abide to the agreement or else the set out process is followed incase of a default by the debtor. They also aid in corporate restructuring and hence enhance the corporate development strategies and procedures.

The AMC’s assists all the parties involved in the agreement through many ways. They are usually very beneficial to the banks, which act as the creditors, in many ways. First, they help banks in quicker and more effective disposition of its non-performing assets especially the assets that are associated with a given debt from a company and which are held as securities for the debt. The banks can hence be able to acquire income and compensation for their credited money much faster thus ensuring the flow of income in the bank is maintained at a normal. AMC’s also help stabilize the credit market and generally the banking activities ensuring they are at a normal, manageable and sustainable level through controlling the amount of banking as well as ‑­regulating competition amongst the banks. In addition, AMC’s help reduce the risks involved when banks excessively rely on some form of assets such as mortgages as some of these assets have been noted to contain a gradual decrease in value. If the banks rely on such assets, they may end up miscalculating the value of a security hence incurring losses incase of defraud by a debtor. On the other side, banks enjoy lowered NPL ratios with the intervention of the AMC’s, a factor that reduces on their expenses and also ensures their stability and security. Finally, banks are able to implement more improved and reliable financial structures that aid them with better management of their credit facilities especially on the aspects relating to securities. Hence, AMC’s have a great importance in the banking sector and they are an effective mechanism that assists banks in their operations and especially in aspects relating to provision of credit facilities.

AMC’s are also of great benefits in that they have a mandate of enhancing and encouraging corporate restructuring is attained so that the corporate entities involved may be well prepared and structured so as to maximize on the use of credit facilities obtained and thus reduce the risks involved in mismanagement of such facilities which may destabilize the corporate entity. The AMC’s also help in restructuring of the banks so as to ensure they offer very attractive terms for their loan facilities so as to maximize on the utilization of the credit facilities. This way, banks are able to benefits from the benefits of earned interests from the credit facilities while the corporate entities are able to acquire the required income easily and hence they are able to grow and develop faster and more sustainably.

One major player AMC in Asia is the Great Wall Asset Management company based in China. The company has been in operation for over ten years and was established due to the need for private companies to be involved in the business in addition to the government parastatals. The company has previously dealt with many cases involving company insolvency and has been noted as a leading company in the sector. Though the company had many setbacks between 2005 and 2008, it has been able to rise back to its feet and operate as one of the largest and most prominent companies. The company has been serving its main objectives of enhancing restructuring processes in the corporate and the banking sectors. The company has hence been involved in the formulation and implementation of the restructuring ‑­strategies so as to increase the benefits realized from the credit facilities for both the debtor and the creditor. The company has also been involved in the faster disposition of assets for banks so as to ensure they enjoy manageable and sustainable sources of income.

This company has been relied on by most of the major creditors in China to deal with its credit deals especially in the cases of debtors' insolvency. Most of the major beneficiaries of its services have been from the telecommunication, banking and industrial sectors though other credit corporations and companies have also utilized the services of the company.

3. First Manufacturing Co (FMC)

For FMC, a furniture manufacturing company that got into debts with a bank and defaulted the loan then was defeated on the case involving it and the bank, the company raises a petition.

Under the US bankruptcy code, the bankruptcy trustee may expect the court to allow the bank to stop the operations of the company until it repays the fine or just use an auction to raise funds to clear the charges. On top of this, the company may be fined by the court for defaulting on the agreement, especially if the bank provided enough evidence for the default and also on the previous completed payment of a loan debt that was paid to SS even before it was due. This may be taken as a point of neglect and hence the bank may win against the company. The liquidator will hence be successful and may hence get some assets allocated for the payment of the debt.

Under the HK Companies Ordinance, the bank could have won against the debtor since the law is against defrauding of an agreement. However, since the loan involved an unsecured creditor which is the bank, then the bank could not have been able to take hold of any assets in the company. The liquidator could hence not have been successful and could only have been allowed to block the company from selling most of its assets and only to sell any of its assets if there are plans to replace it until when the debt is fully cleared.

4. “Secured creditors should be bound by the automatic stay in a corporate insolvency."

A secured creditor is a creditor who has a legally binding agreement with the debtor that allows the creditor the privilege to hold a security interest on the assets of the debtor to act as security for the debt that has not been cleared. In the case where the company (debtor) is unable to pay the debts, especially due to bankruptcy, the secured creditor may take charge and have full privilege on the assets of the debtor used as security such that the creditor avoids competition with the unsecured creditors who are owed by the company. Hence, the secured creditor may be able to easily acquire the security interest from the company even without long proceedings by the court unlike the unsecured creditor. An example of a secured creditor is the one who takes a property interest in form of a mortgage for the loan offered to a debtor.

An automatic stay is an injunction by a court of law that covers the debtor for some duration of time from action that may be taken by creditors aimed at recovery of their money from the debtor usually through auction of their property. The injunction forbids a creditor from taking any action upon filing of a case against the debtor indicating that the debtor has failed to adhere to the agreement and is unable to repay the debt, usually due to bankruptcy. This provision hence acts as a relief for the debtor from loss of assets to creditors by way of auction or holding of custody. For example, if a debtor is declared bankrupt, the court stops any creditors from engaging in auction of the company property for the duration in which a suit by a creditor takes place and until the court gives a go-ahead to the creditor to do so.

An automatic stay has some exceptions, especially on creditors who may be able to petition against it and successfully prove a cause of the lift of the provision on the debtor. This provision of a lift of the stay may be implemented especially in cases where the creditor is able ‑­to prove that the property lacks an equity or required protection such as insurance for the property.

Mostly, a secured creditor may be able to successfully raise a petition against the debtor for the lift of the automatic stay and hence be able to carry out action against the debtor so as to recover unpaid debts. This is mainly possible since a secured creditor usually holds a security interest in form of a property and hence may be allowed by the court to have an access to the property and hence raise the required amount of the unpaid debt this way.

On the other side, a secured creditor may be able to raise a petition for the lift of the stay if the property involved is not required for a formal restructuring of the debtor. This way, the creditor may be allowed an easy access to the assets involved so as to use them to raise the debt that has not been cleared.

In the context of the liquidation of a company, there is a need for the secured creditors to be allowed the privilege of exclusion from an automatic stay if they prove the cause of their action. This allows the secured creditor to have priority over unsecured creditors in the event of liquidation of assets from the company involved. This is usually at the interest of striking a balance that ensures that corporate entities are protected from exploitation by creditors incase of bankruptcy or when the company is unable to raise the required amount to clear a debt as promised and also ensures that secured creditors are protected from loss of their property or money in the event that a debtor turns bankrupt. The jurisdiction involved in this aspect is the Corporations Law which allows for preferences and consideration of the type of interests held by creditors in the event of liquidation of the company (Westbrook et al., 2010).

‑­Even with the option of a formal and an out-of-court restructuring for the company involved in debts or that turns bankrupt, there is a need to protect the interests of creditors and always ensure that no party in any agreement loses unfairly due to the failures of the other party or due to unavoidable circumstances. Hence, if a creditor is able to prove without doubt the cause of the action required, then the automatic stay should be lifted to allow the creditor the benefit of securing the amount or property involved.

Therefore, I disagree with the statement that secured creditors should be bound by the automatic stay in a corporate insolvency especially at the interest of the creditor functionality and objectives since such a binding situation would result to losses on the part of the creditor.

5. The appropriate treatment of workers in corporate insolvencies

In the event of insolvency by a company, there are many parties that incur losses or are left at a position where they are unsecured in terms of the agreements and contracts held between them and the company. Some of these parties include the secured creditors, unsecured creditors and the company workers. Usually, secured creditors are given priority over the rest of the parties and hence are able to easily obtain permission from the court or other necessary bodies to attach their debt value to the associated security interest, usually in form of assets owned by the company. However, the unsecured creditors and workers in the company are usually left stranded whenever the company is faced by insolvency.

In this aspect, workers need to be treated in a better manner since they always are a part of the company and the loss they may incur incase they lose all their dues inn the company would have serious effects on them and their families. Under the Corporate law jurisdiction, preference always starts with the secured creditors followed by the liquidators and then followed by the employees before considering unsecured creditors. The Insolvency Act also states that employees should be given preference over debtors holding floating charges, though they always follow the creditors holding fixed charges in priority. This law implies that the company workers are always protected incase of company insolvency.

In addition, under the Employment Rights Act, the law dictates that liquidators of a company should always consider clearing all the outstanding payments in terms of employee benefits and salaries before consideration of the floating charges against the company. Therefore, workers should be accorded special protection in the case of insolvency in the company and hence should be given preference over the unsecured creditors. Hence, the second student was wrong in arguing that workers are to be treated the same as the unsecured creditors incase of insolvency.

However, under all these jurisdictions, the law accords clearly that workers can never be given preference over the secured creditors. Their consideration is always after consideration of fixed securities and also after payment of liquidators. Hence, the first student was also wrong in stating that the workers deserve more protection than secured creditors (Westbrook et al., 2010).

Therefore, I disagree with both students. While workers deserve to be treated better than the unsecured creditors incase of company insolvency, it is not possible to give them more protection and special treatment offering them a higher priority than the secured creditors.

6. Country X is in the midst of reforming its formal corporate insolvency laws

In the US debtor-in-possession approach, the company management that has a debt to a creditor loses its control over the company to the debtor who then manages the company and sees it through the restructuring process. In this way, the company assigns some of its staff to the company and the staff takes charge of that company. The staff acts as the management for the company until the whole restructuring process is finalized.

Mainly, the debtor who takes possession of the management is the one owed the largest amount of debts by the company. This way, the company has a lot of security interest on most of the property owned by the company. Further, the company has to be a secured creditor for it to carry out the management of the company.

The US approach is utilized by some large creditors since it has many benefits. First, it offers a very high level of protection and hence most creditors have an assurance over debts granted to borrowers. The approach also allows the creditors to take over the management of the company such that they are able to monitor clearly the value of the assets on sale hence they are able to realize the required amount of monay to clear the debts more easily. The approach has fewer legal processes, a factor that makes it quicker and more efficient for use by creditors. In addition, the high level of protection acts as an incentive to creditors to offer more credit facilities. On the other side, debtors are forced to be more careful how they deal with credit facilities and hence they are forced to utilize any borrowed finances on the specific purpose for which they were borrowed, lowering instances of insolvency. This has a direct impact on the economy as it results to quicher growth of organizations hence resulting to economic growth and stability.

However, the approach has some setbacks that create a lot of problems especially in its application. First, the approach may bring a lot of technical and applicability problems especially when the company has many debtors who are operating at almost the same level in terms of the proportion of their security interests share within the company. Sometimes, more than one secured creditor may have a relatively large share of the company assets in terms of its security interests. In such a case, the whole process of a creditor taking over the ‑­management of the company may be difficult since there could be a problem determining which of the creditors should actually manage the company as it undergoes the restructuring process. In addition, the presence of more than one secured creditors would complicate the situation when the creditor with the largest share of security interests takes over the management of the company since this would mean that this company would be the one to implement the liquidation and restructuring process, a factor that would contradict with the intentions of the procedures since the rest of the creditors may not have the same goals as the creditor in charge or even would feel that there is unfairness in the distribution of the company assets. Moreover, incase the company gets a different way of gaining funds to repay its debts, such as through payment of insurance policies against its loans and property, the management of the company by its creditors would have already interfered with the authenticity of its structures, a factor that may interfere with the future success of the company in its operations and structures.

On the other side is the British-style system in which a third party is appointed to manage the company as it undergoes the liquidation and restructuring processes. In this case, the third party may be chosen by an agreement between the company and its creditor or by the court or any other bodies assigned with that task. The third party hence takes over the management of the company and is responsible for the distribution of company assets as well as implementation of the restructuring process.

The British system is a very beneficial system to use when a company is faced with insolvency. Though with a few weaknesses in its application and with high risks and costs especially due to the involvement of a third party, this system remains the best for carrying out the required procedures after the company insolvency state. First, the method allows the selection of a third-party by the main parties involved, usually the debtor and the creditor. This ensures that the interests of both parties are considered in any decisions involved. Also, incase there are many secured creditors, the third party is able to unify all their interests and share out the assets in a fair and equitable manner, especially through considering their proportional security interests shares. In addition, the third party may also be able to consider other minor parties that may require consideration such as the workers in the company and the unsecured creditors. This may then ensure that there is not a single party that loses out in an unfair way due to the insolvency of the company. Finally, incase the company is able to redeem itself from bankruptcy especially through acquisition of more income, especially from insurance policies, the company may be able to get back to operation easily and without any effects having occurred especially in its operations, success strategies and its organizational structures.

However, the approach has a few setbacks which imply that make its use abit of a problem for the creditoras. First, there are many legal procedures involved hence making it harder and slower for creditors to get their debts cleared. Also, some of the cresitors such as those holding floating charges have a low level of protection and are offered low priority and may take very long to have their debts cleares and in some cases they may end up losing the credited amounts permanently especially if the company property is not sufficient enough to cover debts for creditors holding fixed charges. In addition, the system may have lower incentives for creditors, especilly in the use of floating charges, resulting to lowered crediting activities, a factor that slows down development of organizations consequently slowing down economic growth.

On the decision of whether to adopt the US or the British style, it would be more recommended that Country X adopts the British-style system as this would involve a lot of benefits for all the parties involved incase of company insolvency and also the procedures involved would be simpler to implement.

In addition, there would be a need to know what the jurisdictions involved with insolvency of a company stated so as to determine if the law in that country gave any of the creditors an automatic credit to manage a company incase of insolvency. This would be important as it would determine the applicability of the adopted system so as to avoid any contradictions in the law.


Westbrook, J., Booth, C., Paulus, C., & Rajak, H. (2010). A Global View of Business Insolvency Systems. Leiden & Boston: The World Bank & Martinus Nijhoff.