The Floating Charge - An Elegy

This paper argues that the usual way of conflating floating with fixed charges as small variations on a single theme – as priority-based devices differing only in degree – fundamentally misunderstands its true nature. The floating charge plays a distinctive role as a residual management displacement device which can only be effective if coupled with an appropriate set of fixed security that enables its holder to gather information about the competence of the debtor’s managers and to control their incentives to misbehave. The floating charge allows the debtor free use of its circulating assets while its management is doing well, and when the management fails, it crystallises to divest them of control even over these assets. At this time, it also contributes to controlling the motivation costs of other creditors by discouraging them from rushing to enforce their claims against circulating assets or threatening to do so, and by ensuring the unity of the debtor’s estate under the receiver’s control even after the onset of winding-up. This priority-independent view of the floating charge enables us to explain the peculiarities of its actual operation, to understand why it is generally taken in combination with fixed charges, and either over the debtor’s entire undertaking or over those assets not amenable to the draconian control of the fixed charge, and also to bring out the non-anomalous status of the ‘lightweight’ floating charge. The analysis also helps throw light on the role of registration, and on the problems occurring at the boundary between the two types of charge. Despite all this, however, it will be argued that with the onset of changes introduced to the administration regime by the Enterprise Act 2002, the floating charge has outlived its utility, and that its continued retention is now difficult to justify.