Part E Capital and the financing of companies 16: Loan capital 2513.8 Priority of charges
If more than one charge exists over the same class of property then legal rules must be applied to see
which takes priority in the event the company goes into liquidation.Different charges over the same property may be given to different creditors. It will be necessary in such
cases to determine which party's claim has priority.Illustration^
(^)
If charges are created over the same property to secure a debt of £5,000 to X and £7,000 to Y and the
property is sold yielding only £10,000, either X or Y is paid in full and the other receives only the balance
remaining out of £10,000 realised from the security.
Priority of charges
Fixed charges rank according to the order of their creation. If two successive fixed charges over the
same factory are created on 1 January and 1 February the earlier takes priority over the later one.
A floating charge created before a fixed charge will only take priority if, when the latter was created, the
fixed chargee had notice of a clause in the floating charge that prevents a later prior charge.
A fixed charge created before a floating one has priority.
Two floating charges take priority according to the time of creation.
If a floating charge is existing and a fixed charge over the same property is created later the fixed charge
has priority. This is unless the fixed chargeholder knew of the floating charge. The fixed charge ranks first
since it attached to the property at the time of creation but the floating charge attaches at the time of
crystallisation. Once a floating charge has crystallised it becomes a fixed charge and a fixed charge
created subsequently ranks after it.
3.8.1 Negative pledge clauses
A floating chargeholder may seek to protect themselves against losing their priority by including in the
terms of their floating charge a prohibition against the company creating a fixed charge over the same
property (sometimes called a 'negative pledge clause').
If the company breaks that prohibition the creditor to whom the fixed charge is given nonetheless obtains
priority, unless at the time when their charge is created they have actual knowledge of the prohibition.
3.8.2 Sale of charged assets
If a company sells a charged asset to a third party the following rules apply.
A chargee with a fixed charge still has recourse to the property in the hands of the third party – the
charge is automatically transferred with the property.
Property only remains charged by a floating charge if the third party had notice of it when they
acquired the property.
Exam focus You should be prepared to work out the priority of charges in a scenario.
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