Chapter 4Classification and survey of types of business organisationA mortgage, which will be considered below, is a
term most often used to mean a fixed charge over land.
However, the term ‘mortgage’ may be used to describe
any type of fixed (but not a floating) charge over any
item of land or other property such as a mortgage by a
shareholder who uses his shares, which are personal
property, as security for a loan.
Fixed charges
A fixed legal charge can be given over identified prop-
ertybelonging to the borrower. This property may be
either real property, e.g. land and buildings, or personal
property, e.g. machinery and equipment.
If real property is being used, there is no need for the
borrower to transfer his ownership in the land to the
lender. The Law of Property Act 1925 allows the lender
who has taken the fixed legal charge over, say, land and
buildings, to sell it on his own without any assistance
from the borrower, even though the lender has not
taken a transfer of the ownership from the borrower by
what is called a conveyance.
If personal property, such as machinery and equip-
ment, were to be used as security, the borrower would
have to transfer, by a method called assignment, the
ownership in the machinery and equipment to the lender.
Unless this was done, the lender could not give a good
title to a buyer of the machinery and equipment if he
decided to sell it, which he would want to do if the bor-
rower did not repay the loan.
The great benefit of the fixed legal charge is that once
it has been given, the lender can sell the property charged
by himself. The contract of loan will, of course, end his
right to do this once the loan has been repaid.
Furthermore, if the company becomes insolvent the
preferential creditors (e.g. those owed wages or salaries
up to £800 for a period of four months), do not count
for payment before the fixed charge. Therefore, a creditor,
such as a bank with a fixed charge, will get more than it
would under a floating charge, as preferential creditors
do rank before a floating charge. Thus, if the directors
have given a personal guarantee of the company’s over-
draft, they will have less to pay on the overdraft to the
bank if the bank holds a fixed charge.
Floating charges
1 Generally. This is a charge which is not attached to
any particular asset when the charge is made. Instead it
applies to the assets of the borrower as they are at the
time the charge crystallises, as it will, for example, if the
borrower fails to make repayment of the loan as agreed.
The borrower is in the meantime free to sell the assets
he has and any new assets which his business acquires
are available to be sold by the lender if they were in the
ownership of the borrower when the charge crystallised.
When the charge crystallises, it becomes, in effect, a fixed
charge over the assets which the borrower then has. The
lender can then sell them to recoup his loan.2 Floating charges restricted to companies and LLPs.
In theory, a floating charge could be used by a sole
trader or other partnership but, because of legislation
relating to bills of sale, such a charge is not viable except
in the case where the borrower is a company.A floating charge gives the lender an interest in the
personal property, e.g. stock in trade, of the borrower,
and yet those goods are left in the borrower’s possession.
This may make him appear more creditworthy to
another trader who sees the borrower’s assets but does
not realise that these are already charged to secure a
loan.
If such a charge is to be valid there must be the regis-
tration of a bill of sale listing the items charged, e.g. the
stock, in the Bills of Sale Registry. The floating charge
does not lend itself to the listing of the property charged
in this way because its essential feature is that the assets
charged are always changing. If the borrower sold a tin
of beans from his stock, he would have to amend the
bill of sale; if he bought four dozen jars of jam, it would
also have to be amended. The Bills of Sale Acts 1878
and 1882 do not apply to charges given by companies
and LLPs and so they do not have to follow this particu-
lar registration procedure. However, as we shall see in
Chapter 6, the registration procedures of the Companies
Act 2006 must be carried out by bothorganisations.Guarantees
GenerallyIf a bank lends money to a business it will normally
want, in addition to a charge over the assets, a guarantee
from the sole trader or partner, or the directors of the
company. These persons promise to meet the business debt
from their personal resources if the business cannot.81