A charge is one of the methods of taking security recognised by English law. In daily business life it is common for corporate entities to give security to lenders over their assets either by way of mortgage, lien or charge.
Nature and effect of a charge
- A charge is a creature of equity (technically there is no such thing as a legal charge although a “legal charge” may be created by statute, and a legal mortgage over land is commonly known as a legal charge. Essentially a charge creates an equitable proprietary interest in the asset being secured.
- A charge arises when there is agreement between creditor and debtor that the creditor has an equitable proprietary interest in the secured asset as a security for a debt. When the debt is discharged, the charge terminates.
- There is no transfer of legal or beneficial ownership or possession, merely an encumbrance on the asset.
- The creditor has no right to possession of the asset.
- The creditor can enforce security without reference to court (usually).
- A charge is usually effective against a debtor on liquidation or administration.
Types of assets that can be secured by a charge
Generally, assets which equity recognises as property and are capable of being transferred can be secured by way of charge. Equity recognises most forms of property, including property not recognised by the common law. Examples of assets that can be subject to a charge are:
- Existing assets (such as land, goods and intangibles).
- Future assets (such as land, goods and intangibles acquired after the giving of the security. Intangibles include assets such as book debts, goodwill, benefits under contract, and rights under a trust.
How a charge is created
- The debtor must intend to give the creditor a proprietary interest as security.
- The intention must relate to identifiable assets.
- To create a fixed charge the creditor must have control over the charged asset. Without sufficient control over the asset, the charge will, if given by certain entities, be a floating charge.
- A floating charge can only be created by a company, a limited liability partnership (LLP) or a farmer (over certain assets).
- The charge must be by way of contract with executed consideration (that is, the consideration has been paid or performed, not just promised). The requirement for executed consideration is unlikely to be an issue because if the creditor has not made the loan, the security is not required.
- For a charge over land, there must be a contract in writing signed by both parties (section 2, Law of Property (Miscellaneous Provisions) Act 1989).
- A charge over an equitable interest in land must be in writing and signed by the debtor (section 53(1)(c), Law of Property Act 1925).
- A charge over a patent must be in writing and signed by the debtor (section 30, Patents Act 1977).
- For a charge over cash, financial instruments and credit claims (which are claims under loans made by credit institutions) between two parties (which may be companies, partnerships or any body with a legal personality except an individual) to take advantage of the benefits of the Financial Collateral Arrangements (No. 2) Regulations 2003 (SI 2003/3226) (FCA Regulations 2003), that charge must be in writing.
Registration and other formalities
- Charges created by companies and limited liability partnerships. Charges created by companies and LLPs registered in England and Wales will usually need to be registered at Companies House unless exempt.
- Charges created by individuals. Charges given by individuals over personal chattels usually need to be registered under the Bills of Sales Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882.
- Charges over intellectual property. A charge over a patent usually needs to be registered under the Patents Act 1977. A charge over a registered trade mark usually needs to be registered under the Trade Marks Act 1994. A charge over a registered design usually needs to be registered under the Registered Designs Act 1949.
- Charges over land. Charges over land usually need to be registered under the Land Registration Act 2002 or the Land Charges Act 1972.
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