Corporate and Business Law (Global) · Loan capital

Priority of Charges and Rights of Debenture Holders in ACCA

Updated 11 October 2026 · Fact-checked

Priority of charges decides who is paid first from a company's assets when it cannot pay all lenders. A fixed charge usually ranks before a floating charge. Charges of the same type usually rank by order of creation or registration. Secured lenders enforce by appointing a receiver, or by using administration or sale of the asset.

Understand Priority of Charges and Rights of Debenture Holders

A debenture holder is a lender to a company. Many are secured by a charge over company assets. If the company fails, the security decides who is paid first and how much.

A fixed charge attaches to a specific asset, such as land. The company cannot sell it without the lender's consent. A floating charge covers a class of assets that changes, such as stock or receivables. The company can trade with them freely until the charge crystallises, which turns it into a fixed charge over the assets then held.

The general rule: a fixed charge ranks ahead of a floating charge over the same asset, even if the floating charge was created first. This is because the fixed charge holder takes a specific interest in the asset. Among charges of the same type, the earlier one normally ranks first. The exact test (creation or registration) varies by jurisdiction, so follow the rule given in your study text. A negative pledge clause in a floating charge bars the company from creating later charges that rank ahead. A later lender with notice of it may not take priority.

In a liquidation, the usual order is: fixed charge holders from the proceeds of their asset, then the costs of the liquidation, then preferential creditors (such as certain employee claims), then floating charge holders, then unsecured creditors, then shareholders. Some regimes also set aside a share of floating charge assets for unsecured creditors. Check your syllabus text for this.

A secured lender's remedies depend on the debenture terms. They include appointing a receiver to collect income or sell the charged assets, selling the asset directly, or appointing an administrator where the floating charge permits. A receiver acts mainly for the appointing lender. An administrator acts for all creditors.

Key formulas to remember

Ranking of different charges: Fixed charge > Floating charge (over the same asset); Applies even if the floating charge was created earlier, unless the fixed charge holder had notice of a restriction.
Ranking of same-type charges: Earlier charge ranks before later charge; Use the creation or registration test given in your study text. Registration failure can make a charge void against the liquidator and creditors.
Liquidation payment order (general): Fixed charge holders → liquidation costs → preferential creditors → floating charge holders → unsecured creditors → members; Fixed charge holders are paid from their own asset. Check whether your text also ring-fences a share for unsecured creditors.
Shortfall rule: Unpaid balance of secured debt = debt − proceeds of the charged asset; The shortfall normally ranks as an unsecured claim. Any surplus goes back to the company.

How to solve Priority of Charges and Rights of Debenture Holders questions

Use this method for any question on competing charges or lender remedies.

1List every creditor and mark each as fixed charge, floating charge, preferential, or unsecured.
2Check each charge was validly created and registered. An unregistered charge may be void against the liquidator and other creditors, though the debt remains owed.
3Match each charge to its asset. Pay fixed charge holders from their own asset first.
4Rank charges of the same type by the rule in your text, usually order of creation or registration, and check for a negative pledge.
5Deduct liquidation costs, then pay preferential creditors, then floating charge holders from the remaining floating assets.
6Pay unsecured creditors from what is left, in proportion. Treat any secured shortfall as unsecured.
7If the question asks about remedies, name the right one: receiver, administrator, or sale of the asset. Explain who it benefits and why.

Quickest way: Waterfall in one line

When to use it: Use for objective questions that ask who is paid first or which charge ranks higher.

Ask: fixed or floating? Fixed wins over floating on the same asset.
If both are the same type, pick the earlier one.
If the question mentions a liquidation, apply the order: fixed, costs, preferential, floating, unsecured.
If the question asks about enforcing, look for receiver or administrator and check who the appointee acts for.

Common mistakes in Priority of Charges and Rights of Debenture Holders

Ranking a floating charge first because it was created first.
Students apply a simple first-in-time rule to all charges.
Fix: First-in-time works only between charges of the same type. Fixed generally beats floating over the same asset.
Putting preferential creditors ahead of fixed charge holders.
The word 'preferential' suggests top priority.
Fix: Preferential creditors rank ahead of floating charge holders, not ahead of fixed charge holders.
Saying an unregistered charge makes the debt disappear.
Students mix up the charge with the loan.
Fix: The company still owes the debt. The lender loses its security and becomes an unsecured creditor.
Treating a receiver and an administrator as the same.
Both can be appointed by secured lenders and both manage assets.
Fix: A receiver mainly realises assets for the appointing lender. An administrator acts for creditors as a whole and aims to rescue the company or achieve a better result for creditors.
Ignoring the secured shortfall.
Students stop once the secured creditor is paid from the asset.
Fix: Subtract proceeds from the debt. The remainder is an unsecured claim.

Worked examples

Example 1

A company in liquidation owes Bank A $200,000 under a fixed charge over a building sold for $150,000. It owes Bank B $90,000 under a floating charge. Liquidation costs are $20,000 and preferential claims are $10,000. Other floating assets total $100,000. Unsecured trade creditors are owed $50,000. Ignore any ring-fenced share. How much does each party receive?

Show the solution

Bank A receives the $150,000 from its building. Its shortfall is $200,000 − $150,000 = $50,000, which becomes unsecured.
Floating assets of $100,000 pay costs first: $100,000 − $20,000 = $80,000.
Preferential creditors next: $80,000 − $10,000 = $70,000.
Bank B is next: $70,000 is less than $90,000, so Bank B receives $70,000. Its shortfall is $20,000, which becomes unsecured.
Nothing remains for unsecured creditors. Unsecured claims total $50,000 + $50,000 + $20,000 = $120,000, and they receive $0.

Answer: Bank A $150,000; liquidation costs $20,000; preferential creditors $10,000; Bank B $70,000; unsecured creditors nil.

Example 2

X Ltd gave Lender 1 a floating charge over all its stock on 1 March. On 1 June it gave Lender 2 a valid fixed charge over the same stock. Lender 2 had no notice of any restriction. Which lender ranks first, and what should Lender 1 have done to protect itself?

Show the solution

Identify types: Lender 1 holds a floating charge and Lender 2 holds a fixed charge over the same asset.
Apply the general rule: a fixed charge ranks ahead of a floating charge, even if the floating charge came first.
Check for a negative pledge. None is mentioned and Lender 2 had no notice, so priority is not displaced.
Advise: Lender 1 should have included a negative pledge clause and ensured Lender 2 had notice of it, for example through the registered charge details where relevant.

Answer: Lender 2 ranks first. Lender 1 should have included a negative pledge clause and made sure later lenders knew of it.

Exam tips

For objective questions, decide fixed or floating before anything else. Most wrong answers come from skipping this step.
Learn the liquidation order as a chain and say it aloud. Many options differ only in where preferential creditors sit.
In written answers, name the remedy, who appoints the person, and for whose benefit they act.
Always mention the unsecured shortfall in calculations. It shows you have followed the full waterfall.
Check which jurisdiction's rule the question uses on priority tests and ring-fencing. Use the rule in your study text.

Practice questions from Loan capital

Priority of Charges and Rights of Debenture Holders: frequently asked questions

Does a fixed charge always beat a floating charge?

Generally yes over the same asset, even if the floating charge is older. An exception arises where the fixed charge holder had notice of a restriction such as a negative pledge. Check the facts given.

Who gets paid first in liquidation, secured creditors or preferential creditors?

Fixed charge holders are paid from their own assets first. Preferential creditors rank ahead of floating charge holders. So the answer depends on the type of charge.

How do secured creditors enforce their security?

They follow the debenture terms and the law. Common routes are appointing a receiver, selling the charged asset, or appointing an administrator where allowed. The route chosen depends on the charge and the lender's aim.

What is the difference between a receiver and an administrator?

A receiver mainly acts to recover the appointing lender's money from charged assets. An administrator acts for creditors as a whole and tries to rescue the company or get a better result than liquidation.