When Charges Collide – Priority Battles in Structured Finance

Security interests are a bit like a crowded pub on a Friday night. Everyone thinks they’re next to be served, but only one person actually gets the pint first. In structured finance, that jostling is called priority – and who gets served first can mean the difference between a full recovery and an empty glass.

If you read our article Securing the Bag, you’ll know why lenders take security in the first place. In this article, we’re following on by looking at what happens when multiple creditors show up at the same bar. How does English law decide who drinks first, who waits, and who goes home thirsty?

Fixed vs Floating

English insolvency law draws a sharp line between fixed and floating charges. Fixed charges get first bite of the cherry; floating charges are left hoping there’s still fruit in the bowl.

But the magic word isn’t “fixed” – it’s “control”. A lender only holds a fixed charge if it genuinely stops the borrower from dipping into the asset. If the borrower can treat the charged account like their own cash machine, the courts will downgrade that “fixed” charge to floating faster than the insolvency notice hits Companies House.

Example: In a trade receivables securitisation, an originator might promise the trustee a fixed charge over receivables and the related bank accounts. But unless daily sweeps, blocked accounts and withdrawal limits are firmly in place, the court may decide the charge is really floating. For lawyers, this is why the humble account control agreement attracts more love (and late-night drafting) than almost any other document in the deal.

Priority Between Competing Charges

When more than one lender takes security over the same asset, the usual rule is simple: the first lender in line has the strongest claim. But, as ever, English law adds conditions.

• Registration requirements. Under the Companies Act 2006, most charges over company assets must be registered at Companies House within 21 days. Miss that window and the charge is treated as if it never existed against a liquidator, administrator or creditor. A later lender who files on time can leapfrog over you.
• Notice in equity. If your security is only “equitable” (say, because it wasn’t completed in full legal form), the story can change. A later lender who takes a full legal charge without knowing about your earlier interest can move ahead, even though you were there first. In this context, ignorance really is bliss.
• Special registries. Some assets have their own dedicated registries: land, ships, aircraft, intellectual property. Fail to register there and your priority may collapse altogether.

Preferential and Statutory Claims

Even a properly perfected fixed charge isn’t bulletproof. Insolvency law gives “super-priority” to certain claims: unpaid wages (up to statutory limits), pension contributions, and HMRC’s claims for VAT, PAYE and NICs.

These don’t oust fixed charges, but they can hollow out floating charge recoveries.

Example: Take a facility secured by fixed charges over receivables and securities, plus a floating charge over the borrower’s other assets. If the borrower enters administration owing large sums of VAT, the administrator must pay HMRC out of the floating charge pot first. The secured lender may be left with little more than loose change.

Intercreditor Agreements and Contractual Subordination

Structured finance rarely leaves priority to chance. With senior, mezzanine and junior debt all circling the same collateral, you need more than a Companies Act filing to keep the peace. Enter the intercreditor agreement – part rulebook, part ceasefire, part pecking order.

These agreements spell out who gets paid when, and English law will enforce them if they’re clear. The Lehman fallout after 2008 proved as much: contractual waterfalls held firm even in the middle of the financial storm.

They usually provide that:

• Senior lenders get “first out” rights to enforcement proceeds.
• Junior creditors wait their turn until the seniors are repaid.
• Standstill provisions keep juniors from dashing off alone.
• Payment blockages direct cash to the top of the stack before anyone else sees it.

Example: In a CLO, both senior and junior noteholders are secured over the same loan pool. The intercreditor deed dictates the waterfall: seniors are repaid in full before mezzanine or equity investors see a penny. Without it, the statutory rules would lump them together – less a careful queue, more a rugby scrum.

Enforcement and Priority in Practice

When security is enforced, the theory becomes very real. A security trustee is often appointed to act for multiple creditors, applying recoveries through the agreed waterfall.

But where competing charges are held by different lenders, disputes soon surface. The risks are clearest in distressed repackaging structures, where both noteholders and liquidity providers may share security. Without a tightly drafted intercreditor deed, competing claims can turn into drawn-out litigation, eating into recoveries and leaving everyone worse off.

Practical Considerations

Some points to keep in mind:

1. Control matters. Without genuine control, your “fixed” charge risks being recast as floating.
2. File on time. Miss the 21-day registration deadline and you’ll lose your place in the queue.
3. Remember statutory claims. Floating charges will always sit behind wages, pensions and the taxman.
4. Use intercreditor deeds. They are the only way to keep multi-creditor deals from sliding into disorder.

The Last Word

Priority under English law is shaped by common law rules, statutory priorities and the deals creditors make with one another. Fixed charges outrank floating – but only if control is genuine. Miss a Companies House deadline and you’re out. Statutory claims will always bite into floating charges. And without intercreditor agreements, the whole structure quickly turns into a free-for-all.

For lenders and arrangers, the moral is simple: treat priority as seriously as the security itself. Keep control, file on time, and negotiate your waterfall with care. Otherwise, when charges collide, you may find yourself at the back of the queue – glass empty, wondering how it all slipped away.