Lien / charge

A lien or charge is a security interest: a right granted to a creditor over an asset, securing performance of an obligation, without transferring ownership of that asset to the creditor.

The borrower keeps the asset and continues to use it. The lender gains a legal claim against it — the right to be paid from its value ahead of unsecured creditors, and, on default, to have it sold and the proceeds applied to the debt.

Terminology varies substantially between legal systems, and the same word does different work in different jurisdictions. The table below maps the main forms as used in common law systems; US practice under Article 9 of the Uniform Commercial Code consolidates most of these into a single concept of the security interest, and civil law systems use different categories again.

This page describes general concepts. Security law is jurisdiction-specific and the applicable rules must be confirmed locally.

The Main Forms of Security Interest

FormPossessionDescriptionChargeStays with borrowerAn encumbrance over an asset giving the chargee a right to be paid from its proceeds. No transfer of title or possession.MortgageStays with borrowerA transfer of an interest in the asset as security, subject to the borrower's right to redeem on repayment. Typically over land, but possible over other assets.PledgeTransfers to lenderPossessory security over goods or documents of title. The lender physically holds the asset.Lien (possessory)Held by lenderA right to retain an asset already lawfully in one's possession until a debt is paid — for example, a repairer's lien over goods worked on.Lien (general usage)VariesIn US and increasingly international usage, a broad term for any security claim, including judgment liens and tax liens arising by operation of law.HypothecationStays with borrowerNon-possessory security over movable property, common in civil law and in some commercial lending.AssignmentN/ATransfer of rights — typically receivables, contract proceeds or insurance policies — by way of security.Set-off / banker's lien over depositsLender holds fundsThe right to apply a customer's credit balance against their debt. The most immediately realisable security of all.

The practical distinction that matters most is possessory versus non-possessory. Possessory security is simple and self-enforcing but requires the lender to hold the asset — impossible where the borrower needs it to generate the income that repays the loan. Non-possessory security lets the borrower keep working the asset, but depends entirely on registration and enforcement systems functioning.

Fixed and Floating Charges

A distinction central to lending against business assets.

Fixed charge. Attaches to specific, identified assets. The borrower cannot dispose of them without the lender's consent. Gives strong control and high priority, but is impractical for assets that turn over — a business cannot seek consent for every sale of stock.

Floating charge. Hovers over a class of assets that changes in the ordinary course of business — inventory, receivables, or all assets generally. The borrower deals with them freely until the charge crystallises on a defined event (default, insolvency, cessation of business, or notice), at which point it fixes on whatever assets are then within the class.

Fixed chargeFloating chargeAssetsSpecific and identifiedA shifting classBorrower can deal with themNo, not without consentYes, until crystallisationTypical collateralLand, plant, named equipmentStock, receivables, general assetsPriority positionStrongerWeaker; often ranks behind preferential claimsPracticality for trading assetsPoorGood

In many jurisdictions floating charges rank behind certain statutory preferential claims — unpaid wages, taxes — which fixed charges outrank. The label a document uses is not decisive: courts generally look at the substance of the control exercised, and a "fixed" charge over assets the borrower in fact deals with freely may be recharacterised as floating.

Creation, Attachment, Perfection, Priority

Four sequential concepts. A security interest that stops short of the third is frequently worthless when it matters.

1. Creation. The security agreement is validly executed — proper documentation, authority, capacity, and a sufficient description of the secured obligation and the collateral.

2. Attachment. The interest becomes effective between the lender and the borrower. This generally requires that value has been given, the borrower has rights in the collateral, and the agreement is in place. A borrower cannot grant security over an asset they do not own.

3. Perfection. The interest becomes effective against third parties — other creditors, buyers, and an insolvency administrator. This is the step most often neglected, and the one that determines whether the security has any value in a contest. Perfection methods:

• Registration in the applicable register — a land registry, a companies charges register, a movable collateral or secured transactions registry, or a vehicle register
• Possession of the collateral, for pledges and possessory liens
• Control, for deposit accounts and certain investment property
• Notice to the account debtor, for assigned receivables

4. Priority. Where several creditors claim the same asset, priority determines who is paid first. Common rules:

• First to register, first in priority, in registry-based systems — priority usually runs from the date of registration, not the date of the agreement
• Purchase money security interest (PMSI) super-priority: a lender financing the acquisition of a specific asset can rank ahead of an existing general charge over that asset class, provided the prescribed notice and registration steps are followed
• Statutory preferential claims — taxes, wages, and similar — which may outrank certain security, particularly floating charges
• Possessory liens arising by operation of law, which frequently take priority over registered interests

Collateral Registries

The value of non-possessory security depends entirely on a functioning register. Two implications:

For the lender: registration is what converts a private agreement into an interest good against the world. An unregistered or late-registered charge may be void against an insolvency administrator or subordinated to a later-registered competitor — even one with actual knowledge of it, in strict first-to-file systems.

For the market: many jurisdictions have modernised secured transactions law over the past two decades, replacing fragmented, asset-specific regimes with unified frameworks and searchable electronic registries for movable property. The economic rationale is direct — where movable assets can be used as reliable security, borrowers without land can access credit. Where registries do not exist or do not function, security over movables has little practical value and lending reverts to being unsecured in substance, whatever the documents say.

Search before lending. A registry search reveals existing interests over the same asset. Skipping it is a common and expensive omission.

Discharge and Release

When the debt is repaid, the security must be discharged — the registration removed or marked satisfied, and any possessory collateral returned.

This is an operational obligation, not a courtesy. Failure to discharge promptly leaves the borrower unable to sell, refinance or pledge the asset elsewhere, and is a recurring source of complaints and, in some jurisdictions, statutory penalties. Lenders should treat discharge as a tracked step in the loan closure workflow rather than something done on request.

Partial release — reducing the secured assets as the loan amortises — should be governed by explicit policy where over-collateralisation would otherwise persist.

Why Security Interests Fail

The recurring failure modes are documentary and procedural rather than legal:

• Not registered, or registered late, outside a statutory time limit
• Registered in the wrong register, or against the wrong entity name or identifier
• Inadequate collateral description — too vague to identify the asset, or so broad it is unenforceable
• The borrower does not own the asset, so nothing attaches
• Prior interests not searched, leaving the lender behind an existing charge
• PMSI steps missed, losing super-priority on asset finance
• Recharacterisation of a purported fixed charge as floating
• Enforcement mechanism unavailable — the interest is valid but the courts or registry cannot deliver a realisation in a commercially meaningful timeframe
• Security worth less than the cost of enforcing it, which is the normal position for low-value movable collateral

Effect on Credit Risk Measurement

A security interest reduces loss given default only to the extent it is genuinely enforceable. The assumptions feeding an expected credit loss model should reflect:

• Whether the interest is properly created, attached and perfected
• Its priority position after prior-ranking and statutory preferential claims
• The realisable value of the collateral — forced-sale value net of enforcement costs — not its market value
• The time to enforce, discounted
• The probability that enforcement succeeds at all

Treating nominal security as if it guaranteed full recovery is one of the more common sources of under-provisioning. Where an institution has never successfully enforced a given collateral type, its LGD assumption for that type should reflect that fact rather than the valuation report.

Frequently Asked Questions

What is the difference between a lien and a charge? In common law usage, a possessory lien is a right to retain an asset already in your possession until payment; a charge is a non-possessory encumbrance over an asset the borrower keeps. In US and general international usage, "lien" is often used broadly to mean any security claim, including charges.

What is the difference between a charge and a mortgage? A mortgage transfers an interest in the asset to the lender as security, subject to the borrower's right to redeem. A charge creates a claim over the asset's value without transferring an interest. In practice the distinction has narrowed in many systems, and mortgage is usually reserved for land.

What is the difference between a fixed and a floating charge? A fixed charge attaches to specific identified assets the borrower cannot dispose of freely. A floating charge covers a shifting class of assets the borrower trades in the ordinary course, fixing only on crystallisation.

What does perfection mean? The step that makes a security interest effective against third parties — usually registration, but also possession, control, or notice depending on the collateral. Without it, the interest may bind only the borrower and be worthless in an insolvency or a priority contest.

Who gets paid first when two lenders have security over the same asset? Generally the first to register, subject to exceptions — purchase money security interests financing the specific asset, statutory preferential claims, and certain possessory liens arising by operation of law.

Does a charge mean the lender owns the asset? No. The borrower retains ownership and use. The lender holds a claim against the asset's value, exercisable on default.

What happens to the charge when the loan is repaid? It must be discharged and the registration removed or marked satisfied. Failure to do so promptly can prevent the borrower from selling or refinancing and may attract penalties.

Does taking security guarantee recovery? No. Recovery depends on whether the interest is perfected, where it ranks, what the asset realises under forced sale after costs, how long enforcement takes, and whether enforcement is practically available at all.