Valuable lessons can be learnt from the Hong Kong Court of First Instance’s (“CFI“) recent decision in Bei Ni Ltd v Cornwell (Hong Kong) Limited [2023] HKCFI 1799. The CFI was confronted with the question of whether a charge over shares in a margin account was a fixed charge or a floating charge.

The CFI held that the key question was whether the proceeds were held for the benefit of the chargee.


This is a dispute over who has priority of certain shares held in a margin account.

The defendant had deposited certain shares (“Shares“) as collateral into a margin account held with a third party financial institution (the “Financial Institution“). The Financial Institution was granted a charge over the Shares (the “FI Charge“) by virtue of the account agreement (the “Accounts Agreement“). The plaintiff, on the other hand, as a judgment creditor of the defendant, obtained a charging order nisi (the “Charging Order“) over the Shares. (The underlying dispute between the plaintiff and the defendant is irrelevant for present purposes and is not covered in this blog post.)

The Financial Institution wanted to enforce the FI Charge and sell the Shares to reduce the defendant’s indebtedness to it. The plaintiff and defendant jointly applied for an injunction against the Financial Institution to prevent the disposal of Shares. The injunction was dismissed after the Financial Institution provided an undertaking to pay the proceeds of sale into Court. The Financial Institution applied for the return of the sum. The plaintiff opposes this on the basis that the FI Charge was a floating charge, which only crystalised after the Charging Order and therefore ranked after the Charging Order in priority.


Fixed charge and floating charge, which is which?

It was not disputed that the FI Charge was created first, but the plaintiff argued that it was only a floating charge that subsequently crystalised, therefore the Plaintiff’s Charge should have priority.

The CFI followed the approach laid down in Agnew v Commissioner of Inland Revenue [2001] 2 AC 710 and embarked on a two-stage process in its analysis: first, construing the terms of the contract, and secondly, characterising the charge.

In the first stage, the CFI held that the agreement clearly phrased the charge as a fixed charge.

In approaching the second stage, the CFI reaffirmed the three factors set out in an old, established English case of Re Yorkshire Woolcombers Association Limited [1903] 2 Ch 284 on what constitutes a floating charge:

  1. whether the charge is over a company’s present and future assets;
  2. whether the charge is over an ambulatory or shifting body of assets; and
  3. whether the chargor is free to deal with the secured assets and withdraw them from the scope of the security.

If the answer to the three questions were all in the affirmative, the Court will likely characterise the charge as a floating one. However, the CFI considered the third factor – the chargor’s freedom to deal with the secured assets – to be the hallmark of a floating charge.

Legal control

The CFI went on to consider the level of control required for a fixed charge. Prohibiting the chargor from disposing of the Shares was sufficient control for a fixed charge, but it was not strictly necessary.

The Account Agreement provided for the Financial Institution’s right to sell any of the collateral on an event of default and to refuse any withdrawal of the collateral. The CFI held that the latter was sufficient to show prima facie legal control.

The Financial Institution’s arguments relied heavily on drawing an analogy over book debts and share charges. The CFI agreed with the analogy and held that the focus was whether the proceeds were held for the benefit of the chargee and not purely the freedom to dispose of the charged assets. The CFI found that the proceeds of the Shares were not for the benefit of the defendant. The defendant had no control over the sale proceeds, instead they were automatically applied to reduce the defendant’s margin debt to the Financial Institution.

No implied undertaking for compensation for charging order nisi

After obtaining the Charging Order, the Plaintiff served a Stop Notice on the Financial Institution to prevent the sale of the Shares. When the sale eventually happened, the price of the Shares had dropped dramatically. The Financial Institution sought compensation, arguing that the Charging Order carried an undertaking to compensate the Financial Institution for loss caused by the order. The CFI rejected this argument, stating that the Charging Order did not contain any express provision that prohibited the transfer of Shares and it was not akin to an interim injunction, therefore there could be no implied undertaking to compensate the Financial Institution.


Financial institutions enforcing share pledges sometimes find themselves having to fend off an injunction by judgment creditors interested in the same shares.

The judgment also provides valuable lessons on drafting account terms and conditions to ensure that a fixed charge, as opposed to a floating charge, is created. As a starting point, the agreement should expressly state that it is a fixed charge. It would also be wise to consider incorporating strong control mechanisms. For example, in this case:

  1. the account holder could only dispose of shares through the financial institution as broker, such that the disposal could only take place with the financial institution’s knowledge;
  2. the financial institution should be required to provide permission for disposals and was entitled to refuse any disposals; and
  3. any sale proceeds should be automatically applied to reduce the debt owed to the financial institution so that the proceeds were clearly for the financial institution’s benefit.

Ultimately, whether a charge is classified as a fixed charge or floating charge is always a fact-specific analysis. It is important for chargees to think carefully about the circumstances in light of the legal principles summarised and discussed in this blog post. They should also seek legal advice when in doubt.

For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Peter Ng, Senior Associate, or your usual Herbert Smith Freehills contact.

Gareth Thomas
Gareth Thomas
+852 2101 4025
Rachael Shek
Rachael Shek
+852 2101 4035
Jojo Fan
Jojo Fan
+852 2845 6639
Peter Ng
Peter Ng
Senior Associate
+852 2101 4238