The High Court has held that certain assets sold by a company around the time of its administration were subject to a fixed charge rather than a floating charge and as such, the sale proceeds were not to be distributed to preferential creditors or unsecured creditors: Avanti Communications Ltd, Re  EWHC 940 (Ch).
In reaching its conclusion, the court conducted a detailed analysis of the case law and academic commentary on fixed and floating charges, and rejected the idea that only assets subject to a prohibition on dealings could be subject to a fixed charge. The court said that the case law supported a more nuanced approach to the question of whether a charge is fixed or floating, and to look at the range of possibilities on a spectrum. In considering whether a charge is fixed or floating, various factors must be taken into account, including: (i) the nature of the restrictions on dealing with the assets; (ii) the chargee’s control over the assets; and (iii) the nature of the assets themselves (ie whether they resemble circulating capital or fluctuating assets of the company).
The decision will be of interest to financial institutions keen to ensure that the nature of any security interest purported to have been granted in their favour is indeed what is obtained. Whilst it is a first instance decision, it appears to clarify some of the concerns and commentary which followed the House of Lords decision in Spectrum Plus Limited, Re  UKHL 41.
This was an application made by the Joint Administrators and Avanti Communications Limited (the Company) for directions pursuant to paragraph 63 of Schedule B1 to the Insolvency Act 1986.
The principal activity of the Company was the operation of satellites and the sale of wholesale satellite broadband and connectivity services. In March and April 2022, around the time the Company was put into administration, various transactions involving certain assets (the Relevant Assets) occurred, including an intragroup transfer and a disposal. In summary, the Relevant Assets were:
- a satellite;
- equipment used in the operation of network and ground station facilities;
- certain satellite network filings (the sale of which would require Ofcom’s consent); and
- certain ground station licences issued by Ofcom to entitle the Company to operate the ground stations (the sale of which also required Ofcom’s consent).
The Relevant Assets were subject to debentures (notably a 2017 debenture) and expressed to be subject to a fixed charge. Any assets not subject to a fixed charge were expressed to be subject to a floating charge. The provisions of the relevant security documents were complex, but in short, disposals of the Relevant Assets were subject to restrictions and waterfall provisions. There were some exceptions to these restrictions, eg assets having a fair market value of less than $2m, disposals of satellite capacity in the ordinary course of business, disposals of obsolete assets, disposals of assets which were no longer useful and disposals of licenses in the ordinary course of business.
The development of the law in this area will be well known to practitioners. By way of reminder, the House of Lords in Re Spectrum Plus essentially said that, for a charge to be fixed, the chargee must have the contractual right to exercise control over the relevant asset and must in practice actually do so. However, two important points were not made clear in Re Spectrum Plus: (1) the degree of control required for a charge to be fixed; and (2) whether the decision was limited to its facts, ie whether it applied to charges over book debts only. Following Re Spectrum Plus, some commentators took a literal approach to the characterisation issue and said that the control test must apply to all assets and scenarios, and that a total prohibition on disposals would be required for a charge to be characterised as fixed. In practice, whilst views differed, many thought Re Spectrum Plus was probably confined to its facts, ie that it applies to book debts and not to other asset classes.
The question for the court, termed the “Characterisation Issue”, was whether the Relevant Assets were secured by fixed or floating charges at the time of the transactions. As there was no evidence of crystallisation or release of the security between the date of creation and the relevant transactions, the court simply had to determine whether the Relevant Assets were secured by fixed or floating charges at the time of the transactions.
The court conducted a detailed analysis of the case law and academic commentary on fixed and floating charges, and began by noting that, in order to determine whether a charge is fixed or floating, it is necessary to conduct a two-stage enquiry (as set out in Agnew v Commissioners of Inland Revenue  UKPC 28):
- First Stage: the court must first construe the relevant charge instrument in order to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets.
- Second Stage: the court must then embark on a process of categorisation (or characterisation) of the charge, which is a matter of law.
First Stage: construction of charge instrument
In respect of the First Stage, the court noted that the labels used by the parties are relevant as a guide to what security they objectively intended to create. However, the court is fundamentally concerned with the nature of the rights and obligations the parties intended to create. The nature of the assets in question may also be taken into account in considering this, and the court noted that a distinction often drawn in the authorities was between a chargor’s circulating capital and its non-circulating capital, on the basis that complying with the terms of a fixed charge over a company’s circulating capital would paralyse its business (as per Agnew). Regard may also be had to the nature of the business of the chargor when construing the rights and obligations created under the contractual documentation.
In this case, the First Stage could be broken down into two questions:
- Were the Relevant Assets within the scope of the charging clause in the relevant security documents (notably here the 2017 debenture)?
- What was the nature of the contractual restrictions and permissions on the disposal of the Relevant Assets, under the terms of the security documents?
In respect of the first question, the court considered that the Relevant Assets in this case did indeed fall within the scope of the charge created by clause 3.1(b) of the 2017 debenture. The court noted that the classes of assets listed in sub-paragraphs (i)–(xi) of this section of the charging clause encompassed a very broad range of asset type, and the charge was expressed to be a fixed charge, although the court noted that this label was not decisive.
In terms of the second question, having analysed the position in detail, the court held that the Relevant Assets were all subject to considerable restrictions upon their disposal. Although there were various exceptions permitting asset sales, the court considered that these exceptions were unlikely to apply to the Relevant Assets, or had limited application. The court held that, most importantly, the exceptions provided no opportunity for the Company to dispose of the Relevant Assets in the ordinary course of the Company’s trading.
Second Stage: categorisation of the charge
In respect of the Second Stage, the court noted that the question is whether the rights and obligations in respect of the Relevant Assets are consistent, as a matter of law, with fixed charge security or floating charge security. In considering this question, the labels used by the parties are not relevant. The correct characterisation of the instrument of charge is a question of law, having regard to the rights and obligations ascertained at the First Stage.
With particular regard to the decisions in Re Yorkshire Woolcombers Association Ltd  2 Ch 284, Agnew, and Re Cimex Tissues Ltd  BCC 626, the court noted that one of the most critical questions is who has control of the relevant class of assets, as between chargor and chargee.
In considering the question of the level of control, the court made particular reference to an extract from the textbooks Legal Problems of Credit and Security (Seventh Edition), at pages 4-23, and The Law of Security and Title Based Financing (Third Edition), at paragraph 6.110. The court noted that both textbooks suggested that the law may have reached the point where a charge can only be characterised as fixed, where there is a total prohibition of all dealings and withdrawals or a total restriction on any disposal of the charged assets by the chargor without the consent of the chargee. The court noted that if this was the correct position, then the charge created by the 2017 debenture in this case could not have been a fixed charge over the Relevant Assets, as certain dealings were permitted by the security documents.
The court also referred to an article which appeared in the Journal of International Banking and Financial Law, on 1 October 2008, (2008) 9 JIBFL 467, titled Floating charges: the current state of play. The court was in respectful disagreement with certain statements, including that “a charge is fixed if and only if the chargor is required to preserve the charged assets, or their permitted substitutes, for the benefit of the charge. Without this requirement, the charge is floating”. Nevertheless, the court did say that the article provided some useful commentary on the correct approach to distinguishing between fixed and floating charges, notably that Re Spectrum Plus was a case concerning debts and that, whilst it may have general application, it could easily be misapplied in considering how to characterise charges over other revenue generating assets.
The court analysed key passages from Lord Scott and Lord Walker in Re Spectrum Plus and held that the speeches of their Lordships did not support an absolute approach suggested in the textbooks referred to above, to the effect that a total prohibition on disposals is required before a charge can be a fixed charge. Notably, the court recited part of Lord Scott’s speech in Re Spectrum Plus, rejecting the idea that it was a statement to the effect that a charge is a fixed charge, if and only if the chargor is required to preserve the charged assets, or their permitted substitutes for the benefit of the chargee.
Whilst the court could see it might be helpful to look at “the range of possibilities as a spectrum”, with total freedom of management at one end, and a total prohibition on dealings of any kind at the other end, the court did not consider that it was the case that a charge will only be fixed if it is located at the total prohibition end of the spectrum.
As such, the court considered that the charge over the Relevant Assets was not necessarily a floating charge simply because the Company had some ability to deal with the Relevant Assets under the terms of the security documents.
The court also held that it would not be sensible or appropriate to attempt its own description of the characteristics of a fixed charge and a floating charge, as the existing case law already provided ample guidance. Nor would it be sensible or feasible to try to identify “the location of the point on the spectrum of possibilities where a floating charge gives way to a fixed charge, or vice versa”. The case law supports a nuanced approach to the question of whether a charge is fixed or floating, which requires a number of factors to be taken into account.
The court went on to consider the factors, as identified in case law, which are relevant in determining whether a charge is fixed or floating:
- The nature of the restrictions on dealing with the Relevant Assets stated in the security.
- The chargee’s control over the Relevant Assets and whether the Company was free to deal with them in the ordinary course of its business.
- The nature of the Relevant Assets themselves, ie whether they resemble circulating capital or fluctuating assets of the company, whether they need to be sold to generate income, or if they are income generating.
The court concluded in this case that the chargor’s ability to deal with the Relevant Assets was materially and significantly limited, the scheme of restrictions contained in the security documents gave the chargee very significant control over the Relevant Assets, and the Company had no ability to deal with the Relevant Assets in the ordinary course of business. The Relevant Assets were income generating (ie they could be characterised as the tangible and non-tangible infrastructure owned by the Company, but did not need to be sold to generate income) and were not circulating capital, fluctuating assets or stock in trade. Taking all the circumstances of the case into account, the Relevant Assets were therefore held to be subject to a fixed charge, both when created and at the time of the transactions.
For further information, please contact:
Natasha Johnson, Partner, Herbert Smith Freehills