The English High Court provided guidance on 25 April 2023 in Re Avanti Communications Limited to determine whether a charge is a fixed charge or a floating charge.
The distinction between a fixed charge and a floating charge is important in the insolvency of the chargor. The holder of a fixed charge has priority of distributions over moratorium debts, expenses of the insolvent estate, preferential creditors, the unsecured creditors’ prescribed part, holders of floating charges and unsecured creditors. Also, the fixed chargee will have control over the use and disposal of the charged assets.
After a long line of cases, the Privy Council in Agnew v. Commissioners of Inland Revenue (2001) and the House of Lords in Spectrum Plus (2005) established that the hallmark of a floating charge and a characteristic inconsistent with a fixed charge is that the chargor is left free to deal with the charged assets. The chargee’s control over the charged assets determines the distinction between a fixed charge and a floating charge, irrespective of the intention of the parties about the characterisation of the charge.
The court in Re Avanti Communications Limited [2023] EWHC 940 (Ch) set out guidance on how much freedom the chargor can be given to deal with charged assets if the charge is to retain its status as a fixed charge.
Avanti Communications Limited (Avanti) is part of the Avanti Group, a UK-based satellite operator that provides coverage across Europe, the Middle East, and Africa (EMEA).
The application to the High Court was brought by the joint administrators of Avanti to determine whether the following assets were subject to a fixed charge or a floating charge:
The security documents gave Avanti certain limited freedoms to deal with the charged assets.
At the first stage, the court held:
At the second stage, the court held:
The court held that the charged assets were subject to a fixed charge, with particular significance being placed on (1) the materially and significantly limited freedom of Avanti to deal with the assets, and (2) the type of asset, in this case being tangible and non-tangible infrastructure, that was inherently difficult to transfer and was used to generate the sources of Avanti’s business income.
The Avanti case determined that a limited freedom of a chargor to deal with permanent assets will not create a floating charge.
However, the Avanti case will not resolve the differences of opinion between borrowers’ and lenders’ lawyers about the extent of that freedom—before the security becomes a floating charge.
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