English High Court Takes ‘More Nuanced Approach’ to Difference Between Fixed and Floating Charges

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.

FACTS

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:

• A satellite payload, that provides high throughput connectivity across EMEA and part of Asia.
• Certain equipment used in the operation of network and ground station facilities that are relevant to the operation of the satellite payload and other satellites.
• Certain satellite network filings entitling Avanti to use particular orbital slots in relation to its satellites.
• Certain ground station licenses entitling Avanti to operate the ground stations.

The security documents gave Avanti certain limited freedoms to deal with the charged assets.

JUDGMENT

At the first stage, the court held:

• The charged assets were within the scope of the charge (purportedly a fixed charge).
• Although Avanti was not subject to a total prohibition on dealing with the charged assets, it was subject to considerable restrictions upon their disposal.
• Avanti only had complete freedom to deal with the charged assets if and in so far as the relevant disposal fell within one of the asset sale exceptions. However, the exceptions did not cover the disposals of the charged assets on the facts of this case.
• Crucially, the asset sale exceptions did not allow Avanti to dispose of the charged assets or any of them in the ordinary course of its business.

At the second stage, the court held:

• Contrary to some academic commentary, a total prohibition of all dealings without permission of the chargee is not required to create a fixed charge. Rather, the court employed a more nuanced approach, stating:
  • “I can see that it is helpful, in considering the question of whether a charge is fixed or floating, to look at the range of possibilities as a spectrum, with total freedom of management at one end of the spectrum, and a total prohibition on dealings of any kind at the other end of the spectrum… what I cannot see is that a charge will only be fixed if it is located at the total prohibition end of the spectrum. The case law seems to me to support a more nuanced approach, which depends upon a combination of factors.”
• The charged assets were characterised as “tangible and non-tangible infrastructure owned by the Company, which was used to generate the sources of the Company's business income” and were “inherently difficult to transfer”. The court contrasted this with “circulating capital or fluctuating assets of a company”, and such assets would be subject to a floating charge.
• Income-generating assets can be separated from the income generated, unlike book debts, for the purposes of determining control of the asset.

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.

CONCLUSION

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.