What makes a charge a fixed or floating security and why is this distinction important? The characteristics of a floating charge are long-established, but how does a lender ensure that valuable capital assets, i.e. investment properties, stocks, and bonds, of a borrowing company, are subject to valid fixed charge security?
This question is particularly important in a company’s insolvency: a fixed chargeholder will be paid first but a floating chargeholder will only make any recoveries after any other fixed charges, expenses of the insolvency, preferential creditors (certain tax and employee costs) and, assuming it applies, the “prescribed part” of up to £800,000 have been paid.
Avanti Communications Limited
When a fixed charge is potentially not a fixed charge has been reconsidered in the recent case of Re Avanti Communications Limited (Avanti).
Avanti Communications Limited, a company that operated satellite assets and sold wholesale broadband services amongst other things, went into administration and some of its assets were sold by its administrators. The assets included a satellite, certain equipment and certain network and ground station licences to operate the satellites issued by OFCOM, each of which were expressed to be subject to fixed charges in the security document (described in Avanti as the Relevant Assets).
After the sale, the administrators and the company sought a declaration that the Relevant Assets were subject to fixed security. The security document provided that some assets could be released from the security in certain circumstances and subject to specific conditions. However, the permissions were very limited, applied only to specific circumstances and did not entitle the company to deal with the Relevant Assets in the ordinary course of its business.
After considering the documentary controls and permissions, Edwin Johnson J sitting in the High Court held that the assets in Avanti were subject to the fixed charge in the security document and that limited permissions to remove assets from the fixed charge security did not in themselves recharacterise the security in respect of the Relevant Assets as a floating charge.
Why did the High Court take this view?
In coming to his conclusion, the judge reviewed the previous authorities, which are in brief:
- Re Spectrum (Spectrum)
This House of Lords case held that it is not possible to create a fixed charge in respect of a bank account that a company can pay into and make withdrawals from as a right.
- Agnew v Commissioners of Inland Revenue (Agnew) (also known as Re Brumark) This case established that deciding whether a charge is fixed or floating is a two-stage process:
- first, construe the instrument of charge to determine what rights and obligations the parties intended to grant each other in relation to the charged assets; and
- second, only once the parties’ intentions have been determined, categorise the charge on the basis of those intentions. This is purely a legal question and the label the parties have put on the charge is not relevant.
- Re Cimex Tissues Limited (Cimex)
Permission for the charging company to deal with the assets subject to the fixed charge to some extent is not necessarily inconsistent with that charge being fixed, but if that permission is extensive, then the charge will be floating.
Does Avanti resolve the fixed or floating question?
Whilst it is a helpful decision for lenders, it is arguably an incremental development of the principles set out above in Agnew and Cimex. Much remains to be resolved. It is also a first-instance decision, so will not bind higher courts if and when this question comes before them again.
What is clear from Avanti and the previous authorities is that:
- in order to have a fixed charge, the assets subject to that charge cannot be part of the company’s “circulating capital”, that is, assets that the company needs to sell, deal with or substitute in order to conduct its business from day to day; and
- limited permissions for the company to deal with fixed charge assets during the lifetime of the security do not necessarily endanger the fixed nature of the charge. However, the point at which the charge becomes vulnerable to recharacterisation remains a grey area. It is therefore likely that lenders will continue to resist strongly any right for a company to deal with fixed charge assets, particularly in the ordinary course of business, without the lender’s consent.
We can also be confident that Avanti will not be the last chapter in this story.
If you have questions or concerns about the issues arising from the Re Avanti Communications judgment, please contact Rob Spedding.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.