Key Points

In the recent case of Avanti Communications, the English Court held that to constitute fixed charge security, a chargee’s control over the relevant charged assets does not need to be absolute. A significant amount of control is however still required and the nature of the relevant charged assets should be such that they do not constitute a circulating or fluctuating pool of assets.

The proceeds of fixed charged security can be paid to a secured lender in full whereas floating charge realisations are subject to various deductions including in respect of (i) amounts due to preferential creditors¹ and (ii) the prescribed part.² Accordingly, the decision will be welcomed be lenders who may continue to benefit from fixed charge security without the requirement for a total prohibition on the use of charged assets by the chargor.

Background

Avanti Communications Ltd (the “Company”), a UK-based satellite operator, underwent a restructuring involving a pre-pack administration. The Company’s secured creditors, HPS Investment Partners and Solus Alternative Asset Management, took control of the group through the pre-pack administration, reducing Avanti's debt from $810 million to $260 million whilst the remaining debt, including that owed to HMRC, was left behind in the insolvent structure. The administrators sought a determination as to whether certain assets (the “Assets”) sold by the Company were secured by fixed or floating charges. The relevant Assets included satellite equipment, network and ground station facilities, satellite network filings, and ground station licenses issued by the Office of Communications (Ofcom).

Questions for the Court

The Court had to determine whether the charges granted by the Company in respect of the Assets were fixed or floating. This is the first major case concerning the differentiation between fixed and floating charges since the House of Lords' landmark decision in Re Spectrum Plus [2005] UKHL 41 where a fixed charge on book debts was reclassified as a floating charge due to the chargor's freedom to utilise the secured assets. 

Secured creditors of the Company argued that the Assets were subject to a fixed charge, entitling them to full recovery of the proceeds of sale. However, if the Assets were subject to a floating charge, the proceeds would be shared in part with HMRC, as the sole preferential creditor and other unsecured creditors benefiting from the prescribed part.

In order to determine the difference between a fixed or floating charge, the Court applied the relevant test for a fixed charge (as set out by Lord Millett in the Judgment of the Privy Counsel in Agnew v Commissioners of Inland Revenue [2001] UKPC 28 [2001] 1 AC 701), which considers the degree of control the chargee (the “Secured Creditor”) has over the charged Assets and the chargor's (debtor's) ability to deal with those Assets.

The two-stage test involves:

1. Construing the security document and ascertaining the parties' intentions as to the nature of the rights and obligations they intended to grant each other in respect of the charged assets. The nature of the relevant assets and the chargor's business may be taken into account; post-contractual conduct is generally irrelevant. However, the Court did acknowledge in Avanti that if a stipulation in the charging documents is not adhered to in practice, the agreement may be held to be a sham and characterised as a floating charge. On the facts of Avanti the Court was satisfied that this was not the case but this will be a relevant factor in other cases.
2. Characterising whether the parties' intentions were to grant the company rights in respect of the charged assets that are consistent with the nature of a fixed charge. This involves assessing the following factors:
   • the chargee's degree of control over the charged assets: A fixed charge typically requires the chargee to have a significant level of control over the assets, restricting the chargor's ability to deal with them without the chargee's consent; and
   • the chargor's ability to deal with the charged assets: For a charge to be considered fixed, the chargor should have limited or no freedom to deal with the charged assets, such as disposing of or encumbering them without the chargee's consent.

If the chargee has a sufficient degree of control over the charged assets and the chargor's ability to deal with those assets is significantly limited, the charge is likely to be characterised as a fixed charge.

What did the Court find? 

The Court held that the charge was properly characterised as a fixed charge. The Company’s freedom to deal with the relevant Assets was materially and significantly limited, and the Assets did not constitute fluctuating assets or circulating stock in trade. The Company was not permitted to dispose of the Assets in the ordinary course of its business but could dispose of Assets which were either (i) no longer useful in the conduct of the business of the group and/or (ii) disposals of licences or sublicenses in the ordinary course of business. Accordingly, on the facts of the case, the restrictions on disposals was not absolute.

The Court determined that a complete ban on disposals of assets is not necessary for a charge to be classified as fixed, despite some expert opinions suggesting otherwise. The Court held that case law supported a multifaceted approach to these matters, particularly given that identifying exactly when a charge shifts from floating to fixed is challenging. Avanti's charge was correctly characterised as fixed due to the company's limited freedom to deal with the assets, considerable restrictions on disposal, and limited opportunities to dispose of the assets. The assets in question were utilized for generating income, rather than serving as inventory or trading items. The charge was ultimately classified as fixed after a thorough review of all documentation and circumstances.

Why does the decision matter?

The proceeds of fixed charged security can be paid to a secured lender in full whereas floating charge realisations are subject to various deductions including in respect of (i) amounts due to preferential creditors and (ii) the prescribed part. Accordingly, the decision will be welcomed by secured lenders who may continue to benefit from fixed charge security without the requirement for a total prohibition on the use of charged assets by the charger, particularly without the need to have an absolute restriction on disposal.

Key takeaways

The Assets sold by the administrators were subject to valid fixed charges despite some limited permission for the chargor to deal with the Assets. The Court's decision clarifies that limited permissions for the chargor to deal with charged assets are not fatal to the characterisation of a charge as fixed. The case provides guidance on the distinction between fixed and floating charges, with the Court finding that the nature of the Assets themselves made them inherently difficult to transfer and therefore subject to a fixed charge. The ruling determined the correct distribution of proceeds, with secured creditors entitled to a full recovery whilst the case is the first major consideration of the distinction between fixed and floating charges since the House of Lords decision in Re Spectrum, providing useful guidance to both lenders and debtors.

The authors would like to thank Mohammed Tarajia for his contributions to this OnPoint. 

Footnotes

1) Preferential debts include certain arrears due to employees, pension claims and HMRC, most notably in respect of VAT. 
2) The prescribed part is a ring-fenced sum not exceeding £800k made available to a company’s unsecured creditors from the proceeds of floating charge realisations in priority to secured lenders.