In the recent case of Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch), the High Court revisited the perpetually knotty question: what level of control is necessary for a charge over assets to take effect as a fixed, rather than floating, charge?
The case is interesting both for its facts and for the conclusion of Mr Justice Edwin Johnson, who diverted from the position expressed in some leading academic texts. In holding that provisions in finance documents allowing for disposal of secured assets in limited circumstances do not necessarily result in the security interest being characterised as floating, the court has given comfort to secured lenders, as well as additional certainty for insolvency practitioners. The decision takes on additional importance in light of the reintroduction in 2020 of HMRC’s preferential status in respect of certain taxes in insolvency proceedings, with such preferential claims ranking ahead of floating charges but behind fixed security.
Background
The Avanti group of companies (Group), including operating company Avanti Communications Limited (ACL), were involved in the operation of satellites, providing wholesale data communications and broadband services. The Group had become increasingly highly leveraged, and attempts to carry out a refinancing, merger or sale of the business had all failed. Under the terms of the Group’s finance documents, ACL had granted a fixed charge over ground network licences and satellite network filings, a Ka-band satellite known as “HYLAS-3”, and certain network and ground station equipment (together the Relevant Assets) and a floating charge over all other assets which were not subject to the fixed charge.
It was determined that an administration of ACL and the Group’s holding company, followed by an immediate sale of the Group’s assets to a vehicle owned by its secured creditors by way of a pre-pack transaction, would result in the best outcome for creditors as a whole.
The transaction
Upon the appointment of administrators, ACL entered into a pre-pack sale by which substantially all of its business and assets, including the Relevant Assets, were sold to a vehicle ultimately owned by the Group’s secured creditors.
The sale proceeded on the basis that the Relevant Assets were subject to fixed charge security, and distributions to secured creditors were made on this basis. However, the administrators were concerned that the terms of the debentures securing the Relevant Assets allowed for some uncertainty on this point. In particular, the debentures permitted ACL to make disposals of the Relevant Assets, free from the security, in certain limited circumstances.
The administrators therefore put in place arrangements to fund payments to preferential (HMRC being the only preferential creditor) and unsecured creditors (relating to the application of any prescribed part) in the event that some or all of the Relevant Assets were determined to have been secured by floating, rather than fixed, charges. The administrators then applied to the court for directions as to whether the charge over the Relevant Assets took effect as fixed or floating security.
Fixed vs floating charges
The Court undertook a detailed consideration of the caselaw underlying the characterisation of fixed and floating charges. In doing so, the Court confirmed the application of the two stage test set out by the Privy Council in Agnew v Commissioners of Inland Revenue [2001] UKPC 28 [2001] 2 AC 710: the court must first construe the security document and ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets, and second, categorise, or characterise, the security interest created, which is a question of law and not of the parties’ intentions.
As part of his review of the authorities, Johnson J considered the conclusion in various academic texts that only a total prohibition on dealing with the charged asset without consent of the chargee is sufficient to create a fixed charge (following the House of Lords decision in Re Spectrum [2005] UKHL 41 [2005] 2 AC 680). If this conclusion was correct, the charge over the Relevant Assets would not have taken effect as a fixed charge.
Whilst stating that it was “helpful” to look at the range of possibilities of control as a spectrum, with total freedom of management at one end of the scale and total prohibition on dealings at the other, Johnson J did not agree that a charge will only be fixed if control is located at the total prohibition end of the scale. Instead, the Court held that the authorities support a more nuanced view, which depends on a combination of factors, and stated that it was not “sensible or feasible” to try to identify the point on the spectrum where a floating charge gives way to a fixed charge or vice versa.
The decision
In determining whether the Relevant Assets were subject to fixed or floating security, the Court looked in detail at the disposal permissions set out in the Avanti finance documents, noting that the circumstances in which ACL could make disposals were strictly limited and did not amount to ACL being able to dispose of the Relevant Assets (or any of them) in the ordinary course of business. The Court further noted that the disposal regime gave the secured parties “very significant control” over the Relevant Assets, and that there was no history of the restrictions not being observed.
The Court also confirmed that the nature of the secured assets is an important factor, distinguishing between the circulating capital or fluctuating assets of a company (which lend themselves to floating security, as the chargor needs to be able to deal with them in the ordinary course of its business) and those which are not (which are more suited to fixed security). Here the Relevant Assets did not constitute the company’s fluctuating assets, but were “…more correctly characterised as the tangible and non-tangible infrastructure” owned by ACL, which was used to generate its business income.
The Court noted that it might also be important to consider whether the terms of the security interest mean that the company can deal only with the income generated by the asset or with the asset itself; where the asset has inherent value, it is not a necessary condition to establishing a fixed charge that the lender also have control over the income.
Based on the restrictions in the finance documents and the nature of the Relevant Assets, the Court therefore concluded that it was “quite clear” that the security over the Relevant Assets was fixed, rather than floating.
What’s next?
Although this was only a first instance decision, lenders and borrowers will welcome the decision as a useful summary of the issues to consider when seeking to create fixed or floating charges. The case also serves as a timely reminder for both groups to make sure that any permitted disposal provisions are properly thought through and carefully drafted, and then strictly followed throughout the life of the transaction.
The only parties which appeared in this application were the administrators themselves, and the lead secured creditors. Although HMRC had an interest in the outcome (due its preferential status and resulting interest in security being characterised as floating rather than fixed), it did not make any submissions in this case. It will be interesting to see whether HMRC takes a more active approach to challenging the characterisation of “fixed” charges in future cases, where the relevant security documents are less than clear-cut.
Tim Carter
Helen Martin