In Avanti Communications Ltd  EWHC 940 (Ch), the English court revisited the vexed issue of fixed and floating charges. Notably, it is the first significant case since the landmark decision in Re Spectrum Plus Ltd  UKHL 41 to do so.
The distinction between fixed and floating charges is economically important and affects the recoveries a secured creditor may expect to receive in an insolvent liquidation of the security provider.
The High Court found that a satellite (together with its related infrastructure, permits and licences) was subject to a fixed charge at the time of its disposal. In doing so, the High Court clarified that a total prohibition on a security provider's ability to deal with charged assets and their proceeds is not necessary for a charge to be categorised as a fixed charge. Categorisation of a charge is two-stage process; firstly, ascertaining the parties' rights and obligations in respect of a secured asset and, secondly, deciding as a matter of law what type of charge has been created based on the rights and obligations provided.
Given the nature of the charged assets, none of the general permissions for the security provider to deal with assets were practically available to it. In addition, the parties agreed that, upon disposal of the charged assets, any disposal proceeds were required to be applied in repayment of the secured debt (with a 1% "make whole" premium). The assets themselves were the "tangible and non-tangible infrastructure" of Avanti Communication's business (rather than "fluctuating assets"), and consequently the relevant charge was correctly categorised as fixed.
This decision will come as welcome news to secured creditors and demonstrates the English courts' willingness to take a practical and commercial approach to the construction of finance documents.
- A court will carefully examine any ability to dispose or deal with charged assets and their proceeds, but a complete prohibition on dealing is not necessarily required to establish a fixed charge.
- Factors likely to be taken into account by a court when categorising a charge over a particular asset as fixed or floating include the following:
- Whether the asset is of a type that is sold to generate income ("circulating capital or fluctuating assets or circulating stock in trade") or whether it is used in the business to assist with income generation.
- The extent to which particular or general permissions to deal with assets are of practical relevance to dealings with the asset in question.
- Whether the disposal proceeds may be retained by the security provider or paid over to the secured creditor (and, if so, whether there are commercially unattractive terms for doing so).
- Any history of dealings with the asset (or assets of the same type) with or without consent.
- Where commercially appropriate, parties should consider the following:
- Labelling as fixed charge: Expressly label a charge as "fixed" (if this is the intention). This is relevant evidence of the parties' intentions for the first stage of the categorisation process (discussed in detail below), although not determinative.
- Limited contractual permissions: Contractual permissions to deal with assets without consent should be limited to those assets of a type that are part of the "circulating capital or fluctuating assets or circulating stock in trade" of the relevant business.
- Clearly define categories of assets: Where there is an asset category that includes some particularly valuable or important assets and others that are less important, or some assets that are typically sold or disposed of to generate income and some that are not, consider separating the security taken over those assets into two categories in the security document. This will mitigate the risk of dealings with the less important assets resulting in the categorisation of the charge over all such assets being floating.
- Licences: Where operating licences or leases are important to the business (e.g., in this case, the Ofcom licences), ensure that any disposal permission referring to licences or leases applies to a disposal of assets by way of licence or lease rather than a disposal of a licence or lease that is an asset required by the business in its operations.
- Control of proceeds: Require any disposal proceeds to be paid over to the secured creditor rather than the security provider being free to retain and use those proceeds as it wishes.
- Post-contractual conduct: Ensure that any request to dispose of an asset (where consent is required) is dealt with individually and on its merits and the consent properly documented. Whilst conduct subsequent to the creation of a charge is usually not relevant to the categorisation of a charge as fixed or floating, if there is evidence of subsequent dealings that are inconsistent with the nature of a charge as fixed, a court may consider that the labelling in the security document is not determinative and re-characterise the charge as floating.
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*Norman Womuhai, Trainee Solicitor, also participated as author of this alert.