English High Court re-examines fixed and floating charges - Re Avanti Communications Limited (in administration)

Earlier this year the English High Court held[1] that a charge granted by a company (Avanti) was properly characterised as a fixed charge (as opposed to a floating charge), despite Avanti retaining a degree of control to dispose of the charged assets. The decision is the first major ruling on how to characterise fixed and floating charges since the leading House of Lords’ case, Re Spectrum Plus[2]. It marks an evolution in the law by moving away from a rigid analysis that suggested only total control over a charged asset by a security holder would constitute a fixed charge. 

Background

Avanti was part of a group of companies whose principal activity was the operation of satellites and satellite broadband and connectivity services. The group owned certain satellite equipment, ground station facilities, satellite network filings, and ground station licences. These assets were purportedly subject to fixed charge security. Despite this characterisation, the charge document permitted disposals of the assets in limited circumstances. For example, the assets in question could not be sold unless for market value in cash or cash equivalent, with proceeds over $1million being applied to pay down the secured debt under a contractual waterfall provision.

Administrators were appointed over Avanti on 13 April 2022 who immediately sold certain of Avanti’s assets by way of a pre-pack sale. This included the relevant charged assets. The joint administrators made an application to court for directions to determine whether these charges took effect as fixed or floating. This mattered because, if the assets were subject to floating charges, the realisations from the assets could be used to fund the expenses of the administration and pay preferential creditors.

Comment

Mr Justice Johnson reviewed the case law and academic commentary on the nature of fixed and floating charges following Re Spectrum Plus and concluded that Re Spectrum Plus permits a more nuanced approach than much of the academic commentary had suggested. In Johnson J’s view, a security holder need not have absolute control over an asset for it to be characterised properly as a fixed charge. A charge may be fixed even if the chargor is able to deal with the charged assets in limited and specific circumstances.

In practice, any party seeking to take a fixed charge should take account of the type of asset before granting a chargor the power to deal with the asset. If the charged asset is one that belongs to a fluctuating asset class, a court is more likely to consider the charge to take effect as a floating charge. By contrast, assets which are core income generating assets that do not fluctuate and which are inherently difficult to transfer are more likely to be subject to a fixed charge, even if the chargor has some ability to deal with them.

One of the key considerations for any court considering whether a charge is fixed or floating will be whether a chargor has the ability to deal with charged assets in the ordinary course of business. The Avanti ruling suggests lenders should ensure that there is a total prohibition on a chargor having the ability to deal with assets in the ordinary course of business if the chargor is looking to take a fixed charge. Any ability to deal with charged assets in the ordinary course of business would suggest the charge is floating, given the consequent flexibility provided to the chargor.

The circumstances in which a chargor is contractually permitted to deal with assets should also be extremely limited if those assets are intended to be subject to a fixed charge. For example, security holders should ensure when drafting the relevant contractual provisions that a disposal is for nothing less than market value and that any realisation proceeds are applied in the security holder’s favour.

Conclusion

The judge expressly rejected setting down any definition regarding the degree of control required for a fixed charge. As such, further clarity on the question will depend on future cases being brought before the court.