The judgment in the recent case of Re Avanti Communications Limited provides helpful guidance on the categorisation of fixed and floating charges. The court found that allowing a security provider some freedom to deal with charged assets will not automatically prevent a charge from being fixed.
In the case of Re Avanti Communications Limited  EWHC 940 (Ch), the High Court held that a charge over certain assets owned by Avanti was fixed rather than floating, despite Avanti having an ability to dispose of those assets in certain circumstances.
Whether a charge is fixed or floating is important because fixed charge holders rank first on an insolvency, whereas floating charge holders are paid out after various other creditors and crucially after the costs and expenses of any insolvency process.
The last time the distinction between fixed and floating charges was examined in detail by the English courts was in the case of Re Spectrum Plus  UKHL 41. In that case it was held that a charge over book debts paid into an account from which the security provider was free to make withdrawals was floating, as the security holder did not have sufficient control over those book debts for the charge to be fixed.
Prior to the Avanti case, leading commentators had interpreted Spectrum as meaning that any freedom for a security provider to deal with charged assets would render a charge floating rather than fixed.
In this article we summarise the latest guidance provided in the Avanti case and look at what this might mean for creditors and insolvency practitioners.
Avanti Communications Limited (Avanti) had purported to grant fixed charges over certain equipment, licenses and other rights related to its business as a satellite operator (assets) pursuant to debentures securing debt owing to various lenders (debentures). Avanti went into administration and made a joint application with its administrators to seek a determination as to whether the charge over the assets was fixed or floating, in order to determine what was payable to Avanti’s creditors.
The debentures and other finance documents contained a complex set of contractual provisions governing disposals of the Assets. In simple terms, Avanti could dispose of the assets:
- if they fell within one of a series of “Asset Sale Exceptions” (similar to the concept of “Permitted Disposals” seen in Loan Market Association finance documentation) and which included disposals of assets in the ordinary course of business, of obsolete assets or assets no longer useful to Avanti, and low value disposals subject to a cap; or
- if they applied the proceeds of sale (subject to a de minimis amount) to prepay the secured debt on commercially unattractive terms.
A pre-packaged sale of the assets went ahead pending the outcome of the application. Distributions were made to secured creditors on the basis that the assets were subject to a fixed charge, but the possibility was recognised that the charge could be found by the court to be floating. Therefore, the administrators, supported by certain of the secured creditors, put in place a funding agreement to compensate the preferential creditors and “prescribed part” for unsecured creditors who would have received a distribution ahead of the secured creditors if the assets were found to be subject to a floating charge.
Taking into account previous decisions and commentary in this area, the court confirmed that to determine whether a charge is fixed or floating involves a two-stage test:
- First, look at the wording of the charge document to determine what rights and obligations the parties intended to grant each other in respect of the charged assets.
- Second, consider whether those rights and obligations are consistent with a fixed or floating charge. This is a matter of law and does not depend on the intention of the parties or the label attached to the charge document.
Other factors relevant to characterisation of fixed and floating charges include:
- The nature of the charged assets, with a distinction being drawn between “circulating” capital (i.e., fluctuating assets like stock which a security provider needs to be able to deal with in the ordinary course of business) as opposed to “non-circulating capital”. A charge over circulating capital would normally be inconsistent with a fixed charge.
- The nature of the security provider’s business, whereby if trading in the relevant secured assets is part of its ordinary business (for example a retail business selling goods), then this would suggest that any charge over those assets was not fixed.
The judge commented that it was helpful, when considering whether a charge is fixed or floating, to look at the range of possibilities as a spectrum, with total freedom of management at one end and a total prohibition on dealings at the other. However, in his view it was not correct to say that a charge would only be fixed if it was located at the total prohibition end of the spectrum. He commented that “the case law supports a more nuanced approach, which depends upon a combination of factors.”
Insolvency practitioners will have to look carefully at charges which purport to be fixed but still allow the security provider some limited ability to deal with the assets.
Where time is of the essence, this case shows it is possible (where the security holder agrees) to achieve a quick sale but ensure all creditors are protected pending a final determination.