Re Avanti Communications Ltd (in administration) [2023] EWHC 940 (Ch)

Chancery Division (Companies Court), Edwin Johnson J

 

25 April 2023

The Court’s approach to determining fixed vs. floating security

In order to determine whether a charge is fixed or floating it is necessary to conduct a two-stage process.

 

(1) The first stage of the process the court must construe relevant instrument of charge in order to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets.

 

(2) The second stage, after these rights and obligations have been ascertained, the court must embark on the second stage of the process, which is one of categorisation, or characterisation. This is a matter of law and does not depend upon the intention of the relevant parties, or the label which the parties have attached to the relevant instrument of charge. 

 

Decision

With regard to analysis of the first stage, the court concluded –

 

(1) The Relevant Assets were all subject to considerable restrictions upon their disposal.

 

(2) The Company could make a disposal of the Relevant Assets, by way of an asset sale, provided that such disposal was not caught by certain restrictions, and provided that the following conditions in were met:

 

- assets having a Fair Market Value of less than $2m;

- disposals of satellite capacity and associated licences and equipment;

- disposals of obsolete assets (the “Obsolete Exception”);

- disposals of assets that were no longer useful in the conduct of the business of the Avanti group.;

- disposals of licences or sublicences by the Avanti Group in the ordinary course of business.

 

Moving onto the second stage, the court concluded –

 

(1) The restrictions (mentioned above) did not impose a total restriction on the Company from dealing with the Relevant Assets.

 

(2) The Company’s ability to deal with the Relevant Assets was “strictly limited”.

 

(3) The Relevant Assets did not constitute anything resembling the circulating capital or fluctuating assets of a company.

 

“I come to the conclusion that the charge over the Relevant Assets was not necessarily a floating charge simply because the Company had some ability, under the terms of the Security Documents, to deal with the Relevant Assets or some of them. In order to determine whether the charge was fixed or floating, it is necessary to consider all the circumstances of the present case, and the factors identified in the case law as important to the determination of whether a charge is fixed or floating. I therefore turn to a discussion of the factors, as identified in the case law, which are relevant in this determination.”

 

“Nevertheless the ability of the Company to deal with the Relevant Assets was strictly limited. In terms of complete freedom to deal with the Relevant Assets, the Company did have the ability, but only if and in so far as the relevant disposal fell within one of the Asset Sale Exceptions…”

 

As a result of the two stage process, the court concluded -

 

“(1) At the time of entry into each of the Debentures, the security created over the Relevant Assets by the relevant Debenture was a fixed charge.

 

(2) At the time of the Transactions the Relevant Assets continued to be secured by the fixed charge created by the 2017 Debenture and, so far as this remains relevant, the fixed charge created by the 2013 Debenture.”

 

Considerations for members 

Whilst this case was fact specific with complex security agreements, the court considered that when  considering the question of whether a charge is fixed or floating a nuanced approach based on all the circumstances was to be adopted and not, as some academics have argued that an absolute prohibition on dealing is necessary in order to avoid a charge expressed as fixed to , in fact, a floating charge. Furthermore, the range of possibilities as a spectrum must be considered, including the nature of the charged assets, whether they are by that nature fluctuating or circulating in the business of the charger and the degree of control given the charge. At one end of the spectrum is total freedom of management and a total prohibition on dealings of any kind at the other end of the spectrum..

 

Whether a charge is fixed or floating will be highly dependent on the specific facts of each case – both in terms of the nature of the assets and the business of the group, as well as the breadth and applicability of the permissions and restrictions on dealing with those assets in the finance documents which allow the company to dispose of or deal with those assets.  

 

Whether an appointment is complex or not, members should ensure appropriate legal advice is obtained as to the characterisation of assets, fixed or floating, before distributing monies to creditors.

 

The judgment is available here.