In its recent judgement in Re Avanti Communications Ltd [2023] EWHC 940 (Ch) ('Avanti') the High Court decided that in some circumstances a charge can take effect as a fixed charge despite the chargor having some flexibility to dispose of assets without the consent of the charge holder.

Background

A charge expressed to be a fixed charge may be at risk of being re-characterised by a court as a floating charge if the charge holder fails to exercise sufficient control over the assets. This is a major concern for lenders and their lawyers, particularly now that HMRC ranks as a preferential creditor (behind fixed charge holders but ahead of floating charge holders) in respect of certain taxes in insolvency proceedings. The level of control required is uncertain. Some prominent commentators had argued following the leading decision of the House of Lords in Re Spectrum Plus [2005] 2 AC 680 (‘Spectrum’), that a charge can only be a fixed charge if there is essentially a total restriction on the ability of the chargor to deal with the relevant assets without the charge holder’s consent. The need for lenders to balance the requirement for robust security with the natural desire of borrowers to retain sufficient flexibility to manage the business poses a challenge.

The decision

In Avanti the High Court held that where assets are not of a type which generally fluctuate, the fact that the chargor has some limited power to dispose of those assets without the charge holder’s consent does not prevent the charge from being a fixed charge.  

The assets in question consisted of a satellite payload, equipment used in the operation of a satellite network and related ground stations, satellite network filings permitting the use of certain orbital slots and licences permitting the operation of the ground stations. These were expressed to be subject to a fixed charge pursuant to a debenture. The relevant finance documents included various permitted disposal provisions, including provisions relating to the sale of satellite capacity in the ordinary course of business, sales of obsolete assets and a basket allowing disposals up to US$2,000,000. There was also a provision generally permitting asset sales provided the consideration received was not less than fair market value and was received in cash or cash equivalents. Where the net proceeds were US$1,000,000 or more, they were required to be applied in repayment of the secured debt under a payments waterfall which the judge described as “commercially unattractive”.

The judge concluded that nothing in Spectrum supported the view that only a complete prohibition on disposals suffices to create a fixed charge. He emphasised that it was important to consider the nature of the assets in question. The relevant assets were “infrastructure assets” and not assets required to be sold to generate income in the ordinary course of business (described as “circulating capital”). Some flexibility to deal with those assets was not necessarily inconsistent with the existence of a fixed charge. Whilst declining to give a view as to what level of flexibility might jeopardise a fixed charge, he noted that the restrictions in this case were extensive, gave no ability for the company to deal with the relevant assets in the ordinary course of business and therefore sufficient for the charge to constitute a fixed charge. The judge placed considerable reliance on the High Court decision in Re Cimex Tissues Ltd [1994] BCC 626, where it was commented that:

“Where the charged property is stock, or book debts – ie where the assets are naturally fluctuating – the court will readily conclude that a liberty for the chargor to deal with the charged assets is inconsistent with a fixed charge. Where … the assets are specific and do not necessarily fluctuate, some liberty to release the charged assets may not be inconsistent with a fixed charge”.

Key take aways

• An absolute restriction on disposal is required to be certain of creating a fixed charge.
• In relation to fixed assets not forming part of the company’s circulating capital, a permitted disposals regime will not necessarily jeopardise a charge expressed to be fixed but the chargor’s ability to deal with the relevant assets must be significantly limited.
• No guidance was given as to the level of flexibility which might be afforded to a chargor - the decision will be nuanced and depend on the nature of the business and assets. This creates a grey area where there will be uncertainty as to whether a fixed charge has been created.  However, given the emphasis placed on the “considerable restrictions” actually imposed on disposals in Avanti, it seems likely that very significant control will be required.  
• Avanti suggests the emergence of three classes of assets in the context of characterising fixed charges: (a) those where absolute control is exercised, the borrower has no ability to dispose of them and there is a clear fixed charge; (b) those that are not circulating capital and rarely fluctuate in practice, where limited dealings are permitted but which can still be subject to a fixed charge; and (c) assets such as stock, current accounts and book debts, that regularly fluctuate and in practice may not be capable of being subject to a fixed charge.

Conclusion

Avanti provides useful authority for the view that a complete prohibition on disposal is not always required to create a fixed charge where assets are not part of the company’s circulating capital and some flexibility to deal with such assets might be consistent with a fixed charge.   

Lenders should ensure that security documents are clear and seek to maximise control over assets (whilst balancing the chargor’s business needs). We anticipate that lenders will continue to exercise caution and suspect that there will be little change to current practice in this area. 

Whilst the case may be welcome to secured creditors, from an enforcement perspective, insolvency office holders will not welcome the uncertainty it brings to the categorisation of charges. Given the lack of guidance provided on how much flexibility is too much, further judicial consideration to clarify the parameters would be welcome.