A recent first instance judgment has provided some welcome guidance on the characterisation of a charge as fixed or floating security. The High Court held that the charge in question was fixed rather than floating, despite the fact that the chargor had some permissions to deal with the charged assets.
This case is a helpful clarification of the fixed / floating charge distinction, and clarifies that the hurdle to create a fixed charge does not necessarily lie at the ‘total control’ end of the spectrum. The characterisation analysis will depend partly on control, but also on matters such as the nature of the assets and whether permitted disposals relate to the asset itself or only its proceeds. Careful consideration of permitted disposal provisions will be required where a chargee seeks to obtain a fixed charge.
Facts of the case
The case was brought by the joint administrators of Avanti to determine whether charges granted by Avanti over a satellite payload and certain related assets, rights and licences (the Relevant Assets) were fixed or floating. The outcome would determine the order of payments to be made out of administration proceeds – the preferential creditor (HMRC) and unsecured creditors would only receive payments ahead of the holder of a floating charge.
The relevant finance documents contained restrictions preventing the disposal of the Relevant Assets, but did provide for permitted disposals in certain (limited) circumstances and/or subject to certain conditions.
The Two Stage Test
The two stage test from Agnew v Commissioners of Inland Revenue  was confirmed:
- Construe the charge document to ascertain the nature of the rights and obligations the parties intended to grant
Characterisation – does the law characterise those rights and obligations as creating a fixed or a floating charge?
The judgment sets out a detailed analysis on the case law around the second stage test to characterise fixed and floating charges, including the House of Lords judgment in Re Spectrum , concluding that:
- The critical question is the question of control
- However, the judge disagreed with academic commentary suggesting that only total control (a total prohibition on any disposal being made without the consent of the chargee) is sufficient to create a fixed charge
- The case law supports a more nuanced approach, which depends upon a combination of factors
- Spectrum was a case concerning book debts (where the asset and its proceeds cannot be readily separated) but that case can be misapplied when considering income-generating assets (where proceeds can be separated from the asset, and control of the asset (but not the income) may be required for a fixed charge)
- The ability of Avanti to deal with the Relevant Assets was strictly limited by its finance documents (which did not allow for disposal in the ordinary course of Avanti’s business), and there was evidence that these disposal restrictions were being observed in practice
- Further, the Relevant Assets were not in the nature of circulating capital or fluctuating assets – they were part of the infrastructure which Avanti used to generate income (rather than being assets sold to generate income)
- The charge over the Relevant Assets therefore took effect as a fixed charge