THE SPECTRUM OF A FIXED CHARGE: RE AVANTI COMMUNICATIONS LIMITED (IN ADMINISTRATION) [2023] EWHC 940 (CH)

In the recent case of Re Avanti Communications Limited (In Administration) (“Avanti”), the first major case since the seminal House of Lords decision in Re Spectrum Plus Ltd (in liquidation) [2005] UKHL 41, the court analysed the existing case law and academic commentary on fixed and floating charges under English law. It held that the chargee’s security was fixed despite the chargor having some limited rights to dispose of some of the assets without the chargee’s consent. The court held that there should be a nuanced approach when determining whether a charge is fixed or floating and various factors need to be taken into account. Whilst this decision clarifies that absolute prohibition on the chargor’s rights is not required for a fixed charge, thus potentially increasing the remit of assets covered by a fixed charge, it does not outline at what point on the spectrum a charge will be considered fixed or floating, potentially resulting in uncertainty. 

Fixed charge or floating charge does it matter? 

Whether a charge over an asset is characterised as fixed or floating can impact the priority of the security against other proprietary claims in such asset, for example, claims by a subsequent purchaser or fixed charge holder. In an insolvency, the characterisation of a charge will also determine the recoveries from the asset, even where there is no contesting proprietary claim. Generally, if a charge is fixed, all the proceeds from such asset will be applied towards the secured obligations once only the costs of realisation have been deducted. Conversely, other rights, apart from a fixed charge will rank ahead of a floating charge; for instance, moratorium-related debts, the costs and expenses of the insolvency procedure (which can be substantial), HMRC as a preferential creditor in respect of certain tax liabilities, employee and pension claims, and the “prescribed part” which is a statutorily ring-fenced amount of up to £800,000 (£600,000 before 6 April 2020) can be deducted from the floating charge recoveries to be distributed amongst unsecured creditors. Additionally, an insolvency practitioner cannot dispose of assets subject to a fixed charge without the consent of the fixed charge holder or a court order, in certain circumstances.

Avanti: the background

In this case, Avanti Communications Limited (the “Company”) whose primary business was the operation of satellites and the sale of wholesale satellite broadband and satellite connectivity services to internet providers, mobile network operators, enterprises, governments, and other satellite operators, executed two debentures (though we only speak to one of those in this article) granting fixed charges over certain assets to its secured lenders. These assets included a satellite payload, certain equipment used in the operation of network and ground station facilities, certain network filings required by regulators for the operation of the satellite network and certain ground station licences issued by Ofcom which enabled the Company to operate the ground stations (together, the “Relevant Assets”). The Company went into administration and the administrators sold the Relevant Assets.  The question for the court was whether the Relevant Assets were subject to a fixed charge or a floating charge, in which case, HMRC as a preferential creditor would have priority and the “prescribed part” would be engaged.

Avanti: the decision

In reaching its decision, the court held that it is necessary to apply a two-stage test to determine whether security is fixed or floating.

The First Stage – construe the instrument of charge

The court must construe the charging instrument (in this case, the debenture) to ascertain the nature of the rights and obligations which the parties intended to grant to each other in respect of the charged assets. Factors to consider include (i) ascertaining that the said assets fall within the scope of the charging clause in the charging instrument; (ii) the labels used by the parties to denote their rights and obligations; (iii) the nature of the charged assets – a distinction should be drawn between the chargor’s circulating capital and non-circulating capital because “compliance with the terms of a fixed charge on the company’s circulating capital would paralyse its business”. The critical question is whether the chargor needs to sell the assets, deal with them or substitute them as part of its ordinary course of business, if so, this will constitute circulating capital; (iv) the nature of the chargor’s business, which will also be useful in answering the question in (iii); and (v) the nature of the contractual restrictions and permissions on the disposal of the charged assets.

The Second Stage – categorisation and characterisation

The critical question in the second stage is whether as a matter of law, the rights and obligations in respect of the charged assets are consistent with fixed charge security or floating charge security. This does not depend on the intention of the relevant parties or the label which the parties have attached to the charging instrument. The critical question at the second stage is the question of control. The court found that it is helpful to consider the range of possibilities of control as a spectrum, with total freedom of management of the charged assets at one end of the spectrum and a total prohibition on dealings of any kind at the other end of the spectrum.

The court held that it is not the case that a charge will only be fixed if it is located at the total prohibition end of the spectrum. Whilst the court considered that it would not be sensible or feasible to try to identify the location of the point on the spectrum where a floating charge gives way to a fixed charge or vice versa, it held that a nuanced approach which takes into account the factors discussed above is what is required.

In Avanti, the debenture did not impose a total restriction on the Company dealing with the Relevant Assets. However, the Company’s ability to deal with the Relevant Assets was strictly limited as the exceptions in the debenture only provided limited opportunities to dispose of the Relevant Assets, and only in particular sets of circumstances. Importantly, the exceptions in the debenture did not provide the Company with the opportunity to dispose of the Relevant Assets in the ordinary course of its business. Beyond the restrictions in the debenture, the court also considered that the Relevant Assets did not constitute the circulating capital or fluctuating assets of the Company. They were inherently difficult to transfer and did not need to be sold to generate the Company’s business income, instead the Relevant Assets were “tangible and non-tangible infrastructure owned by the Company, which was used to generate the sources of the Company’s business income”.

There is a distinction between a charge over an income generating asset and a charge over the income generated by that asset. The court therefore held that the Relevant Assets were subject to a fixed charge rather than a floating charge.

Much ado about nothing – what happens next?

Secured creditors will welcome this positive interpretation of the law as it provides reassurance that a fixed charge does not require the chargee to have absolute control over the charged assets and a complete prohibition on disposal is not always required where the charged assets are not part of the company’s circulating capital; some flexibility to deal with such assets might be considered consistent with a fixed charge. This decision will also impact preferential and unsecured creditors as the characterisation of a charge as floating instead of fixed may result in better recovery in an insolvency. Insolvency practitioners will also consider this decision when taking a view as to whether to seek directions from the court in the administration of charged assets.

Whilst this decision envisages a “spectrum of possibilities” and advocates for a more nuanced approach, it can also lead to uncertainty. Therefore, parties must ensure that charging instruments are well drafted to ensure that the nature and extent of any restrictions on the chargor’s ability and approvals required from the chargee are well outlined and adhered to.

A departure from Re Spectrum Plus?

Following the decision in Re Spectrum Plus, prominent academic commentators interpreted the decision to mean that any right to dispose of a charged asset without the chargee’s consent was inconsistent with a fixed charge. However, the judge in Avanti disagreed with this view, stating that it was not supported by the House of Lords’ decision or any existing case law.  

It is also important to state that the Relevant Assets in Avanti constituted non-fluctuating assets whereas Re Spectrum Plus considered the question in respect of book debts. Therefore, one could consider that Re Spectrum Plus remains the authority for this category of assets. Where the charged assets are “naturally fluctuating assets” such as book debts or stock, the ability of the chargor to deal with such assets is inconsistent with a fixed charge.

Finally, as this is a first instance decision at the High Court, it remains to be seen whether Avanti will be followed in future cases, if HMRC and any other preferred creditor will be incentivised to institute or participate in insolvency proceedings, if insolvency practitioners will seek direction from courts more frequently and if there will be any changes to current practice. Watch this space and whilst at it, ensure your charging instruments are drafted well!