Fixed or Floating?
Recent guidance discussed below will be of interest to Lenders active in commercial lending where a suite of fixed and floating security is usually taken as collateral. The distinction between fixed and floating security can be critical on the enforcement of security especially at times of insolvency.
The recent UK High Court case of Re Avanti Communications Limited[1] provides helpful guidance on the categorisation of fixed and floating charges.
A fixed charge would give a Bank or other chargeholder first ranking security over the charged assets when distributing the assets of a company on insolvency, whereas a floating charge would put the chargeholder behind those creditors who rank ahead of them in the prescribed order of priority (i.e. liquidation costs, revenue, employee benefits) reducing the amount of assets available to discharge the floating chargeholder’ s claim.
Prior to this decision the main case in this area in the UK was the case of Re Spectrum Plus[2] which leading commentators had interpreted the judgment as meaning any freedom to deal with charged assets would render a charge floating rather than fixed.
Background
Avanti Communications Limited (the “Company”) granted security over its assets. The security documents referred to the security over the assets as fixed charges but permitted the Company to deal with those assets without consent of the chargeholder subject to certain strict conditions and exceptions.
Administrators were appointed over the Company in 2022 who then sold certain assets of the Company charged in favour of the chargeholder.
The assets consisted of equipment used in the operation of a satellite network and related ground stations, satellite network filings permitting the use of certain orbital slots, various licences permitting the use of ground stations together with other related assets.
The High Court considered an application by the joint administrators and the Company as to whether certain assets sold were subject to fixed or floating charges pursuant to the debenture granted by the Company, which would in turn determine who was entitled to the proceeds of the sale.
It was concluded in the UK High Court that the assets charged by the Company were captured by fixed charges rather than floating charges despite the Company retaining a limited degree of control to dispose of the charged assets.
Judgment
Mr Justice Johnson examined the previous case law in this area and confirmed it was necessary to adopt a two-stage test when determining whether security is fixed or floating:
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- Firstly, 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.
- Secondly, consider whether those rights and obligations are consistent with a fixed or floating charge which is a matter of law and does not depend on the intention of the parties or the label attached to the charge document.
The Court noted other factors relevant in deciding whether security is fixed or floating include the nature of the charged assets and the nature of the security providers business in the security documentation. A total restriction on the Company dealing with the assets would provide some certainty to the lender that it has a fixed charge while describing security over fluctuating assets as fixed may result in the charge being characterised as a floating charge.
The Avanti Case, in the UK would appear to create a third interpretation being a fixed charge over assets which permits dealing with the charged assets, provided the assets are not of an ordinarily fluctuating nature and any such dealings are tightly restricted.
The Court ultimately decided the borrower’s ability to dispose of the charged assets was compatible with the nature of a fixed charge and that the charges in this case took effect as fixed charges.
The Court expressly refused to set down any definition regarding the degree of control required to convert a fixed charge into a floating charge.
Key Take-aways
Although this is an English decision of the High Court and is, strictly, not binding in Ireland, the facts of the case and the decision of the court may be persuasive in Ireland. It remains to be seen how the Irish courts might assess the characterisation of fixed v floating charges in Ireland going forward. Until then it would be prudent for chargeholders (and also insolvency practitioners, preferential creditors, and third parties) to look carefully at the drafting of the charging provisions in the security document, the types of assets being charged and the scope afforded to the security provider to deal with the assets.
If you have any queries or concerns, or would like to discuss the above in further detail, please feel free to contact Conor Mac Nally, Partner, Banking & Finance (cmacnally@bhsm.ie) for further information.
This article is for general information purposes. Legal advice must be obtained for individual circumstances. Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.
Footnotes
[1] Re Avanti Communications Limited [2023] EWHC 940 (Ch)
[2] Re Spectrum Plus [2005] UKHL 41