The recent case of Re Avanti Communications Limited provides welcome analysis to lawyers, lenders and insolvency practitioners on the degree of control necessary to ensure that a charge is fixed.
It suggests that a charge could still be fixed even if the chargor has limited freedom to deal with the charged assets.
The case
Administrators sought determination as to whether certain assets that had been sold in a pre-pack administration deal were secured by way of fixed or floating charge, despite being labelled as fixed. The distinction between fixed and floating charges is particularly vital in the event of insolvency, given the priority that a holder of a fixed charge has over company assets and the impact on preferential creditors.
The assets in question included various satellite equipment and certain ground station licenses issued by Ofcom, and these were stated to be subject to fixed charge under two debentures. Any assets not picked up by the fixed charge were the subject of a floating charge. ACL (and its group) were vastly restricted in the circumstances in which they could dispose of the assets covered by the fixed charge, ACL had only limited opportunities to make disposals of the relevant assets, which were only permitted in particular specified circumstances.
The Law
The judgement is a helpful summary of how to determine whether a charge is in fact fixed. This is a two stage process:
First stage: the court must construe the instrument of the charge, and the intention of the parties by the contractual language used – this is not to discover the intention but ascertain the nature of the attached rights and obligations in which the parties intended to grant.
Second stage: as a matter of law, the court must categorise the security asset. This does not depend on the label attached, nor the intention, and the nature and extent of the chargee's control of the assets must be investigated.
The key difference between a fixed and floating charge turns on the ability of the chargor to deal with the charged asset. The question is, what degree of control is needed?
The court's decision
The charge was fixed. Despite restrictions on disposal not being totally restrictive on ACL, they were strict. ACL's ability to deal with the assets was limited to several constrained exceptions, none of which could be viewed as being in the ordinary course of its business or trade.
There is a sliding scale of control, ranging from total freedom to total prohibition on disposal. There is nothing in case law to support academic commentary that a total prohibition on disposal of assets is required for a charge to be fixed, whilst also noting that it is not feasible to distinctly note on a spectrum of restrictions when a charge would be floating or fixed. Therefore, whilst the level of control of the asset class is highly important, it depends on the asset, and a total prohibition is not necessary.
Comment
This case is useful authority for the proposition that the control of a fixed charge holder over the charged assets does not need to be total. However, whilst the charge in this case was fixed, the judge was careful not to make any general remarks about what freedoms may or not be compatible with a fixed charge in any particular case and to make clear that the position may be different depending on the nature of the assets concerned.
Much of the case law and academic comment in this area has focussed on charges over book debts. The judgment re-affirms that where the assets of a company naturally fluctuate from time to time, as would be the case for book debts, a court will readily conclude that freedom to deal with the charged assets is inconsistent with a fixed charge. Whereas in the case of specific assets that do not necessarily fluctuate (in this case satellite equipment and licenses) some freedom to deal with the charged assets may still be possible.
