Fixed to floating charges – a spectrum?

This article reviews the impact of Re Avanti Communications Ltd (In Administration) [2023] EWHC 940 (Ch) on security agreements.

Security – the basics

Lenders take security over loans via charges. Should a borrower default on its loan, lenders with security can take control of the secured assets and realise their value. In the event of a formal insolvency procedure, a lender with security ranks higher – and thus has better prospects of recovering their debt – than unsecured creditors.

Charges fall into two main categories:

1. Fixed charges, which restrict the owner’s freedom to deal with specific assets

2. Floating charges, which hover over a pool of assets used in the trading of the business and ‘crystallise’ in event of default.

What had the parties agreed?

Avanti Communications Limited (“Avanti”) granted a fixed charge over certain assets, including satellite and station equipment. The charge restricted Avanti from disposing of the charged assets other than in certain specified circumstances, including when assets dropped below a specified value, became obsolete, or formed licences used in the ordinary course of business.
After their appointment, the administrators of Avanti, taking a neutral stance, invited the court to consider whether the ability to release certain charged assets without the lender’s consent rendered the charge floating.

Why did it matter?

In formal insolvency proceedings, the order of distribution to creditors is set by the Insolvency Act 1986. Fixed charge holders are paid first, whilst floating charge holders are paid from any surplus once the following have been provided for:
• Fixed charges
• Administration expenses
• Expenses of the insolvent estate
• Preferential creditors
• The “prescribed part” – the part of the property of a company that an administrator must reserve for unsecured creditors.
If the lender’s charge was fixed, it would rank top of the pile for repayment. If it was a floating charge holder, the funds available to the lender may first have been reduced by up to £800,000 – in part due to a substantial claim from HMRC – making full re-payment of the debt unlikely.

What did the court say?

The charge was fixed. There was not an absolute requirement for a fixed charge to entirely prevent the removal or substitution of charged assets. Whilst the House of Lords in Re Spectrum had found that, in principle, a charge is floating if the assets can be freely removed, the court in Re Avanti decided that charges exist on a spectrum of freedom. The position of a charge along the spectrum, and so its classification, depends on the facts and commercial context.
The court found that Avanti had neither wide freedoms to dispose of the charged assets, nor did so within its ordinary course of business. This was because released assets were neither ‘for profit’, nor realisable on commercially attractive terms. The charged assets did not comprise Avanti’s circulating capital or fluctuating assets and were thus part of its infrastructure. This infrastructure generated income without needing to be sold. The two points were distinct and therefore the assets were not used in ‘day-to-day’ business.

The upshot?

Charges exist on a spectrum. Whether the charge is fixed or floating will depend on the context, with the key factors being whether:

1. The lender retains significant control over the assets
2. The assets are traded during day-to-day business, as opposed to being income-generating infrastructure.

By refusing to identify the exact point on the spectrum that a fixed charge becomes floating, the court afforded itself flexibility to accommodate nuanced factual matrixes in future cases, being a key draw of English law to commercial parties.
Nevertheless, Re Avanti should prompt prudent lenders to review their existing and proposed security arrangements to ensure that their charges afford maximum protection in the event of the borrower’s insolvency.