Fixed and Floating Charges – An Update from the High Court

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Fixed and floating charges An update from the High Court v2

A recent High Court ruling in April 2023 has clarified one of the key distinctions between fixed and floating charges, namely how the ability to deal with the charged assets can determine if a charge is fixed or floating.

The decision offers important insights for administrators and secured and unsecured creditors. 

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Fixed v floating charges

A fixed charge is a security interest over specific assets, such as land or buildings.

If the company wants to sell or dispose of this asset, they will either have to seek the lender's permission or repay any outstanding debt to the lender to release the charge before the asset can be sold or disposed of.

Other obligations include keeping the charged asset in good condition and repair and insuring it against loss or damage.

If a default occurs, a fixed charge can be used to compel a sale of the charge asset. 

A floating charge is a security interest over a shifting class of assets, such as stock or debtors, including future assets of that class.

A floating charge allows lenders to take security over the assets of a company without hindering the company's day-to-day business operations.

If the company becomes insolvent or ceases to trade, the floating charge becomes a fixed charge – a process called crystallisation. 

The question of whether a charge over an asset is created as a fixed or floating charge is an important one as, crucially, upon the borrower's insolvency, the holder of a fixed charge will be paid from the proceeds of the sale of the assets subject to the fixed charge before all other creditors.

A floating charge holder, in contrast, is only paid after fixed charge holders and preferential creditors have been paid. 

Prior to the recent High Court case of Re Avanti Communications Ltd (In Administration) [2023] EWHC 940 (Ch), case law suggested that if the borrower has any ability to deal with the charged assets, it must be a floating charge.

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Fixed v floating charges v2

The recent High Court ruling

In Re Avanti Communications Ltd (Avanti), the court examined whether certain assets of a company in administration were secured by fixed or floating charges based on whether the security documents permitted the borrowers to dispose of certain charged assets without the consent of the lender.

The outcome of the case would determine how much money was payable to creditors.

Avanti operated satellites and provided satellite broadband and satellite connectivity services.

Avanti had granted fixed charges over a satellite payload and its related tangible and intangible infrastructure (including certain satellite network filings and ground station licences) and a floating charge over any assets not subject to a fixed charge.

The question for the court was whether the fixed charge over the satellite payload and its related infrastructure was valid.

The lenders argued that the charge was valid because the borrower's ability to deal with those assets was materially and significantly limited.

The borrower argued that the charge was invalid because the borrower was permitted to deal with those assets in certain circumstances, such as in the ordinary course of business or with the consent of the lenders.

The court held that the charge in question was a fixed charge, as opposed to a floating charge, despite the borrower having the ability to deal with the charged assets, albeit in a limited capacity.

The charge granted by Avanti over its assets was properly characterised as a fixed charge even though there were limited permissions for Avanti to deal with the charged assets.

The court further held a fixed charge did not mean a total prohibition was required on all dealings in relation to the charged assets.

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The recent High Court ruling v2

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The decision has defied existing case law and recent academic commentary and highlighted that there does not need to be a total prohibition on disposals for a charge to be deemed as fixed.

If you require legal advice in relation to interests and charges over assets or any other corporate issues, please call:

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