Fixed or Floating Charge? What is the Impact of the Recent Re Avanti Communications Judgment?
The recent High Court decision in Re Avanti Communications Limited  EWHC 940 (Ch) has generated considerable excitement among finance lawyers as the fixed versus floating charge security debate flares up again. The Re Avanti case is the first significant judicial consideration of the issue since the House of Lords judgment in Re Spectrum in 2005. The fixed versus floating charge security debate has also been brought into sharper focus since the return in December 2020 of HMRC as a preferential creditor in respect of certain debts (such as VAT, PAYE, NICs). Preferential creditors rank behind fixed charge holders but take priority over debts owing to floating charge holders.
The Re Avanti judgment consolidates the law on the characterisation of security as fixed or floating and contains a very succinct and clear analysis of the judicial approach to interpreting security agreements that the judge himself described as “complex and detailed” and “not easily summarised”. The judgment appears to introduce a shift away from the long-held notion that in order for a chargee to have the benefit of a fixed charge, it has to have total control over the charged asset. However, before senior secured lenders get too excited with this perceived relaxation in the position, there is a degree of nuance in the judgment that needs to be carefully looked at.
Before looking at what the Re Avanti judgment says about the requisite degree of control, there are a number of basic principles in relation to the taking of security that the judgment reminds us of:
- Firstly, the analysis as to whether a fixed or floating charge has been created is a two stage process. The first stage is to construe the security agreement in order to ascertain the rights and obligations that the parties intended to grant each other in respect of the charged assets. In other words, is the security agreement effective to create a security interest? Once it is ascertained that a security interest has been granted, the second stage is to characterise the nature of that security. The important point here is that when characterising a security interest as either a fixed or floating charge, it is a matter of law and does not depend on the intention of the relevant parties or the labels given in the security agreement.
- Secondly, the relevant time for determining the characterisation of the security interest is at the time when the security was created. We often see security arrangements where it is agreed that notice of security and a direction giving the chargee control over a secured asset (whether for example a bank account or account receivable) need only be given following the occurrence of an event of default. In that situation, it is unlikely that the security will be characterised as a fixed charge, given the lack of control that the chargee has over the charged asset at the relevant time.
- Thirdly, even if the security agreement granted the chargee the requisite degree of control over the charged asset at the relevant time in order for the security to be characterised as a fixed charge, if control over the charged asset is not exercised in practice, then regardless of what the security agreement says, the agreement may be held to be a sham and the security will be at risk of being recharacterised as a floating charge.
Turning to the question of control, the judge took a very close look at the relevant case law and academic authorities and was clearly uncomfortable with the established notion that in order for a charge to be characterised as a fixed charge, there must be a total restriction on any disposal of the charged assets by the chargor without the consent of the chargee. Since Re Spectrum finance lawyers have been fixated on this question of control but the judge in Re Avanti said that a nuanced approach needed to be taken and in particular the nature of the charged assets needed to be taken into account. The judge accepted that where charged assets comprise circulating capital or fluctuating assets which the chargor uses in the ordinary course of its business (e.g. stock or book debts), leaving the chargor free to deal with those assets is inconsistent with a fixed charge. However, in this case, the assets in question were a satellite payload operating in orbit, certain equipment used in the operation of network and ground station facilities, certain satellite network filings; and certain ground station licences issued by Ofcom. These assets were described as being more in the nature of tangible and non-tangible infrastructure owned by the chargor, used to generate the sources of its income. The charged assets did not need to be sold to generate this income and were all inherently difficult to transfer.
The judge also carefully looked at the permitted disposal provisions and concluded that the chargor’s freedom to deal with the charged assets was materially and significantly limited. While there were certain limited permitted disposal exceptions, there was no opportunity for the chargor to dispose of the charged assets in the ordinary course of its business. The judge concluded that the inclusion of permitted disposal exceptions did not of itself undermine the fixed nature of the security.
So where does the Re Avanti judgment leave us in the fixed versus floating security debate?
- With HMRC restored as a preference creditor, it is likely that we will see further judicial consideration as more challenges are brought.
- It is clear that the nature of the charged assets is important and that for example, in relation to charges over bank accounts, a total block on the account will still be needed in order for the charge to take effect as a fixed charge. In relation to other non-fluctuating assets it is clear that an absolute prohibition on the ability of the chargor to deal with the charged assets is not required in order to preserve the fixed nature of the security.
- However, the judge did not consider it to be "sensible or feasible to try to identify the location of the point on the spectrum of possibilities where a floating charge gives way to a fixed charge, or vice versa". Instead, he considered that the case law on fixed and floating charges seemed to support "a nuanced approach to the question of whether a charge is fixed or floating, which requires a number of factors to be taken into account".
- The nature of the charged assets is important. A different result may be reached on similar facts depending on the nature of the charged asset.
- Drafting of security documents is likely to remain unchanged, but the judgment in Re Avanti makes it harder to recharacterise a fixed charge as a floating charge based solely on lack of total control.