Fixed or floating? The characterisation of charges in financing transactions

Why should I read this?

Those involved in drafting or enforcing security and finance providers who hold the benefit of security may be interested in a recent High Court judgment considering the question of the categorisation of charges granted by a company as security to its lenders – that is, whether they were fixed or floating (the “Characterisation Issue”).

Two points to highlight from the judgment:

• A reminder that calling a charge fixed is not sufficient, on its own, to make that charge a fixed charge.
• A total prohibition on dealings is not necessarily required for a charge to be characterised as fixed. Given that the characterisation will depend on the facts in question and there is no set of rules to apply to determine what level of dealings can be permitted without risking a fixed charge characterisation, parties are still likely to exercise caution where a fixed charge is required.

Re Avanti Communications Limited

The case, which provides useful guidance on the Characterisation Issue to lawyers and other professionals involved in secured financing transactions, is Re Avanti Communications Limited (In Administration) and the judgment is available at: Avanti Communications Limited, Re [2023] EWHC 940 (Ch).

The context was the administration of a company which had operated satellites and sold satellite broadband services.   Its administrators applied to court seeking a determination of whether certain assets were secured by fixed or floating charges. 

Review of case authorities

The judge, Mr Justice Edwin Johnson, conducted an in-depth review of the authorities.  He noted that there is a two-stage enquiry to be conducted when considering the Characterisation Issue, quoting Lord Millett in the Privy Council case of Agnew v The Commissioner of Inland Revenue [2001] UKPC 28 as follows:

"The question is not merely one of construction. In deciding whether a charge is a fixed charge or a floating charge, the court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it."

The judge also cited the description of the essential differences between fixed and floating charges provided by Lord Walker in the 2005 case of Re Spectrum Plus Limited [2005] UKHL 41, which stated:

“Under a fixed charge the assets charged as security are permanently appropriated to the payment of the sum charged, in such a way as to give the chargee a proprietary interest in the assets.  So long as the charge remains unredeemed, the assets can be released from the charge only with the active concurrence of the chargee … Under a floating charge, by contrast, the chargee does not have the same power to control the security for its own benefit”.

What level of control is required for a charge to be characterised as fixed?

Mr Justice Johnson noted that the view had developed amongst some commentators that only a total prohibition of all dealings and withdrawals without permission is enough to create a fixed charge.  The judge respectfully disagreed with this view, noting that “a more nuanced approach, which depends upon a combination of factors” is required.  He commented that “it is helpful, in considering the question of whether a charge is fixed or floating, to look at the range of possibilities as a spectrum, with total freedom of management at one end of the spectrum, and a total prohibition on dealings of any kind at the other end of the spectrum”. 

In the case in question, the company had, under the relevant security documentation, a very limited ability to deal with the charged assets.  There were ‘Asset Sale Exceptions’ but these were limited; and importantly, these did not include disposals in the ordinary course of business. Other disposals were permitted subject to conditions – these included terms that potentially made a disposal commercially unattractive and, again importantly, the disposal proceeds were required to be applied against the secured debts. The nature of the assets was also significant – they were difficult to transfer and did not need to be sold to generate income for the company.  The judge therefore concluded that the charges in question could properly be characterised as fixed, notwithstanding that the company had a limited ability to deal with the assets. 

Why does it matter?

The Characterisation Issue is of critical importance to a lender where a borrower has entered insolvency proceedings.  This is because the question of whether a charge is fixed or floating determines where the realisations from the sale of the assets subject to the charge would rank in the statutory order of distribution in insolvency, and thereby affects the returns to the holders of the charges in question.  In the words of Mr Justice Johnson, the Characterisation Issue “matters because it affects what is payable” to creditors.   

Finance providers should therefore give very careful consideration to the terms of any security being taken, in conjunction with appropriate legal advice.

How Eversheds Sutherland can assist

Should you require advice on any aspects of the taking or enforcement of security, the characterisation of charges, or any other financing matters, Eversheds Sutherland can leverage its market-leading strength and depth of experience in these areas to assist. 

For more information or guidance, please get in touch with your usual Eversheds Sutherland contact, or one of the individuals below.