Fixed and floating charges – a more nuanced approach?

Background

The Company had previously entered into debentures, granting fixed and floating charges over its assets, including a ‘fixed charge’ over a satellite payload, other equipment in relation to ground operations, and the relevant rights and licences in relation to the satellite (the “Assets“) which could be disposed of without the charge holder’s consent subject to certain strict conditions and criteria.

The Company transferred the Assets and various of its other assets as part of intra-group transfers and a pre-packaged administration sale.

The administrators needed to determine whether at the time of the transfers the Assets were subject to a fixed or floating charge in order to determine, and distribute to, the entitled creditors, as if the Assets were subject to a floating charge, HMRC would be a preferential creditor and entitled to a proportion of the administration proceeds.

Legal question

In order for the Court to determine whether the charges were fixed or floating, the Court had to apply the two-stage test:

• 1. Firstly, to construe the language of the relevant security document in order to understand the nature of the obligations and what the parties had objectively intended to grant in regards to the assets, including considering the nature of the assets in question; and
• 2. Secondly, whether the rights and obligations in respect of the relevant assets are consistent, as a matter of law with a fixed charge or a floating charge.

In ascertaining whether a charge is a floating charge under the second stage of the above test, the Court considered:

• a) Is the charge on a class of present or future assets?
• b) Whether that class of assets is one which in the ordinary course of business would change from time to time; and
• c) Whether the company may carry on its business in the ordinary way in relation to the particular assets (or whether charge holder consent is needed),

and noted that (a) and (b) above are common features of a floating charge but are not definitive, and the distinguishing feature of a floating charge is (c), being the level of control the charge holder has over the assets.

Analysis

Whilst this decision is only a first instance High Court decision, and therefore will not be binding on higher Courts, it provides helpful guidance on whether a charge is a fixed or floating. The Court would not give a definitive identification of when on the spectrum of control a charge goes from fixed to floating in nature, however it has confirmed that in its view a fixed charge does not need or require absolute control over the relevant assets, contrary to some academic discussion, and that key factors are:

• the nature of the assets in question to the business
  • are they part of the company’s circulating capital or stock
  • do they have an inherent value as well as an income generating value
• the extent of the restrictions in how a company can deal with the assets
• whether there is the ability to dispose in the ordinary course of business

This case is helpful in considering the drafting of security documents and the scope of ‘permitted disposals’ which a company may utilise to dispose of assets subject to security. Lenders should be put at ease that allowing certain pre-approved exceptions to the prohibition against disposals won’t negate a fixed charge, but should be wary in allowing disposals in the ‘ordinary course of business’ where the asset is intended to be subject to a fixed charge. It is also useful to note that income generated from fixed assets with intrinsic value, such as land, does not need to be subject to a strict level of control in the same way that the asset itself is, in order for a fixed charge to be effective over the asset.

It however remains to be seen whether this holistic more nuanced approach will be adopted by the more superior Courts when the issue of characterisation of security next reaches them.