Further guidance on Fixed and Floating Charges: is an IP address in a debenture subject to a fixed or floating charge?
We previously considered how the High Court in Avanti adopted a more nuanced approach to determining whether charges were fixed or floating (click here to read).
In the recent case of UKCloud Ltd, In the Matter Of (Re Insolvency Act 1986) [2024] EWHC 1259 (Ch), we have seen the High Court apply the same nuanced approach adopted in the Avanti judgment to consider whether IP addresses held by a collapsed cloud service provider were subject to a fixed or a floating charge.
UKCloud granted a debenture to a lender, providing a first fixed charge over “all licences, consents and authorisations (statutory or otherwise) held or required in connection with the Company’s business or the use of any Secured Asset, and all rights in connection with them”, which (it was held) would include IP addresses although not specifically mentioned.
UKCloud was wound up by the Court in October 2022, and the Official Receiver was appointed as liquidator. The main issue was whether the debenture gave the lender the benefit of a fixed or a floating charge over UKCloud’s IP addresses.
The distinction between a fixed charge and a floating charge is important to a lender as if determined to be a fixed charge they will be entitled to the proceeds of sale, however if determined to be a floating charge then certain other items are paid first, such as the cost of the insolvency process and preferential creditors such as HMRC and pension contributions, leaving less if any proceeds available to the lender.
Considerations
The Court set out the legal principles applicable to determining whether a debenture creates a fixed or floating charge, including the two-stage process set out in Agnew v Commissioners of Inland Revenue [2001] UKPC 28: (1) the Court must first construe the debenture based on the language the parties used to determine the nature of the rights and obligations which the parties intended to grant each other and then (2) categorisation, being whether the type of assets and rights attaching to them are those which are capable of being subject to a fixed or floating charge.
The Court also cited the decision in In re Spectrum Plus Ltd [2005] UKHL 41 for its discussion on the key distinctions between fixed and floating charges; whereby a floating charge does not give a chargee the same power to control security for its own benefit.
Conclusions
The Court concluded that the IP addresses were subject to a floating charge.
Language: The Court found that the word ‘authorisations’ indicated an intention to create a fixed charge on the IP addresses, this was not however determinative of a fixed charge in and of itself. The Court also held that the principles in Re Beam Tube Products Ltd [2006] EWHC 486 (Ch) were binding on it, meaning that all assets referred to within a specific clause must be subject to either a fixed or a floating charge, and that you cannot have some assets subject to a fixed charge and some subject to a floating charge, (the “all or nothing” basis).
Categorisation: Whether the IP addresses are of a nature that that makes them susceptible of being subject to a fixed charge or only a floating charge – The Court acknowledged that the IP addresses could not have been part of UKCloud’s fluctuating or circulating capital as UKCloud was not able to trade them in the ordinary course f business and therefore, one characteristic commonly associated with the creation of a floating charge was absent, however it did not necessarily follow that that the charge was therefore a fixed charge.
Control: Whilst the Court found that the terms of the debenture provided for control to be exercised, the lender did not exercise control or seek to exercise control over the IP addresses in practice. This meant that the control provisions in the debenture were a “sham” in the same context as Re Avanti. On balance, and in part due to this failure to exercise control, the Court concluded that the IP addresses were subject to a floating charge.
Takeaways
This decision has re-enforced the holistic approach taken by the High Court in Avanti when determining fixed and floating charges. A Court will consider a multitude of factors to decide on balance whether a charge is floating or fixed, however the absence of control will be a key factor is determining that a charge is not a fixed charge.
Whilst post contractual conduct is not usually taken into account when construing a contract, both this case and Avanti have shown that the Courts are willing to do so when considering whether a lender in practice is exercising control over an asset purported to be subject to a fixed charge. Therefore, lenders should be mindful of their conduct and keep a tight level of control over those assets which it is important they have a fixed charge, and not simply rely on the fixed charge language of the security document.
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