In the recent case of Re Avanti Communications Ltd (In Administration)¹, the High Court considered whether charges granted by a satellite business over certain equipment and intangible assets (the Relevant Assets) were fixed or floating. It held the security was fixed, even though the security gave the chargor conditional and limited rights to dispose of certain assets without the lenders' consent. Does this case change the law, and why does it matter? 

Fixed or floating – why does it matter? 

There are circumstances outside insolvency when it matters whether a creditor's security is fixed or floating. For example, it can affect the priority of the security against other proprietary claims in the assets (such as those of a later purchaser or fixed charge holder). However, the most common context in which it matters whether security is fixed or floating is the security provider's insolvency, as was the case in Avanti. In an English insolvency procedure, whether a charge is fixed or floating can make a big difference to the recoveries of the security holder from the charged asset, even when no other party is claiming a rival proprietary right in that asset.

Where a charge is fixed, all enforcement proceeds from the asset during the insolvency will be applied to the secured debt without deduction, other than the costs of realisation. By contrast, with a floating charge, the enforcement proceeds will only be applied towards the secured debt after the following deductions²:

• Moratorium-related liabilities – potentially relevant where the company has been in a moratorium in the 12 weeks leading up to the insolvency procedure.
• General costs of the insolvency procedure.
• Preferential debts – these now include certain tax liabilities, such as VAT and PAYE income tax.
• Prescribed part – this is an amount of up to £800,000 (or £600,000 if the charge was created before 6 April 2020) from floating charge recoveries for distribution among the unsecured creditors. 

Avanti

In Avanti, the company had granted a debenture over all its assets. The debenture referred to the security over the Relevant Assets as a fixed charge, but permitted the company to dispose of those assets without consent subject to certain conditions and exceptions. The disposal consent mechanics were complex, but broadly the company was permitted to sell an asset if:

• its market value was under US$2 million, it was damaged, obsolete or no longer useful for the business or, for certain types of asset, if the disposal was "in the ordinary course of business" of the company; or
• otherwise, provided any net sale proceeds equal to or greater than US$1 million were applied in prepayment of the secured facilities within 30 days of receipt.

The company subsequently entered administration and the administrators sold all its assets. 

The court decided the debenture created a fixed charge over the Relevant Assets despite the company's disposal rights. This was on the basis that the company's freedom to deal with the Relevant Assets was "materially and significantly limited" and it had "no ability to deal with the Relevant Assets in the ordinary course of its business". 

Analysis

Avanti is of interest as it is the first case since the seminal House of Lords judgment in Spectrum Plus to consider the fixed/floating test in detail³. Most leading academic commentators have interpreted the existing case law differently to the judge in Avanti, concluding that any right to dispose of a charged asset without consent is likely to be inconsistent with that charge being fixed. The judge in Avanti disagreed with this interpretation. 

The judge did not set out an alternative test for determining whether a charge is fixed or floating, stating that it is not "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". However, the judge considered it relevant that the assets in question were not "circulating capital or fluctuating assets" of the company that needed to be sold as part of the company's ordinary business. 

Will the courts follow Avanti?

For secured creditors, Avanti represents a positive interpretation of the law. However, it may not be prudent for creditors to assume that pre-approved disposal rights are now consistent with a fixed charge. Avanti is only a first instance decision. As such, it is not capable of overriding the large body of existing case law from the higher courts. While that existing case law is not entirely consistent, there are numerous references from higher courts that could still be used to support arguments for a tighter test on disposal rights (as per the dissenting academic commentary referred to in Avanti) regardless of whether the relevant asset is circulating/fluctuating. For example, in Spectrum Plus itself, Lord Walker stated (at para 138):

"Under a fixed charge the assets charged as security are permanently appropriated to the payment of the sum charged…so long as the charge remains unredeemed, the assets can be released from the charge only with the active concurrence of the chargee."

While secured creditors have often found this legal position frustrating, it is at least clear. A fixed charge on an asset means that the asset has been entirely "appropriated" to the secured debt – if the asset is not entirely so appropriated, the security cannot be fixed to the asset and so the security must be floating. It remains to be seen whether the "more nuanced approach, which depends upon a combination of factors", as advocated in Avanti, will be followed by the English courts in future cases. It may be, for example, that Avanti will be viewed as a case on its own facts, with limited wider significance. 

1. [2023] EWHC 940 (Ch) (25 April 2023)↩
2. Unless the floating charge is a "security financial collateral arrangement". ↩
3. Spectrum Plus itself was about a slightly different point: when considering whether a charge over book debts is fixed or floating, does the secured party need control over the proceeds from the book debts as well as the book debts themselves? (The House of Lords concluded "yes".) It was not about the level of control a secured party needs generally to create a fixed charge.↩