Relevant Facts
Avanti Communications Limited (Company) appointed administrators to affect a sale. The sale included items under a ‘Relevant Assets’ definition. These items consisted of were a satellite payload, certain equipment used in the operation of network and ground station facilities, certain satellite network filings and certain ground station licences which entitled the company to operate the ground station assets.
The issue was whether the Relevant Assets were secured by way of fixed or floating charge. If the charge was fixed, the secured creditors would be entitled to recover the full amount, but if it was a floating charge, the preferential and unsecured creditors would receive an allocated amount.
First and second stages
In order to determine whether a charge is fixed or floating, the court considers a two-stage enquiry:
- First stage: the court must interpret the charge instrument to find out the nature of the rights and obligations the parties intended to grant to each other in respect of the charged assets.
- Second stage: after ascertaining the rights and obligations, is one of categorisation, or characterisation. This stage considers whether the rights and obligations ascertained in the first stage in respect of the Relevant Assets are consistent, as a matter of law, with fixed charge or floating charge security. This does not depend upon the intention of the relevant parties, or the label which the parties have attached to the relevant instrument of charge.
Analysis
Mr Justice Edwin Johnson gave extensive consideration to the leading authorities, including Re Spectrum [2005] 2 AC 680, Re Cosslett [2002] 1 AC 336 and academic works.
First stage
The charges over the satellite network filings and the ground station licences were determined to be covered by a fixed charge, granted by the Company over “the benefit of all licences, consents and agreements held by it in connection with the use of any of its assets”. The charges over the payload and the equipment used in the operation of network and ground station facilities were determined to be covered by a fixed charge, granted by the Company over equipment.
The assets were all subject to considerable restrictions on their disposal, and none of the exceptions (capacity exception, obsolete exception, de minimis exception, usefulness exception nor licences exception) covered the disposals made of the Relevant Assets, having analysed their scope in detail in the context of the relevant transactions.
Second stage
The degree of freedom of management over charged assets which would be permitted when a fixed charge is taken, was analysed. Mr Justice Edwin Johnson commented: “I can see 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…..what I cannot see is that a charge will only be fixed if it is located at the total prohibition end of the spectrum. The case law seems to support a more nuanced approach which depends upon a combination of factors”.
He focused on the type of asset that was secured by the relevant charge and noted examples in relation to fixed charges taken over land and equipment. These types of assets could be contrasted with assets forming part of a company’s “circulating capital” which needed to be sold to generate income, and which it would be harder to argue a fixed charge could be created over.
Conclusion
The judge decided that when the security was agreed, the charge over the Relevant Assets was fixed because:
- the Company’s ability to deal with them was materially and significantly limited;
- the Relevant Assets were not part of the circulating capital or circulating stock of the Company;
- the Relevant Assets were inherently difficult to transfer; and
- it was clear that the charges took effect as fixed charges when created and remained as fixed charges at the time of the relevant transactions.
Read the detailed judgement in full here.
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