Re Avanti ' Fixed / Floating Charge Security Under English Law

• Law Firm: Duane Morris LLP
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Charges, Mortgages, Indemnities, Insolvency/Bankruptcy, Fund Finance
• Author: Mr Drew D. Salvest, Natalie A. Stewart and Rebecca Green
• Published date: 19 June 2023

In the recent case of Re Avanti Communications Limited (in administration)¹ (Re Avanti), the court considered the nature of fixed and floating charges. Whether a charge is fixed or floating has implications for both lenders and administrators in terms of determining to what extent a chargor can recover from the charged assets and to what extent a borrower can deal with its assets.

Background of case:

In Re Avanti, the administrators applied to the court to determine whether certain assets were subject to a fixed or floating charge pursuant to debentures granted by the relevant company. As all net proceeds from the sale of fixed charge assets are paid to secured creditors, and proceeds from the sale of floating charge assets are not paid to secured creditors until those who rank ahead of them under English insolvency law (such as administrator's costs and HMRC) have been paid in full, the characterization of the charge was crucial for determining whether the secured lenders would recover their secured debt in full. If the charges over the assets were fixed, secured creditors could recover the amount owed to them. If the charges were determined to be floating, HMRC would rank as a preferential creditor with respect to certain taxes due by the insolvent company and would receive a portion of the proceeds from the sale of the assets.

The finance documents in question contained a restriction on the disposal of the relevant assets with certain exceptions, for example an exception allowing the company to dispose of obsolete assets. Exceptions are commonly negotiated in finance documents where certain assets are dealt with by a company in its ordinary course of business or circulating capital (such as inventory).

Two-stage test:

In determining whether the assets in question were subject to a fixed or floating charge, the Judge applied the two stage test set out in Agnew v Commissioners of Inland Revenue².

At the first stage, the court must determine the intention of the parties and which rights and obligations were intended to be granted with respect to the relevant assets.³ At the second stage, the court then determines whether as a matter of law, irrespective of the intention of the parties, the assets are fixed or floating, with this analysis requiring consideration of the degree of control the chargor has over the relevant assets. In this particular case, although there were exceptions to the prohibition on asset disposals, the...