Taking Security & the Importance of Control

Fixed v floating charges

A fixed charge is vice-like and immediate, while a floating charge is ambulatory and hovers over the charged assets until some future event causes it to descend and become fixed.

A borrower cannot deal with assets which are subject to a fixed charge without the consent of the secured lender. By contrast, it may deal with assets which are subject to a floating charge in the ordinary course of business without such consent.

A lender will ordinarily wish to have a fixed charge because:

• a floating charge may be set aside if it is created within 12 months before the onset of insolvency (or 2 years if the charge is granted to a connected person) except to the extent that it secures new money (s. 245 of the Insolvency Act 1986);
• an administrator may dispose of or take action relating to property which is subject to a floating charge as if it were not subject to the charge (para. 70, Sch. B1 of the Insolvency Act 1986); and
• floating charge proceeds will be subject to erosion by the expenses of insolvency, the claims of preferential creditors and the payment of the prescribed part (if applicable) to unsecured creditors.

Leading Cases

Lawyers acting for lenders draft their security documents with the intention that the charge should be fixed but it is the court which is the ultimate arbiter.

In deciding whether a charge is fixed or floating, the court will undertake the analysis set out in the two leading judgments. The first is that of the Privy Council in Agnew v Commissioners of Inland Revenue (2001), while the second is that of the House of Lords in Re Spectrum Plus (2005).

The judgments establish that the degree of control exercised by a lender over the charged assets (both in terms of the documentary provisions and the factual matrix) is determinative.

Commentary

In commenting on the two leading judgments, some textbook writers suggested that the greater the degree of control ceded to a borrower, the greater is the likelihood that a court will find the charge to be floating and that the only way in which a lender could be assured of obtaining a fixed charge is by prohibiting the borrower from dealing with the charged assets in any way.

Recent Judgment

The analysis above has been questioned in Re Avanti Communications Limited (In Administration) [2023] EWHC 940 (Ch) (25 April 2023) (link here).

The security documents considered by the court permitted the borrower to dispose of certain charged assets without the consent of the lender.

The permissions included (but were not limited to) assets whose value was less than a stated amount, those which were damaged, worn-out or obsolete, those which failed to meet certain technical attributes and those which were no longer useful in the conduct of the business of the group of which the borrower formed part. Each permitted disposal was subject to conditions.

The judge (Edwin Johnson J) decided that the borrower’s ability to dispose of the charged assets was compatible with the nature of a fixed charge and that the charges in this case took effect as fixed charges, both at creation and subsequently.

Where to now?

If the judgment in Re Avanti is correct, it will change the nature of the analysis commonly undertaken by lawyers and insolvency practitioners when characterising fixed and floating charges.

Will the judgment be followed? It is perhaps too early to say. The judgment is that of a court of first instance and the judge did not hear argument in court to support the proposition that the charges created by the finance documents were floating.

Even if the judgment is not appealed, and to date there is no indication that it will be, it is likely to prompt debate.