In our April webinar “Risk Mitigation Techniques in Trade Financing Structures”, which I delivered with my colleagues Sam Fowler-Holmes and Maria Capocci, we discussed methods to mitigate risks all the way along the transaction lifecycle. We covered the option of taking charges over the accounts of a Borrower and the funds standing to the credit of such accounts, looking at the importance of the "triple cocktail" in demonstrating the requisite level of control where a lender wants to take the coveted fixed charge.
Well it may be timely that now, in the first major case since the 2005 House of Lords decision in National Westminster Bank plc v Spectrum Plus Ltd & Ors [2005] UKHL 41, (“Re Spectrum Plus”), Re Avanti Communications Limited (in administration) ([2023] EWHC 940 (Ch)), has shed some light on the law on the characterisation of English law fixed and floating charges.
Background to the case
Avanti had granted fixed charges over a satellite payload and the tangible and intangible infrastructure associated with it. A floating charge was also granted over any assets not subject to the fixed charge. This is a distinguishing factor between the two cases, whereby Re Spectrum Plus dealt with charges over book debts, rather than goods.
The joint administrators of Avanti brought the case to determine whether certain assets were subject to a fixed or floating charge, and therefore to determine whether HMRC, as a preferential creditor, would be entitled to any proceeds. If the charge was held to be a floating charge, then HMRC as a preferential creditor, would be paid out of the floating charge assets before other floating charge holders.
Judge’s findings
The two stage test as set out in Agnew v Commissioners of Inland Revenue [2001] UKPC 28 [2001] 2 AC 710 was confirmed by Mr Justice Edwin Johnson:
Stage 1: construe the security document and ascertain the nature of the rights and obligations the parties intended to grant from the language of the document; and
Stage 2: categorise the security, an objective test, which is a matter of law not dependant on the intentions of the parties.
A distinction between a chargor’s ‘circulating capital’ and ‘non-circulating capital’ was drawn. The judge noted that the secured assets were not circulating capital or fluctuating assets needed for the day to day running of the business, but rather were income-generating assets, and what’s more, they did not need to be sold to generate the income. He found that granting a fixed charge over circulating capital would cause real problems for a chargor who would not be able to use the circulating capital to run their business, and so it is more suitable for a floating charge.
Additionally, the judge did not agree with some of the academic commentary that a fixed charge needed an absolute prohibition on dealing without the consent of the secured creditor. Rather the situation is more nuanced, and one could argue that pre-agreed permitted disposals, to a limited extent, may be set with the consent of the secured creditor because the lender or security agent is party to negotiations of the finance documents.
Takeaways
What is helpful in this case is the analysis of the case law. The judge looked at a number of circumstances including: the nature of the assets, the restrictions in the security documents and the facility agreements, the intention of the parties as documented in the charge as created and the element of control.
This case has placed renewed emphasis on the importance of well drafted security documents, including clearly setting out the restrictions, the approvals and the nature and the extent of them. While the judge did not examine the actions of the parties, which we discussed at length in our webinar, this case has clearly shown that control can be seen as a scale, and so drafting will be key. It must be noted however that Re Spectrum Plus remains the authority on fixed charges over book debts, and the actions of the parties is evidently relevant.
In all, the main takeaway from this first instance decision appears positive; just remember that drafting is key.
