Re Avanti Communications Limited (in administration) – how much freedom can a fixed charge provider have?

Autor

Annie Harvey

Senior Knowledge Lawyer

London

Re Avanti Communications Limited (in administration) – how much freedom can a fixed charge provider have?

In-depth analysis

Judgment in the case of Re Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch) was handed down on 25th April 2023. The judgment is a thorough and interesting analysis of case law and writings in the area of fixed and floating charges and particularly the degree of control necessary to take fixed charge security over different types of asset.

Relevant facts

Mr Justice Edwin Johnson considered an application by the Joint Administrators and the company itself as to whether certain assets were subject to fixed or floating charges pursuant to debentures granted by the relevant company in 2013 and 2017, following a sale of such assets as part of a pre-pack in 2022. It was concluded that they were secured by fixed charge. The Relevant Assets 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 (together the Relevant Assets). The only preferential creditor in the case was HMRC, who would rank between fixed charge holders and floating charge holders in respect of certain taxes. The group of companies included the company itself (Avanti Communications Limited (the Company)), the parent (Avanti Communications Group PLC (the PLC)) and various other companies and it was engaged in the operation of satellites and the sale of wholesale satellite broadband and satellite connectivity services.

Relevant documents

The company had borrowed $825.6 million pursuant to a super senior facility, a lien facility and senior secured loan notes (the Debt Facilities).
The security documents were described as extremely complex, incorporating a "thicket of contractual provisions"! A number of documents, including an intercreditor agreement, were entered into, but the focus of the analysis was on debentures dated 2013 and 2017, securing the Debt Facilities. These are referred to in the judgment as the "Debentures". It was only considered necessary to consider the terms of the 2017 debenture on the basis the 2013 debenture contained materially the same charging terms as the 2017 debenture, and the majority of the indebtedness secured by the 2013 debenture was understood to have been exchanged for notes (secured by the 2017 debenture), with the remainder converted into equity.

The "first" and "second" stages

Mr Justice Edwin Johnson referred to a two staged process of characterising a charge as:

First stage: construing the relevant instrument of charge itself in order to ascertain the nature of rights and obligations the parties intended to grant to each other in respect of the charged assets;
Second stage: after ascertaining such rights and obligations, the process of categorisation or characterisation, which is a matter of law and does not depend on the intentions of the parties nor the label assigned to the charge by the parties.

Case law relating to the freedom that may be afforded to a chargor, and whether a total restriction on any disposal is required where a fixed charge is purported to be taken was analysed in detail. Various factors were stated to be relevant to this analysis including the nature of the assets that were being charged and the nature of the chargor's business.

Nature of the Relevant Assets

A distinction was drawn between a chargor's circulating capital and its non-circulating capital, on the basis that assets forming part of a company's circulating capital naturally lend themselves to floating charge security, and to grant a fixed charge over them would be likely to paralyse the business of the chargor.

Nature of the relevant business

It was stated that regard should be had to the nature of the chargor's business, with the example given of a company trading in shares, in which instance the shares would be likely to be part of the company’s circulating capital, with sale of such assets being part of the ordinary business of the chargor.

Analysis of the first stage

Were the Relevant Assets covered by the charging clause?

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.

Did the permitted disposals of the Relevant Assets negate the possibility of a fixed charge?

The issue to be determined was whether the rights of disposal afforded to the chargor in relation to such assets meant these could not take effect as fixed charges.

The 2017 debenture provided the Relevant Assets could be released from the charges by permitted release provided set conditions were satisfied, namely that there was a non-distressed disposal of the asset:

to a person outside the group
certified by 2 directors of the PLC not to be prohibited under the loan documents.

The loan documents were then analysed, focussing on the more restrictive super senior facility, to see which disposals were permitted:

the asset sale clause permitted disposals provided the proceeds were applied in accordance with a set prepayment waterfall.

There were specified exceptions to this which permitted the company to make disposals and not adhere to the requirement to prepay. The exceptions were disposals of:

satellite capacity, transponder capacity, backhaul services, related licensing arrangements and equipment to be used in relation to the capacity services (the capacity exception)
obsolete assets (the obsolete exception)
lower value assets (below $2 million) (the de minimis exception)
assets that were no longer useful to the business (the usefulness exception)
licences and sublicences by the parent/any subsidiary in the ordinary course of business (the licences exception).

Further restrictions on disposals were applied to guarantors (which included the Company) in relation to disposals of substantially all of the assets of the guarantor and the subsidiaries taken as a whole.

The conclusions were:

The assets were covered by the charging clause which purported to create a fixed charge.
The assets were all subject to considerable restrictions on their disposal, and the exceptions (capacity exception, obsolete exception, de minimis exception, usefulness exception and licences exception) provided limited opportunities to make disposals of the Relevant Assets in particular circumstances, and not to dispose of them in the ordinary course of the Company's business.

Analysis of second stage

The degree of freedom of management over charged assets which would be permitted when a fixed charge is taken was analysed, with Mr Justice Edwin Johnson commenting: "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 focussed on the type of asset that was secured by the relevant charge and noted examples in relation to fixed charges taken over land (where income from commercial operations in relation to the land is at the disposal of the chargor) and equipment (which may be hired out to customers). These types of asset 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.

Overall conclusions

It was determined that the company's ability to deal with the Relevant Assets was materially and significantly limited.
The Relevant Assets were described as "tangible and non-tangible infrastructure owned by the company which was used to generate the sources of the company's business income" which were not part of the circulating capital or circulating stock of the company. The Relevant Assets did not need to be sold to generate the income derived from them.
The assets were inherently difficult to transfer.
It was clear the charges took effect as fixed charges when created and remained as fixed charges at the time of the relevant transactions.

Final thoughts

The analysis within this judgment on the distinctions between different asset types, and the potential to take fixed security over them, together with the degree of control and restrictions on disposal needed to properly create fixed charge security provides very useful, thorough guidance on this topic and a critical and extremely helpful analysis of case law and writings on it.