Lending Focus - May 2023 – 5 / 6 观点
Judgment in the case of Re Avanti Communications Limited (in administration)  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.
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.
Mr Justice Edwin Johnson referred to a two staged process of characterising a charge as:
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.
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.
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.
Were the Relevant Assets covered by the charging clause?
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 assets were covered by the charging clause which purported to create a fixed charge.
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.
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.
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.
To discuss the issues raised in this article in more detail, please contact a member of our Banking and Finance team.
For further reading on this important judgment, please see our R&I update: Avanti's satellites not floating, but fixed security according to English court.