In reaching its conclusion, the court conducted a detailed analysis of the case law and academic commentary on fixed and floating charges, and rejected the idea that only assets subject to a prohibition on dealings could be subject to a fixed charge. The court said that the case law supported a more nuanced approach to the question of whether a charge is fixed or floating, and to look at the range of possibilities on a spectrum. In considering whether a charge is fixed or floating, various factors must be taken into account, including: (i) the nature of the restrictions on dealing with the assets; (ii) the chargee's control over the assets; and (iii) the nature of the assets themselves (ie whether they resemble circulating capital or fluctuating assets of the company).
The decision will be of interest to financial institutions keen to ensure that the nature of any security interest purported to have been granted in their favour is indeed what is obtained. Whilst it is a first instance decision, it appears to clarify some of the concerns and commentary which followed the
Background
This was an application made by the
The principal activity of the Company was the operation of satellites and the sale of wholesale satellite broadband and connectivity services. In March and
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a satellite;
- equipment used in the operation of network and ground station facilities;
- certain satellite network filings (the sale of which would require
Ofcom's consent); and - certain ground station licences issued by
Ofcom to entitle the Company to operate the ground stations (the sale of which also requiredOfcom's consent). - Second Stage: the court must then embark on a process of categorisation (or characterisation) of the charge, which is a matter of law.
- Were the Relevant Assets within the scope of the charging clause in the relevant security documents (notably here the 2017 debenture)?
- What was the nature of the contractual restrictions and permissions on the disposal of the Relevant Assets, under the terms of the security documents?
- The chargee's control over the Relevant Assets and whether the Company was free to deal with them in the ordinary course of its business.
- The nature of the Relevant Assets themselves, ie whether they resemble circulating capital or fluctuating assets of the company, whether they need to be sold to generate income, or if they are income generating.
The Relevant Assets were subject to debentures (notably a 2017 debenture) and expressed to be subject to a fixed charge. Any assets not subject to a fixed charge were expressed to be subject to a floating charge. The provisions of the relevant security documents were complex, but in short, disposals of the Relevant Assets were subject to restrictions and waterfall provisions. There were some exceptions to these restrictions, eg assets having a fair market value of less than
The development of the law in this area will be well known to practitioners. By way of reminder, the
Decision
The question for the court, termed the "Characterisation Issue", was whether the Relevant Assets were secured by fixed or floating charges at the time of the transactions. As there was no evidence of crystallisation or release of the security between the date of creation and the relevant transactions, the court simply had to determine whether the Relevant Assets were secured by fixed or floating charges at the time of the transactions.
The court conducted a detailed analysis of the case law and academic commentary on fixed and floating charges, and began by noting that, in order to determine whether a charge is fixed or floating, it is necessary to conduct a two-stage enquiry (as set out in Agnew v Commissioners of Inland Revenue [2001] UKPC 28):
In respect of the
In this case, the
In respect of the first question, the court considered that the Relevant Assets in this case did indeed fall within the scope of the charge created by clause 3.1(b) of the 2017 debenture. The court noted that the classes of assets listed in sub-paragraphs (i)-(xi) of this section of the charging clause encompassed a very broad range of asset type, and the charge was expressed to be a fixed charge, although the court noted that this label was not decisive.
In terms of the second question, having analysed the position in detail, the court held that the Relevant Assets were all subject to considerable restrictions upon their disposal. Although there were various exceptions permitting asset sales, the court considered that these exceptions were unlikely to apply to the Relevant Assets, or had limited application. The court held that, most importantly, the exceptions provided no opportunity for the Company to dispose of the Relevant Assets in the ordinary course of the Company's trading.
Second Stage: categorisation of the charge
In respect of the Second Stage, the court noted that the question is whether the rights and obligations in respect of the Relevant Assets are consistent, as a matter of law, with fixed charge security or floating charge security. In considering this question, the labels used by the parties are not relevant. The correct characterisation of the instrument of charge is a question of law, having regard to the rights and obligations ascertained at the
With particular regard to the decisions in
In considering the question of the level of control, the court made particular reference to an extract from the textbooks Legal Problems of Credit and Security (Seventh Edition), at pages 4-23, and The Law of Security and Title Based Financing (Third Edition), at paragraph 6.110. The court noted that both textbooks suggested that the law may have reached the point where a charge can only be characterised as fixed, where there is a total prohibition of all dealings and withdrawals or a total restriction on any disposal of the charged assets by the chargor without the consent of the chargee. The court noted that if this was the correct position, then the charge created by the 2017 debenture in this case could not have been a fixed charge over the Relevant Assets, as certain dealings were permitted by the security documents.
The court also referred to an article which appeared in the
The court analysed key passages from
Whilst the court could see it might be helpful to look at "the range of possibilities as a spectrum", with total freedom of management at one end, and a total prohibition on dealings of any kind at the other end, the court did not consider that it was the case that a charge will only be fixed if it is located at the total prohibition end of the spectrum.
As such, the court considered that the charge over the Relevant Assets was not necessarily a floating charge simply because the Company had some ability to deal with the Relevant Assets under the terms of the security documents.
The court also held that it would not be sensible or appropriate to attempt its own description of the characteristics of a fixed charge and a floating charge, as the existing case law already provided ample guidance. Nor would it be sensible or feasible to try to identify "the location of the point on the spectrum of possibilities where a floating charge gives way to a fixed charge, or vice versa". The case law supports a nuanced approach to the question of whether a charge is fixed or floating, which requires a number of factors to be taken into account.
The court went on to consider the factors, as identified in case law, which are relevant in determining whether a charge is fixed or floating:
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The nature of the restrictions on dealing with the Relevant Assets stated in the security.
The court concluded in this case that the chargor's ability to deal with the Relevant Assets was materially and significantly limited, the scheme of restrictions contained in the security documents gave the chargee very significant control over the Relevant Assets, and the Company had no ability to deal with the Relevant Assets in the ordinary course of business. The Relevant Assets were income generating (ie they could be characterised as the tangible and non-tangible infrastructure owned by the Company, but did not need to be sold to generate income) and were not circulating capital, fluctuating assets or stock in trade. Taking all the circumstances of the case into account, the Relevant Assets were therefore held to be subject to a fixed charge, both when created and at the time of the transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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