Re Avanti Communications Ltd [2023] EWHC 940 (Ch): The impact of fixed and floating charges

Re Avanti Communications Ltd [2023] EWHC 940 (Ch): The impact of fixed and floating charges

Intro:

The distinction between a fixed and floating charge is a fundamental concept in commercial law, with significant implications for both lenders and borrowers. A fixed charge attaches to specific assets, whereas a floating charge covers a class of assets that may change in nature and extent.

In the case of Re Avanti Communications Ltd [2023] EWHC 940 (Ch), the High Court was tasked with determining the nature of a charge granted by Avanti to secure a loan, following a sale of such assets as part of a pre-pack in 2022. This article examines the importance of fixed and floating charges in commercial transactions, and the impact of the court’s decision in this case.

Background:

Avanti Communications Ltd (“Avanti”) is a satellite operator based in the UK that provides internet services to customers across the world.

Before entering administration on April 13, 2022, Avanti owned HYLAS 3, a satellite payload, satellite network filings, network and ground station assets and ground station licenses. These assets were transferred to another entity in the group, Avanti Hylas 2 Limited, in exchange for loan notes. Avanti also granted a fixed charge over the loan note obligations to secure the creditors.

Later, Avanti sold its remaining assets, including: HYLAS 3, network and ground station assets, and payment obligations, as part of a pre-packaged sale during the administration. The total value of these assets in the sale was $41,557,579.

At the time of these transactions, Avanti had significant borrowings (around $825 million) secured by a shared security package. The administrators and Avanti sought clarification on whether the assets were secured by fixed or floating charges, which would impact the payment to creditors.

What the Law says:

To determine whether a charge is fixed or floating, a two-staged process is used.

• Firstly, the terms of the charge must be scrutinised to determine the rights and obligations granted by the parties, while also considering the labels used by the parties and the nature of the assets.
• Secondly, it is them examined how the charge is categorised based on legal principles, irrespective of the parties’ intentions or labels.

Outcome:

Mr Justice Edwin Johnson and the High Court applied this two-stage test and found the following:

• Regarding the first stage, the relevant assets fell within the charging clause of the debenture, and that the charge was therefore expressed as fixed;
• The court then addressed the argument as to whether only a complete prohibition on disposal or withdrawal without permission could establish a fixed charge. The court disagreed, stating that a more nuanced approach is required, as it is necessary to consider a combination of factors to determine if the charge is fixed or floating.
• Considering the restrictions in the security documents, the court found that although Avanti had some limited ability to deal with the assets, the restrictions were substantial. Avanti could only dispose of assets within specific exceptions and were subject to other limitations.
• The court recognised that the assets were not fluctuating assets. They represented Avanti’s infrastructure which was used to generate income and were not easily transferable. Considering these factors, the court concluded that the assets are therefore subject to a fixed charge.

Conclusion:

This case highlights the importance of understanding the difference between fixed and floating charges and the potential legal consequences of misclassifying charges. In particular, it emphasises the importance of being specific about which assets are subject to a fixed charge in order to ensure that the charge is enforceable in the event of insolvency.

How KTS Legal can assist:

If you require any assistance with insolvency or dealing with lenders, our specialist commercial team can provide you with expert advice and assistance in dealing with such complex matters.

We can be reached by email at info@ktslegal.com, and by telephone at +44 (0) 208 367 0505.