Insights

Chris Ward

Published 9 June 2023
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Guidance About Fixed and Floating Charges

If you’re borrowing or lending money or are involved in insolvency proceedings, understanding the difference between fixed and floating charges is important. And a recent High Court decision has now provided further clarity about what distinguishes them from one another.

Fixed charges are often against property, land or important parts of a business although they can be against intellectual property and copyright. Floating charges are usually more flexible for the borrowing business and cover assets like stock, movable machinery, debtors and even future assets to be acquired. It’s a common misconception that the difference between these types of charges is whether they are physical, but this is not the case.

The cases of Agnew v. Commissioners of Inland Revenue (2001) and Spectrum Plus (2005) established that what distinguishes a fixed charge from a floating one is that with a floating charge, the borrower is able to deal with the charged assets, regardless of what the parties thought about the nature of the charge.

In other words, a fixed charge gives the lender an element of control over the assets, so that for example, should the business owner want to sell the charged asset, they will need the lender’s permission.  With a floating charge, the business owner can deal with the charged assets without the need for approval or permission from the lender. 

When it comes to insolvency and payment disputes, fixed charges take priority over moratorium debts, expenses of the insolvent estate, preferential creditors, floating charges, and unsecured creditors (although in insolvency a floating charge may become fixed).

The recent decision of Re Avanti Communications Limited

In the recent decision of Re Avanti Communications Limited [2023] EWHC 940 (Ch), on an application brought by the joint administrators of Avanti, the court had to decide whether certain assets were subject to fixed or floating charges. The court held that the assets were subject to a fixed charge and provided useful guidance about the extent to which a borrower can deal with charged assets in order for the charge to keep its status as a fixed charge.

In particular, the court relied on the fact that although Avanti was not subject to a total prohibition on dealing with the charged assets, there were considerable restrictions. Indeed, Avanti could only deal with the assets if they fell within one of the asset sale exceptions, but the exceptions did not apply in the circumstances of this case and did not allow Avanti to dispose of the assets in the ordinary course of its business.

The court went on to find that a complete prohibition of all dealings without permission of the lender is not required to create a fixed charge. The court also made the point that the assets in question, in this case, were a combination of both tangible and non-tangible infrastructure used to generate income and were “inherently difficult to transfer”.

Commentary

Whilst this guidance is welcome, the court described a spectrum of control retained by borrowers and the need to take a “nuanced” approach when deciding the issue. Therefore it remains important to ensure carefully drafted security documents and the need to be very clear about the extent of all and any restrictions.  

As always, we will keep you informed of any developments. But if you’d like more information or to discuss the implications for you, please get in touch.

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