Battle over valuable IP addresses

Overview

In this case, the Court considered whether IP addresses held by a collapsed cloud service provider were subject to a fixed or floating charge. The Court applied the nuanced approach to characterising fixed and floating charges adopted in the Avanti judgment, admitting that this was a difficult case with valid arguments to be made on either side. On balance, the Court concluded that the IP addresses were subject to a floating charge due in part to the chargee’s failure to exercise control over the IP addresses in practice. The Court was also persuaded by the language of the debenture and more specifically the principle that a charging clause like the one in this case ought to be construed as a whole, on an “all or nothing” basis — all assets that fall within the clause must be subject to a fixed charge or a floating charge.

Background

UKCloud Ltd was a British cloud service provider headquartered in Farnborough. Until 2017, the company was reportedly the third largest provider of cloud services to the public sector, providing cloud computing services to government departments and local authorities, including the use of IP addresses held by UKCloud. Certain IP addresses held by UKCloud were particularly valuable because they were IP v.4 addresses — the first major version of IP addresses. Millions of IP v.4 addresses are bought and sold every year because they are finite in number and are seen as superior to their successor. UKCloud held over 23,500 IP v.4 addresses estimated to be worth £700,000.

It held these IP addresses as a “responsible organisation” and member of the Réseaux IP Européens Network Coordination Centre (“RIPE NCC”), which allocates IP addresses in Europe. The terms on which a responsible organisation is permitted to hold IP addresses are set out in the RIPE NCC Standard Services Agreement. UKCloud had the use of the IP addresses on very limited terms — the right to use and the right (in certain circumstances) to seek a transfer.

UKCloud’s parent financed its operations through a loan from Harbert Specialty Lending Company SARL. As part of the loan, UKCloud granted a debenture to Harbert (the “Debenture”). The Debenture provided in relevant part that UKCloud granted Harbert a first fixed charge over “all licences, consents and authorisations (statutory or otherwise) held or required in connection with the Company’s business or the use of any Secured Asset, and all rights in connection with them”.

UKCloud was wound up by the Court in October 2022, and the OR was appointed as liquidator. The company’s assets, including the IP addresses, were realised. Harbert agreed to their sale subject to its security attaching to the proceeds of sale. Harbert, owed in excess of £6 million, will not be paid in full.

The main issue was whether the Debenture gave Harbert the benefit of a fixed or floating charge over the IP addresses. Harbert argued it had a fixed charge, while the OR was professedly neutral, recognising the force in some of Harbert’s arguments, but also putting forward a number of reasons why the charge should be considered to be a floating charge.

The Court’s Decision

The Court prefaced its decision by acknowledging that the issue was not straightforward or easy to resolve. The Court then set out the legal principles applicable to determining whether a debenture creates a fixed or floating charge, including the two-stage process set out in Agnew v Commissioners of Inland Revenue [2001] UKPC 28: (1) the Court must first construe the debenture based on the language the parties have used to determine the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets, then (2) the Court can embark on the second stage — categorisation — which is a matter of law that does not depend on the intention of the parties.

The Court also cited the decision in In re Spectrum Plus Ltd [2005] UKHL 41 for its discussion of the key distinctions between fixed and floating charges. Under a fixed charge, the charged assets are permanently appropriated to the payment of the sum charged, giving the chargee a proprietary interest in the assets. So long as the charge remains unredeemed, the assets can only be released with the chargee’s consent. Under a floating charge, by contrast, the chargee does not have the same power to control the security for its own benefit. Its interest is in a fund of circulating capital, and it is for the chargor to decide how to run its business.

The difference between the two types of charge was similarly described in Agnew. Since the existence of a fixed charge would make it impossible for the company to carry on business in the ordinary way without the consent of the charge holder, it follows that its ability to do so without such consent is inconsistent with the fixed nature of the charge. This is the hallmark of a floating charge and what distinguishes it from a fixed charge.

The Language of the Debenture — All or Nothing Clauses

The Court began its analysis by looking at the terms of the Debenture. The OR argued that the relevant clauses made no express reference to IP addresses and that the parties could easily referred to them if they had intended to create a fixed charge over them. Harbert advocated a wider interpretation which rested on the natural and ordinary meaning of the words used, contending that the IP addresses were plainly caught. The Court agreed, noting in particular the word “authorisations” as evincing an intention to create a fixed charge on the IP addresses. But this was not the end of the matter.

Harbert relied on the proposition that a charging clause like the one in this case ought to be construed as a whole, on an “all or nothing” basis — all assets that fall within the clause must be subject to a fixed charge or a floating charge. It pointed to a few cases in support of this proposition, including Re Beam Tube Products Ltd [2006] EWHC 486 (Ch), where the Court stated:

“In my view it is all or nothing. Either the clause creates a fixed charge over all of the assets to which it refers or it creates a fixed charge over none of them. I do not consider that the clause is to be construed as a fixed charge over some of the assets but only a floating charge over the others. I consider that this construction is consistent with the approach taken by Lord Hoffmann in Smith (Administrator of Cosslett (Contractors) Ltd) v Bridgend County Borough Council [2001] 1 AC 336”.

The Court found that these principles were binding on it. Even if they weren’t and could be said to be no more than a general tendency, it was a strong general tendency from which there was no reason to deviate in this case.

The Nature of IP Addresses and the Issue of Control

The Court then considered whether IP addresses are of a nature that would make them susceptible to being subject to a fixed charge or only a floating charge. If an asset is part of the company’s circulating capital or is a fluctuating asset or body of assets, it is more likely that any charge to which it is subject will be floating rather than fixed.

A feature of circulating capital is that it is disposed of and replaced. Harbert argued that the IP addresses did not form part of UKCloud’s circulating capital, since the company had no proprietary interest in the addresses and its capacity to deal with them was limited — it could not simply sell or dispose of them and then replenish the gap, as would be the case with stock or some other asset dealt with as part of the “churn” of business.

The Court acknowledged that the IP addresses could not have been part of UKCloud’s circulating capital and that this meant that one characteristic commonly associated with the creation of a floating charge was absent in this case. This conclusion was not determinative, however, as the Court had yet to consider the issue of control, and the impact of the High Court’s decision in Re Avanti Communications Ltd [2023] EWHC 940 (Ch) on this case.

In Avanti, the Court endorsed a nuanced approach to determining whether a charge is fixed or floating that involves looking 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. A charge does not need to be located at the total prohibition end of the spectrum to be fixed.

Here, the terms of the Debenture provided for control to be exercised. However, the Court could not conclude that it was exercised as a matter of fact. There was nothing to suggest that Harbert took steps to check compliance with the Debenture, never mind enforce control.

Although post-contractual conduct is generally irrelevant and inadmissible, if a stipulation in a charging document is not adhered to in practice, the agreement may be held to be a sham and characterised as a floating charge.

The Court ultimately found that Harbert did not exercise control or seek to do so, and that this was a case where some regard should be had to post-contractual conduct. This meant that the control provisions in the debenture were a “sham”, not in any fraudulent sense, but in the sense used in Re Avanti.

Conclusion

On that basis, the Court concluded — albeit with some misgivings — that the charge in this case was a floating charge.

Judge: Deputy ICC Judge Baister

Counsel: Mr Ian Tucker of Exchange Chambers (instructed by DLA Piper) for the OR

Ms Nicola Allsop of Quadrant Chambers (instructed by CMS Cameron McKenna Nabarro Olswang) for Harbert Specialty Lending Company II SARL