Total restriction on disposal necessary to create fixed charge?

Overview

This case examines the differences between a fixed and a floating charge, and considers whether only a total restriction on any disposal of the charged assets by the chargor without the consent of the chargee is sufficient to created a fixed charge.

Background

Avanti Communications Limited (the "Company"), a world-leading provider of satellite technology, entered administration on 13 April 2022. Immediately prior to the transactions which are relevant to this application, the Company owned:

1. A Ka-band satellite payload known as HYLAS 3 ("HYLAS 3");

2. Certain equipment used in the operation of network and ground station facilities, including relevant spares, electronic components and antennae, together with the benefit of warranties on those items (the "Network and Ground Station Assets");

3. Certain satellite network filings (the "Satellite Network Filings") registered with the International Telecommunication Union;

4. Certain ground station licenses issued by the Office of Communications. These licenses (the "PES Licenses") entitled the Company to operate the ground stations referred to above.

By a sale and purchase agreement dated 17th March 2022 the Satellite Network Filings and the PES Licences were transferred by the Company to another entity in the group, Avanti Hylas 2 Limited ("AH2L"). The assets were sold in exchange for two intercompany loan note instruments issued by AH2L to the Company in an aggregate amount equal to the fair market value of the assets transferred, which was stated as $35,000,100 (the "AH2 FMV Payment Obligations").

As part of this transaction, the Company granted a new fixed charge over its rights in respect of the AH2 FMV Payments Obligations in favour of the secured creditors. At the same time, a parallel intercompany loan note instrument (the "AH2 Additional Payment Obligation") was also issued by AH2L to the Company. The purpose of the AH2 Additional Payment Obligation was to permit the Company to meet the potential claims of preferential creditors and the value of the prescribed part in the event of a judicial determination that some or all of the Satellite Network Filings and the PES Licences were subject to floating charge security and not fixed charge security.

On 13 April 2022, the Company entered into two asset purchase agreements as part of a pre-packaged sale in relation to the administration of the Company. By these agreements, the Company sold substantially all of its remaining business and assets to an entity ultimately owned by its secured creditors, Plate Bidco 4 Limited and certain other Group companies. The Disposal included HYLAS 3, the Network Ground Station Assets and the AH2 Payment Obligations. The value attributed to these particular assets, as part of the overall sale, was $41,557,579.

At the time of the transactions, the Company had borrowings of approximately $825.6 million pursuant to various financing agreements (the "Secured Debt") in favour of Global Loan Agency Services Limited ("GLAS") as agent, Wilmington Trust (London) Limited as administrative agent and the Bank of New York Mellon, London Branch ("BNY Mellon") as trustee and in various other capacities, respectively. The Secured Debt was secured by a shared security package, including 2013 and 2017 debentures with BNY Mellon as primary security agent.

The Joint Administrators and the Company made an application for directions as to whether these assets were secured by fixed or floating charges created by the debentures, an issue affecting what was payable, and what had already been paid, to creditors.

The Law

In order to determine whether a charge is fixed or floating, it is necessary to conduct a two-stage enquiry. At the first stage of the process, the court must construe the relevant instrument of charge in order to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. The labels used by the parties to denote their rights and obligations are relevant at the first stage as a guide to what security they objectively intended to create, such as the labels fixed and floating. The nature of the assets in question may also be taken into account. A distinction often drawn in the authorities is between a chargor's circulating capital and its non-circulating capital, the reason being that "compliance with the terms of a fixed charge on the company's circulating capital would paralyse its business". Regard may also be had to the nature of the business of the chargor when construing the rights and obligations created under the contractual documentation.

After these rights and obligations have been ascertained, the court must embark on the second stage of the process, which is one of categorisation, or characterisation. This is a matter of law, and does not depend upon the intention of the relevant parties, or the label which the parties have attached to the relevant instrument of charge.

If a charge has the following three characteristics, it is a floating charge:

1. if it is a charge on a class of present and future assets of a company;

2. if that class is one which, in the ordinary course of the business of the company, changes from time to time; and

3. if the charge contemplates that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets.

It is the third characteristic which is the hallmark of a floating charge and serves to distinguish it from a fixed charge. 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. If the chargor is free to deal with the charged assets and so withdraw them from the ambit of the charge without the consent of the chargee, then the charge is a floating charge. The test can equally well be expressed from the chargee's point of view. If the charged assets are not under its control so that it can prevent their dissipation without its consent, then the charge cannot be a fixed charge.

The High Court’s Decision

With respect to the first stage, the first question was whether the relevant assets fell within the scope of the charging clause in the 2017 debenture. The Court found that the charging language captured the relevant assets, and that the charge was expressed to be a fixed charge (although this was not determinative).

The second question was whether there were any contractual restrictions and permissions on the disposal of the Relevant Assets under the terms of the Security Documents. The Court found that the Relevant Assets were all subject to considerable restrictions and conditions, including with respect to the nature and value of the consideration. The senior facility agreement did contain various exceptions which would allow an asset sale to occur free of restrictions, but the circumstances in which those exceptions arose were very limited and/or limited the assets that could be sold.

Before turning to a specific discussion of the nature of the charge over the assets (the second stage), the Court found it necessary to address the contention that the point in law has been reached where only a total prohibition of all dealings and withdrawals without permission is enough to create a fixed charge, or only a total restriction on any disposal of the charged assets by the chargor without the consent of the chargee is sufficient to created a fixed charge. If these statements were correct, then the charge created by the debenture could not have created a fixed charge over the relevant assets.

The Court disagreed with this contention, finding that such an absolute approach was not supported by the case law. Rather, 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. It is not the case that a charge will only be fixed if it is located at the total prohibition end of the spectrum. The case law supports a more nuanced approach, which depends upon a combination of factors.

Applying this to the facts at hand, the Court concluded that the charge was not necessarily a floating charge simply because the Company had some ability under the terms of the Security Documents to deal with the relevant assets or some of them. In order to determine whether the charge was fixed or floating, it was necessary to consider all the circumstances of the case.

Starting with the nature of the restrictions contained in the Security Documents, the Court noted that these restrictions did not impose a total restriction on the Company dealing with the relevant assets or some of them. Nevertheless, the ability of the Company to deal with the relevant assets was strictly limited. In terms of complete freedom to deal with the relevant assets, the Company did have the ability, but only if and in so far as the relevant disposal fell within one of the asset sale exceptions, and then only if the relevant disposal was not caught by one of the restrictions on sale. Most importantly, the asset sale exceptions provided no opportunity for the Company to dispose of the relevant assets or any of them in the ordinary course of its business.

Likewise, another provision in the Security Documents which gave the Company the ability to make disposals of the relevant assets was materially and critically qualified by a requirement to comply with certain waterfall provisions on commercially unattractive terms, save in the case of disposals where the proceeds of sale were less than $1 million.

As a result, the Court found that the restrictions on disposals of the relevant assets gave to the chargees very significant control over the assets. The Company’s freedom to deal with the assets was materially and significantly limited. Put differently, the scheme of restrictions in the Security Documents gave the Company no ability to deal with the Relevant Assets in the ordinary course of its business.

Turning to the nature of the assets, the Court found that they did not resemble the circulating capital or fluctuating assets of a company. Rather, the assets were more correctly characterised as the tangible and non-tangible infrastructure owned by the Company, which was used to generate the sources of the Company's business income. The assets did not need to be sold to generate this income. In addition, the assets were all inherently difficult to transfer. Therefore, the Court concluded that the assets could perfectly well have been the subject of a fixed charge. They were income generating assets of the Company, which were not themselves part of the circulating capital or fluctuating assets or circulating stock in trade of the Company.

Taking all of these considerations into account, the Court concluded that, at the time of the sale, the assets were subject to a fixed charge created by the debentures.

Judge: Mr Justice Edwin Johnson

Counsel: Tom Smith KC and Edoardo Lupi of South Square (instructed by Simpson Thacher & Bartlett) for the Joint Administrators; David Allison KC and Rabin Kok of South Square (instructed by Kirkland & Ellis) for HPS Investment Partners LLC and Solus Alternative Asset Management LP