The key distinction between a fixed and a floating charge is well established as a matter of English law. Assets subject to a fixed charge are permanently appropriated on creation of the charge as security for the payment of the chargee’s debt,Re Spectrum Plus Ltd (in liquidation) [2005] UKHL at [138] (Lord Walker). whereas on creation of a floating charge, the assets are not so appropriated until a specified future event.Spectrum at [111] (Lord Scott of Foscote). In other words, the floating charge remains unattached to the assets prior to crystallisation.
For secured creditors, the validity and enforceability of their security interest directly affects the risk profile of their debt instrument and, consequently, the commercial terms that they negotiate. A creditor with a fixed charge can claim, in the event of the company’s insolvency, any proceeds from the sale of the fixed-charged assets in priority to other creditors of the company and without accounting for the costs and expenses of the insolvency process. On the other hand, the claims of creditors with a floating charge (regardless of whether it has been duly crystallised into a fixed charge), rank behind the costs and expenses of the insolvency process (including the remuneration of insolvency office-holders), preferential claims (which now include certain tax arrears of HMRC),Including any unpaid VAT and relevant deductions including PAYE income tax, employee national insurance contributions due to HMRC under paragraph 15D of Schedule 6 to the Insolvency Act 1986 and the Insolvency Act 1986 (HMRC Debts: Priority on Insolvency) Regulations 2020. and the prescribed part.A ring-fenced fund out of the proceeds of enforcement of floating charge security for the benefit of unsecured creditors (after making full provision for preferential creditors and expenses out of floating charge realisations) which applies to (a) 50% of the first £10,000 of the company’s net property and (b) 20% of the remainder of the company's net property over £10,000, with a maximum aggregate cap of £800,000 (or £600,000 in the case of a first-ranking floating charge created before 6 April 2020).
Accordingly, a creditor with the benefit of a charge that is expressed to be fixed but that is re-characterised as floating is at risk of their recovery being significantly reduced in the event of the company’s insolvency. Recent case law highlights that this risk is particularly acute when the charging provisions of the security document are drafted in a way that does not specifically include the assets in question, and further when the conduct of the parties does not in practice reflect the purported restrictions on the chargor dealing with these assets.
In Re UKCloud Ltd (in liquidation),[2024] EWHC 1259 (Ch). the court examined the nature of the charge granted by UKCloud — a provider of cloud computing services — over certain IP addresses that had been licenced to it by the Réseaux IP Européens Network Coordination Centre (RIPE NCC). The company allocated the IP addresses to its customers to allow them to access its cloud-based services. The charge was contained in a debenture as security for a loan advanced by a third-party lender to UKCloud’s parent.
The judge referred to the two-stage enquiry that the court engages in determining whether a charge is fixed or floating:
Having reviewed the terms of the debenture, the court held that, although the debenture did not expressly refer to them, the IP addresses were within the scope of a charging provision relating to a general category of licenses, consents, and authorisations, and that the natural and ordinary meaning of the language used in the debenture evidenced an intention of the parties to create a fixed charge over the IP assets.
As to the nature of the assets, the judge found that the IP addresses did not form part of UKCloud’s “circulating capital” (i.e., categories of assets that are disposed of and replaced in the ordinary course of the chargor’s business and thus constantly changing). Whereas the company could sub-allocate them to customers and reassign and transfer them in certain circumstances, this was not in the sense of selling and replenishing stock, and the company had no proprietary interest in them. The various authorities that indicated assets which form part of the chargor’s circulating capital were more likely to be floating charge assets did not state that this was a conclusive feature of a charge being floating and, as a corollary, the inverse did not mean the charge over assets that are non-circulating capital would be fixed.
In a finely balanced decision, the judge found that the IP assets were subject to a floating charge, as he was ultimately persuaded that the secured lender did not exercise sufficient control over the IP assets. In reaching that conclusion, he considered whether the restrictions in the purported fixed charge were adhered to in practice and, having found that the secured lender’s conduct did not amount to exercising control, the control provisions in the debenture were a legal sham.
A number of principles relating to the characterisation of a charge as fixed or floating were not specifically explored in the context of the IP addresses.
Unlike in Re Avanti Communications Limited (in Administration),[2023] EWHC 940 (Ch). the judgment did not include a detailed analysis of all the applicable provisions of the relevant security document and facility agreement to give a comprehensive picture of the security interest the parties understood was granted in respect of the assets. In Avanti, a careful analysis of the permitted disposal provisions of the facility agreement with respect to the satellites and other affiliated assets lead to the judge’s conclusion that the charge was fixed. By contrast, UKCloud made only passing reference to the permitted disposals carve-outs in the facility, making it difficult to understand the rationale for the decision. The company was unable to dispose of the IP addresses without permission from the secured lender or under the terms of its licence with RIPE NCC. Reaching any conclusion is difficult absent further analysis of the level of control. For example, the court did not appear to consider whether the IP addresses were assets of a type in which the head licence (under which the company was granted the right to sub-allocate the IP addresses to its customers) might be separable from the income stream generated by the IP addresses. If it could, this might point towards a fixed charge over the former and a floating charge over the latter.
UKCloud serves as a reminder that the correct characterisation of fixed and floating charges remains a complex area, not least with respect to new, intangible asset types. The judgment underscores that a nuanced understanding of the legal and practical controls the chargee exercises over the assets is required by reference to their nature, the terms of the underlying security document, and the practical observance of that regime by the parties. In particular, the judge’s finding that he was bound by a number of casesRe G E Tunbridge Ltd [1995] 1 BCLC 34; Re ASRS Establishment Ltd [2002] BCC 64; Smith (Administrator of Cosslett (Contractors Ltd) v. Bridgend County Borough Council [2001] UKHL 58; and Re Beam Tube Products Ltd [2006] EWHC 486 (Ch). that held the effect of a charging clause that bundles categories of assets together generically is that all assets falling within its scope are necessarily subject to the same type of charge (i.e., it is not possible for one such asset to be a fixed charge asset whilst another is a floating charge asset — the so called “all or nothing” principle), reinforces the importance of ensuring that critical assets are specifically identified under their own charging provision within the security document.