Fixed and Floating Charges are very important for a secured lenders and have significant impact if a company becomes insolvent as it governs the sequence in which creditors can be paid. The High Court ruling in Avanti Communications Ltd introduced both more flexibility and more ambiguity about the key characteristics of a Fixed Chage.
A Fixed Charge is created by a borrower in favour of a lender and means that it is immediately attached to property that is capable of being definite. This means it can be identified and gives the lender proprietary rights in those assets, while ownership and possession of the relevant asset remains with the borrower.
The key characteristic of a Fixed Charge is that the lender can exercise some control over what is done with the relevant asset.
By contrast, a Floating Charge will ‘float’ above a shifting pool of assets until such time an event occurs which causes the floating charge to “crystallise”. A charge can be crystallised if the borrower can no longer trade, if the lender exercises its rights to intervene and take control of the assets, or if the lender receives notice that certain specified events have occurred.
Until a Floating Charge is crystallised, the borrower is free to deal with the charged assets and the consent of the lender is not required if they dispose of the asset.
Whether a charge is Fixed or Floating will be very important to a secured creditor, if the borrower becomes insolvent, particularly where there are a variety of secured creditors holding security of a company’s assets.
The judge suggested in the judgement of Avanti Communications that for a charge to take effect as a Fixed Charge there does not need to be complete prohibition on the borrower dealing with or disposing of the charged assets. It was held that carefully worded exceptions to a complete prohibition of certain assets are not necessarily inconsistent with the creation of a Fixed Charge. These are often carefully negotiated clauses by borrowers in finance documents and therefore can significantly impact the drafting on these documents for the borrowers and any one acting on their behalf.
The judgement set out a highly detailed set of criteria for analysing securing documentation and categorising Fixed Charged assets. It is likely to have significant influence on asset-backed financial arrangements going forward. It will bring more flexibility on how businesses can be funded however, it introduces scope for disputes where security documentation is vague and poorly drafted.
For further information on this topic or on any other legal area, please contact John Szepietowski or Kay Stewart at Audley Chaucer Solicitors on 01372 303444 or email firstname.lastname@example.org or visit our LinkedIn page at https://www.linkedin.com/company/audley-chaucer-solicitors
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