In a recent judgment¹, the High Court determined (contrary to the arguments of the affected secured creditor) that a debenture created a floating charge rather than a fixed charge over certain internet protocol (IP) addresses.  Whilst elements of the decision are inevitably fact-specific, some broader lessons and reminders can be taken from the judgment which will be of general relevance to lenders when taking security.

• The true characterisation of security interests matters.  This case provides a simple illustration of why the distinction between fixed and floating charge security is important.  By virtue of how the insolvency waterfall operates, had the secured creditor been successful in arguing that it had a fixed charge over the IP addresses, it would have had primary entitlement to the proceeds once those assets were realised.  In the event, the fact that it only had a floating charge meant that the proceeds of the assets (which were estimated to be worth approximately £700,000) would instead be applied towards the prior ranking liquidation expenses.
• A nuanced approach is required when assessing whether a charge is fixed or floating.  This judgment endorsed the conclusion of Re Avanti² that a nuanced approach should be taken to the question of whether a charge is fixed or floating, having regard to a number of factors (such as the nature of the assets in question).  Putting this into practice, the judge considered whether the IP addresses were part of the circulating capital or fluctuating assets of the company, determining that they were not but concluding that this simply meant that one characteristic commonly associated with floating charge security was absent, not that the charge was necessarily fixed.
• Post-contractual conduct can be significant.  Re Avanti had surveyed the law relating to the characterisation of charges and reaffirmed that the critical question was the nature and extent of the chargee’s control of the relevant assets.  It also observed that the post-contractual conduct of the parties would generally be irrelevant to this question, subject to the caveat that if a contractual control mechanism (i.e. a restriction on disposals) was not enforced in practice, it could be regarded as a sham.  This was precisely the conclusion reached in the present case, with the judge finding that the chargor was in practice free to carry on its business as regards the IP addresses without the consent of the secured creditor notwithstanding the existence of control provisions in the debenture.  This is a timely reminder to lenders to monitor whether chargors are complying with their obligations and actually seek to enforce contractual controls.
• Security documents should be carefully crafted to avoid falling foul of the “all or nothing” principle.  Supplementing his finding on post-contractual conduct, the judge also concluded that he was bound by previous authorities to construe the relevant charging provision in the debenture on the basis that the “all or nothing” principle applied, which meant he had to be satisfied that all assets falling within the clause (not just the IP addresses) were subject to a fixed charge.  Ultimately this wasn’t plausible due to the breadth of the charging provision relied upon, which extended to all licences, consents and authorisations held or required in connection with the chargor’s business.  The key takeaway from this for lenders when taking security is the importance of identifying the valuable assets of the chargor(s) which could be subject to practical control and ensuring that the charging provisions are crafted so as to minimise the risk of any purported fixed charges being recharacterised as floating due to this principle. 

¹ Re UKCloud Ltd (in liquidation) [2024] EWHC 1259 (Ch).

² Re Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch).