Earlier this year ICC Judge Baister handed down judgment in the case of UKCloud Ltd, building on the decision in Avanti[1] by providing further analysis around the distinction between fixed and floating charges – following a dearth of caselaw on the point since Spectrum.[2]

This blog pulls together some of the key messages and practical takeaways from the case.

Background

UKCloud Ltd (“UKCloud”) provided computing services to its clients and provided IP addresses to those clients to allow them to access the services. UKCloud entered liquidation on 25 October 2022, with the official receiver stepping into the role of liquidator. This case is the result of an application to Court for directions as to how a charge over IP addresses claimed by one of UKCloud’s creditors should be properly classified.

The Charge 

The charge in question arose under a debenture granting fixed and floating charges over assets of UKCloud, including a 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”. The Judge considered that IP addresses would be covered by the ordinary interpretation of this wording. The question for the court, therefore, was whether the charge over IP addresses should properly be construed as a fixed charge or a floating charge.

This judgment follows the approach taken in Avanti, (see our previous blog), and applied the two-stage test for determining whether a charge is fixed or floating. The two stage test looks first at the wording of the security document and the nature of the rights and obligations that the parties intended to create, and second at the categorisation of the security, which is a matter of law.

Arguments

In interpreting the wording of the debenture various arguments were considered. It was argued that, because no specific reference was made to IP addresses in the wording of the debenture, that the parties could not have intended to create a fixed charge. However, the judge found that this was not conclusive evidence of the parties’ intentions.

The nature of the assets was considered, and it was argued that the IP addresses were assets that were ‘circulating’ in nature, and therefore that any charge over them should properly be construed as a floating charge. The judge, however, did not agree that the assets were ‘circulating’ because, although, UKCloud disposed of the assets regularly in providing them to its clients, it could not replenish the IP addresses with identical products in the same way as one might replenish equivalent stock in a retail company. However, the nature of the assets as ‘non circulating’ was, again, not conclusive as to how any charge over those assets should be classified but was one of many factors which should be considered.

The question of control over the assets was also considered, and it was noted that the lender exercised no control over UKCloud’s dealing with the assets. UKCloud was free to trade or use the IP addresses freely in the course of its business. It was noted that there were control mechanisms drafted into the debenture, but in practice these were not adhered to (and it was noted that it was not clear how such control mechanisms would, practically, have been applied to the IP addresses in any event).

‘All or Nothing’

It was argued, relying on caselaw pre-dating Spectrum and Avanti, that the charging clause of the debenture should be interpreted as a whole and on an ‘all or nothing’ basis, i.e. that all assets within that clause were subject to either a fixed charge or a floating charge. Arguments were made that such precedent was not binding, however, the judge in this case did consider himself bound and the Court found that if several items covered by the clause are a fluctuating body of assets (and therefore could only properly be construed as being subject to a floating charge), this would mean that the fixed charge analysis for the whole class of assets must fail, resulting in a floating charge for the entire class.

Judgment

Judge Baister found that the charge was a floating charge, particularly drawing on the ‘all or nothing’ principle and the lack of control exercised by the lender.

Takeaways

This case builds on the underlying principle of Avanti, that there should be a nuanced approach to considering the control of assets. This case also spotlights that the nature of the assets, although instructive, is not determinative when considering proper charge classification.

The court’s approach to the ‘all or nothing’ principle is interesting, and parties should be mindful of this when drafting their security documents, seeking to be as specific as possible in charging clauses, rather than relying on broad ‘catch all’ provisions.

[1] Re Avanti Communications ltd (in administration) [2023] EWHC 940 (Ch)

[2] National Westminster Bank plc v Spectrum Plus Ltd & Ors [2005] UKHL 41