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Float like a butterfly or sting like a fixed charge - fixed or floating charges on digital assets

13 Jun 2024
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In the recent case of Re UKCloud Ltd (In Liquidation), the English High Court examined whether the effect of a debenture granted by the Company gave the benefit of a fixed or floating charge over its internet protocol (IP) addresses. The distinction was important, impacting recoveries for the Company’s unsecured creditors.

In deciding whether a charge is fixed or floating, the Court will:

  1. construe the charge instrument to ascertain the nature of the rights and obligations the parties intended to grant; and
  2. categorise the charge to determine whether the character of the charge is consistent with a fixed or floating charge.

Here, the debenture specified that certain assets were subject to a fixed charge, including “all licences, consents and authorisations…held or required in connection with the Company’s business…” Deputy ICC Judge Baister found that the language used in the debenture (in particular “authorisations”) indicated the parties’ intention to create a fixed charge over the IP addresses. That was not the end of the matter, however, as a critical issue in determining the nature of a debenture is whether the debenture holder has sufficient control over the charged assets.

Crucially, there was no evidence that the debenture holder had exercised control over the IP addresses, as the Company freely allocated IP addresses to customers without oversight, despite control terms being provided for in the debenture. If a stipulation in the charging documents is not adhered to in practice, the agreement may be held to be a sham and characterised as a floating charge. The Judge concluded that there was no exercise of control and accordingly the control provisions in the debenture were a “sham”.

Applying an “all or nothing” analysis of the charging clause – that all assets that fall within the clause must be subject to either a fixed charge or a floating charge – the Judge held it created a floating charge across all covered assets since the lender lacked practical control. Consistent with the Court’s analysis in Re Avanti, an inability to prohibit ordinary dealings over the asset is a key factor in determining whether a charge is fixed or floating.

The Judge noted that determining whether the IP addresses were an asset subject to a fixed or floating charge was challenging, not least due to the imprecise nature of digital assets. However, this judgment (along with helpful industry-led guidance provides welcome guidance on the examination of security over digital assets.

While Harneys does not provide legal advice on the laws of England and Wales, it is important to note that this decision will likely have persuasive effect in other common law jurisdictions, such as the BVI, Bermuda and the Cayman Islands, where cases dealing with digital assets in insolvency settings are increasingly prevalent.