Rebecca Green – Duane Morris Banking and Finance Law

In the recent case of Re Avanti Communications Limited (in administration)[1] (Re Avanti), the court considered the nature of fixed and floating charges. Whether a charge is fixed or floating has implications for both lenders and administrators in terms of determining to what extent a chargor can recover from the charged assets and to what extent a borrower can deal with its assets.

Background of case:

In Re Avanti, the administrators applied to the court to determine whether certain assets were subject to a fixed or floating charge pursuant to debentures granted by the relevant company. As all net proceeds from the sale of fixed charge assets are paid to secured creditors, and proceeds from the sale of floating charge assets are not paid to secured creditors until those who rank ahead of them under English insolvency law (such as administrator’s costs and HMRC) have been paid in full, the characterization of the charge was crucial for determining whether the secured lenders would recover their secured debt in full. If the charges over the assets were fixed, secured creditors could recover the amount owed to them. If the charges were determined to be floating, HMRC would rank as a preferential creditor with respect to certain taxes due by the insolvent company and would receive a portion of the proceeds from the sale of the assets.

The finance documents in question contained a restriction on the disposal of the relevant assets with certain exceptions, for example an exception allowing the company to dispose of obsolete assets. Exceptions are commonly negotiated in finance documents where certain assets are dealt with by a company in its ordinary course of business or circulating capital (such as inventory).

Two-stage test:

In determining whether the assets in question were subject to a fixed or floating charge, the Judge applied the two stage test set out in Agnew v Commissioners of Inland Revenue[2].

At the first stage, the court must determine the intention of the parties and which rights and obligations were intended to be granted with respect to the relevant assets.[3] At the second stage, the court then determines whether as a matter of law, irrespective of the intention of the parties, the assets are fixed or floating, with this analysis requiring consideration of the degree of control the chargor has over the relevant assets. In this particular case, although there were exceptions to the prohibition on asset disposals, the exceptions were restrictive and did not allow disposal in the ordinary course of business, which would indicate a floating charge. Although disposals were permitted in certain circumstances, the restrictions were strictly limited. In this second stage, there is a clear distinction between assets that form part of a company’s circulating capital and assets that although they form a class (such as, for example, machinery), are not fluctuating. Assets that form part of a company’s circulating capital are more likely to be subject to a floating charge, and assets that do not fluctuate are more likely to be subject to fixed security. The ability of the company to deal with a certain class of assets does not mean these assets are subject to a floating charge – it is a matter of the degree of control that the company can exercise over the relevant assets.

Impact of case:

This case clarifies that a complete prohibition on the ability of a company to dispose of the charged assets is not required for the court to determine the assets are subject to a fixed charge. Any exceptions must be clearly drafted when a chargee is seeking to take fixed security over the relevant assets.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.

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

[2] Agnew v Commissioners of Inland Revenue [2001] UKPC 28

[3] Re Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch) at [26]

Background

The Financial Conduct Authority (“FCA”) is seeking to overhaul the current retail investor disclosure regime that is based on EU rules and is no longer viewed as fit for purpose in the UK.

The FCA published a discussion paper in December 2022 seeking feedback on new disclosure rules to ensure retail investors are able to get clear and useful information, such as the costs involved with investing and investment risk, in order to better facilitate investment decisions.

On 9 December 2022, His Majesty’s Treasury (the “Treasury”) published a consultation paper on the future of retail disclosure in the UK, further indicating the UK’s intention to replace the EU retail disclosure rules with a new regime.

Treasury Consultation Paper on PRIIPs and UK Retail Disclosure

The Treasury’s consultation paper set out the government’s intentions to repeal the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation (“PRIIPs Regulation”) as it is not “fit for purpose” and sought views on a new framework to replace it.

The PRIIPs Regulation was introduced in 2018 in the EU with the goal of providing retailers with a standardised single document that they could use to compare packaged retail investment products or “PRIIPs” in the EU retail market.

The PRIIPs Regulation requires PRIIP manufacturers to produce a “Key Information Document” (KID) and to publish this KID on their website. Anyone advising a retail investor on a PRIIP or selling a PRIIP to a retail investor must provide the investor with this KID before any transaction is concluded. Financial services firms have raised issues with the highly prescriptive format of the KID and how this reduces flexibility in communicating with clients. Many firms provide their own “fact sheets” in addition to the KID, leading to non-standardised documents being provided to clients which can be confusing for investors and a burden for firms. The Treasury is of the view retail investors should receive disclosure information in a standardized format that can be tailored by firms, something that is not currently permitted by the PRIIPs Regulation.

Another issue raised in the paper is the impact of the PRIIPs Regulation on investment products created in other jurisdictions and the cost of compliance and liability risks. The Treasury outlines that these costs can dissuade firms from making these products available to retail investors in the UK. An example provided in the paper is that following the introduction of the PRIIPs Regulation, many firms did not produce a KID for their corporate bonds due to the extra cost and possible liability risk. This led to fewer corporate bond products being available for purchase by retail investors. The Treasury is seeking to improve accessibility as the requirement to produce a KID has restricted choice for retail investors.

The paper sets out the government’s intentions to revoke the PRIIPs Regulation and to remove the Undertaking for Collective Investment in Transferable Securities (UCITS) disclosure requirements so that the FCA will become responsible for establishing a future retail disclosure regime. As set out in the paper, the Treasury do not intend to keep any PRIIPs or UCITS disclosure requirements in legislation but rather intend for future disclosure requirements to be included in the FCA Handbook.

FCA Future Disclosure Framework Discussion Paper:

The PRIIPs Regulation will be repealed by the Financial Services and Markets Bill (the “FSM Bill”), which is currently before Parliament and likely to become law in 2023. Rules relating to retail disclosure are currently set out in various legislation and FCA rules, resulting in a complex regulatory landscape. The FSM Bill repeals retained EU law in financial services, including the PRIIPs legislation and the UCITS disclosure requirements.

Under the new UK regime, the responsibility for regulatory oversight and development of future retail disclosure rules will become a matter for the FCA. The FCA will determine the format and presentation requirements for disclosure and regulatory requirements related to retail disclosure will be maintained in FCA rules rather than in legislation. The FCA will be tasked with integrating UCITS and PRIIPs disclosure into a clear UK retail disclosure framework before the 2026 exemption end date.

The FCA published the discussion paper “Future Disclosure Framework” as a first step in developing a new regulatory retail investment framework. The FCA sought feedback from financial services firms and consumers to create a disclosure regime that applies to all retail products including UCITS, PRIIPs, non-PRIIPs packaged products and some NURS.

It is noted by the FCA that the disclosure regulations were designed with paper-based disclosure in mind rather than digital disclosure and given the trend in online investment, feedback was sought on the delivery, presentation and content of retail disclosure. The FCA notes that “for example, most firms provide disclosure as a single PDF prior to the point of sale. Research suggests consumers do not engage with disclosure when it is provided this way.” Providing information to retail consumers in the right format is a priority for the FCA to support consumer choice.

Final Remarks:

Following Brexit, the UK has signaled a clear intention to repeal retained EU law in retail disclosure and create clear detail disclosure rules regulated by the FCA, rather than the patchwork of regulations and laws that currently exists. The priority of both the Treasury and FCA has been made clear – to adapt to the digital age and allow financial services firms to be more flexible, while still operating within a standardized framework.

Author: Rebecca Green

Re Avanti – Fixed / Floating Charge Security Under English Law

UK Retail Disclosure Update