UKCloud Ltd (in liquidation), Re

Whether a debenture creates a fixed or floating charge depends on the rights and obligations objectively created, followed by legal categorisation. The label used by the parties is not conclusive.

Where one charging clause covers a range of assets, it will generally operate on an all-or-nothing basis. A fixed charge cannot ordinarily apply to some assets within the clause while a floating charge applies to others.

The essential question is whether the chargor may deal with the assets and withdraw them from the security without the chargee’s consent. Contractual control, the nature of the assets, the company’s ability to carry on business, and relevant post-contractual conduct may all be considered. A charge over IP-address rights was therefore characterised as floating.

Gareth Jonathan Allen, the Official Receiver and liquidator of UKCloud Ltd, applied for directions under Insolvency Act 1986, section 168(3). The issue was whether a debenture granted to Harbert European Specialty Lending Company II SARL created a fixed or floating charge over the company’s internet protocol addresses.

The company used the addresses in providing cloud-computing services. It had limited rights under the RIPE NCC arrangements and allocated addresses to customers for use during their services. The parties agreed that the addresses could be sold, leaving the nature of Harbert’s security to be determined. The central questions were how the charging clause should be construed, whether it operated on an all-or-nothing basis, and whether Harbert had sufficient control for the charge to be fixed.

1. The application was determined in favour of the Official Receiver. The charge over the IP addresses was a floating charge.

2. The court applied the two-stage approach in Agnew v Commissioners of Inland Revenue: first, construe the debenture to ascertain the rights and obligations intended by the parties; secondly, categorise the charge as a matter of law. The parties’ description of the security as fixed was only a guide.

3. The words “licences”, “consents” and “authorisations” were capable of covering permission to use IP addresses. The language therefore indicated an intention to charge the relevant rights by way of fixed charge. That conclusion did not resolve the issue because the nature of the rights and the extent of control still had to be examined.

4. The all-or-nothing approach applied. A single charging clause could not ordinarily create a fixed charge over some assets and a floating charge over others. The approach in Re ASRS Establishment Ltd and Re Beam Tube Products Ltd was binding, and there was no sufficient reason to depart from it.

5. The IP addresses were not readily classifiable as circulating capital or a fluctuating body of assets. That factor was inconclusive. The decisive difficulty was control. The debenture contained contractual restrictions, but there was no evidence that Harbert exercised or sought to exercise control. The company was able to carry on its business without Harbert’s consent, and the control provisions were therefore a “sham” in the limited sense adopted in Re Avanti Communications Ltd.

6. The absence of actual control, together with the all-or-nothing principle and the nature of the rights held by the company, meant that the charge was floating. The judge would hear counsel on the form of the final order.