UKCloud Ltd: fixed charges and intangible assets

Case law relating to the potential recharacterisation of fixed charges tends not to come around too often, but the recent case of Re UKCloud Ltd follows (relatively) hot on the heels of the Avanti Communications case, discussed here.

The case background

UKCloud Ltd (UKCloud) was a specialist cloud-based service provider in the UK and had executed a debenture in favour of Harbert Specialty Lending Company II SARL (Harbert) in 2020 (the Debenture).

One of UKCloud’s valuable assets was a large number of IP v.4 licences that were only available in limited numbers and enabled UKCloud to provide internet protocol addresses (commonly called IP addresses) to its customers. IP addresses are unique identifying addresses for each device connected to the internet and allow the internet to differentiate between different types of devices and so communicate specifically with them. The Debenture did not specifically charge IP addresses but did include a first fixed charge in respect of “all licences, consents and authorisations held or required in connection with [UKCloud’s] business … and all rights in connection with them”.

What did the court have to decide?

UKCloud went into compulsory liquidation in October 2022 and, as part of the liquidation, the question before the court was whether its IP addresses were subject to the purported fixed charge in the Debenture or only the floating charge.

Why does this matter?

Whether an asset is subject to a fixed or floating charge is particularly important in a company’s insolvency when its assets are sold. A fixed chargeholder will be paid first from the realisations of fixed-charge assets, but a floating chargeholder will only make any recoveries after certain prior-ranking payments have been made. This includes expenses of the insolvency, preferential creditors (certain tax and employee costs) and, assuming it applies, the “prescribed part” of up to £800,000. This distinction can clearly make a big difference to how much a creditor receives.

Fixed or floating?

Judge Baister held that, even though the IP addresses were not charged by the Debenture by name, on balance they were capable of being subject to the purported fixed charge as “licences, consents and authorisations”.

Judge Baister then considered previous case law and held that:

• individual charging clauses are “all or nothing”. This means all assets that fall within the specific clause must be subject either to a fixed charge or a floating charge; there cannot be a mixture of assets subject to different types of security within the same charging clause; and
• IP addresses were not part of UKCloud’s “circulating capital”, which are assets that a company can dispose of and replace as of right. This would usually be a good indicator of a fixed charge, but Judge Baister was also of the view that Harbert did not have the requisite control in practice over the IP addresses and, unusually, looked at post-contractual performance in reaching this view. There were generic controls included in the Debenture but the court found that Harbert had never enforced them against UKCloud in practice.

Judge Baister stated in his judgment that the issue was not easy to resolve. He concluded “albeit not without misgivings” that the IP addresses were subject to the floating charge in the Debenture. His reasons for this were: (i) Harbert’s lack of control over the IP addresses in practice; and (ii) if the charge over “licences, consents and authorisations” were fixed, it would have caught a number of assets that the parties would never have intended to be controlled to that extent, such as software licences and even laptops that would be replaced from time to time.

Some key takeaways following this case are:

• there is no reason in theory why intangible assets such as IP addresses cannot be subject to a fixed charge;
• if a company has particularly valuable assets, those assets should be checked to verify that they are not part of the company’s “circulating capital” and specifically charged by name in the relevant security document. Security holders should never rely on a generic charging clause and very clear drafting is key; and
• the security holder should include controls over those assets in the security document, such as an absolute prohibition on disposals of them if commercially possible, and ensure that it exercises those controls in practice. The most detailed documentary controls will be of no assistance if the security holder does not enforce them in practice.

If you have any questions or concerns about the issues arising from the UKCloud judgment, or English security documents generally, please contact Robert Spedding.