Secured Lending Against Digital Assets – The Importance for Lenders to Exercise Control

The recent case of Re UKCloud Ltd (in liquidation) [2024] EWHC 1259 (Ch) (“Re UKCloud”) has highlighted how the lender exercising control in practice is the key determining factor in characterising a charge as fixed as opposed to floating. Re UKCloud has provided helpful guidance for lenders and explored how, despite careful drafting being important, implementing control in practice is crucial to maintaining the intended security status.

Re UKCloud Ltd Case Background:

• UKCloud Ltd (the “Company”) was a British cloud-based provider to both public and private sectors. They held 23,552 IP v.4 addresses. In 2020, the Company granted a debenture in favour of Harbert Specialty Lending Company II SARL (the “Debenture”).
• The Debenture created a fixed charge over “all licences, consents and authorisations held or required in connection with the Company’s business…and all rights in connection with them”. The Debenture did not specifically refer to the IP addresses. As a result, the Official Receiver utilised Section 168(3) Insolvency Act 1986 and applied for directions as to whether the IP addresses were subject to a fixed or floating charge.

Why was it important to categorise the charges?

• Whether the IP addresses were subject to a fixed or floating charge was an important factor, because if they were not subject to a fixed charge, Harbert would not have exclusive possession over the IP addresses, and they would not be paid out of the proceeds of sale of the IP addresses before the other creditors.

What was the High Court’s decision process?

• The High Court followed the two-stage process seen in Agnew v Commissioners of Inland Revenue [2001] UKPC 28 [2001] 2 AC 710. The first step was to attempt to understand the intentions of the parties by analysing the language used in the Debenture. The lack of explicit reference to the IP addresses pointed to a lack of intention to create a fixed charge. However, Judge Baister acknowledged that this was only a pointer in understanding the parties’ intentions. This is useful for when umbrella terms have been used in security agreements over assets to encapsulate a range of legal rights.
• The High Court had to decide whether the IP addresses fell within “all licences, consents and authorisations.” It was concluded that IP addresses could fall within the natural and ordinary meaning of the words used in the Debenture, particularly “authorisation”.
• The second step was to determine whether the charge is closer to being fixed or floating. In reviewing the nature of IP addresses, Judge Baister reviewed the argument that if the asset is in the Company’s circulating capital or is a fluctuating asset or body of assets then this would point to it most likely being a floating charge. The Court did not consider the IP addresses as a circulating or fluctuating asset because the Company was not able to trade the IP addresses in the ordinary way. Despite this, it was not automatically decided that the charge was fixed. This is because intangible assets can be subject to a fixed charge.

Point of Control

• In Re UKCloud the evidence pointed to a complete lack of control. Re UKCloud provided IP addresses freely without reference to Harbert and without their consent despite the Debenture. Judge Baister stated that it was difficult to see how one would exercise control in relation to the IP addresses. This points both to the poor drafting of the control provisions and that it may be more challenging to exercise practical control over particular assets. The High Court concluded that the IP addresses were subject to a floating charge because the control provisions were not exercised in practice.

Important Takeaways from Re UKCloud:

• Detailed control clauses will be of no assistance if the lender does not enforce the controls. As Re UKCloud has shown, the High Court takes a comprehensive approach when characterising a charge, but the absence of control is a determining factor. If control is not enforced this will result in any contractual control provisions being viewed as a sham. Lenders should ensure to check whether borrowers are complying with their obligations, and if they are not, contractual controls should be exercised.
• Ensure drafting is specific. Valuable assets should be charged by name, as generic drafting is likely to cause issues. Security documents should identify assets which will be subject to control and clauses should be drafted to minimise any risk that the charge could be characterised as floating. Both the careful drafting of provisions and exercising control over assets should be the key takeaway for lenders if they want to ensure that they have fixed charges over assets.

Our Property Finance team has considerable experience in advising businesses and lenders in property finance transactions. Should you require any assistance, please contact Joanne McIvor. We are experts in this field and are here to help.

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