Implications for lenders in permitting transactions made in the ordinary course

Lenders should be aware that, in secured deals, permitting transactions 'in the ordinary course of business', as part of any carve-outs to the restrictions contained in the loan agreement (e.g. in the 'no disposals' covenant), is likely to be seen as allowing a degree of freedom inconsistent with fixed security. As a result, assets which can be disposed of by the borrower (or by any charging company) in the ordinary course of its business will be the subject of a floating charge only, even if the relevant security document purports to create a fixed charge over them. In addition, lenders should be aware that, in unsecured deals, the expression 'in the ordinary course of business' may in appropriate circumstances be widely construed so as to permit unprecedented or exceptional transactions.

In the recent case of Ashborder BV & Ors v Green Gas Power Ltd & Ors [2004], the borrower group in question disposed of certain assets (licences and shares) which were the subject of debentures securing loans from some of the Enron group of companies. The debentures purported to grant fixed security in relation to some assets (including the licences and shares) and a floating charge over all other assets. The court held (applying the two stage test formulated in Agnew v Commissioner of Inland Revenue [2001]) that a carve-out in the "no disposals" covenant of the loan agreement for the disposal of any asset in the ordinary course of business was inconsistent with the security being fixed under the debenture. As a result, the parties had in fact created only floating security over the licences and shares.

The court then went on to consider whether the shares and licences had been disposed of 'in the ordinary course of business'. It held on the facts of the particular case that the disposals were not in the ordinary course of business, but it expressly recognised that there was no reason why an unprecedented or exceptional transaction could not in appropriate circumstances be regarded as in the ordinary course of a company's business. In addition, according to the court, the mere fact that a transaction would, in a liquidation, be liable to be avoided as a fraudulent or otherwise wrongful preference of one creditor over others would not alone preclude the transaction from being in the ordinary course of business, nor would the fact that the transaction constituted a breach of a director's fiduciary duty. Not surprisingly, however, the court regarded transactions that bring to an end, or are intended to bring to an end, the company's business as transactions that are outside the ordinary course of its business.

The Ashborder case serves as a warning to lenders that they must carefully consider the implications of any requests they receive from borrowers for carve-outs to the covenant package. Following Ashborder, allowing a company freedom to deal with its assets 'in the ordinary course of business' may mean that even one-off or exceptional transactions will be permitted and, in the case of secured loans, that any attempt to take fixed security may be unsuccessful.

Should you require further details or advice please contact Stephen Moore on +44(0) 207 367 2855 or at [email protected] or Jane Whitfield on +44(0) 207 367 3583 or at [email protected]