What is a Debenture

how do debentures workA debenture is a loan agreement between a lender and a borrower which is registered at Companies House and lodged against your company’s assets.

Debenture’s are sometimes referred to as a ‘floating charge debenture’ and includes all company assets. The charge is floating as some of the assets may be changing on a daily basis, such as stock for example.

The debenture secures the assets for the lender should the company fail and in liquidation, the charge becomes ‘fixed’ on the asset’s value at that point in time.

What is a debenture holder

A debenture holder is a business or individual that has lent money to another person or company by using a debenture. This is basically a loan that is backed by the company’s assets.

In other words, if the company goes bankrupt, the debenture holders will be first in line to get their money back (after the employees, of course). Debentures are typically issued for a fixed period of time, and the interest rate is usually fixed as well. This makes them attractive to investors who are looking for stability.

Debenture holders are essentially creditors of the company, and they do not have any ownership rights. That means they don’t have a say in how the company is run. However, they do have certain rights when it comes to things like dividend payments and asset sales.

How do debentures work?

A debenture works by if you default on a loan the lender has security over that businesses assets, such as its book debt or vehicles. In simple terms a debenture is a legal charge.

When you and the lender have agree terms and signed the debenture, the lender needs to file it at Companies House within 21 days. This needs to be done within the time limit as if the business should enter insolvency then the lender will not have any preference over assets and be another unpaid unsecured creditor.

What does debenture mean in business

In business a debenture typically means that a bank, factoring company or invoice discounter have taken a charge on a company in order to show security for their loans. The use of security family a debenture can only be taken on a limited company or limited liability partnership. This type of security cannot be used with a sole trader or standard partnership.

What is a company debenture

A company debenture is a loan agreement in writing between a borrower and a lender that is registered at Companies House. It gives the lender security over the borrower’s assets. Typically, a company debenture is used by a bank, factoring company or invoice discounter to take security for their loans.

Can a director issue a debenture

Directors who have lent or advanced money into their own limited company could take a debenture to secure the loan. Private lenders can also take a debenture.

Company directors can use a debenture to secure their own interests e.g. when lending to a company. As long as the debenture is registered at Companies House at the time the loan is made the debenture can secure the company assets for the director.

How does a debenture holder enforce security?

The debenture holder normally the lender has the right to appoint an administrator to take control of the company should it defaults on the loan. Should the lender call in the loan for repayment. Normally the threat of appointing an administrator can often be enough to make a company repay the debt, or agree terms to repay it.

How does the debenture holder get their money?

If the worse come to the worse and you appointed an administrator or liquidator, they must hand over assets caught by the debenture to the lender. Usually, lenders agree for the sale the assets once an administrator or liquidator has been appointment in order to recover their fees..

Assets can fall into a fixed or floating charge category caught by the debenture.

The following types of assets can be caught by a fixed charge: book debts under an invoice factoring agreement, freehold or leasehold property, and plant and machinery fixed to the floor.

Floating charge assets items that are not caught by the fixed charge of the debenture, and are typically movable assets such as trading stock, equipment, furniture and computers.

Are company debtors a floating charge asset?

Company debtors can fall into the fixed charge category under a factoring or invoice discounting agreement. The terms of the factoring agreement that decides whether the debtors are fixed or floating charge assets. Otherwise, they are usually a floating charge asset.

What creditors have priority over a floating charge asset?

Preferential creditors have a claim over a floating charge. The arrears of employee wages and holiday pay takes preferential creditor status in any claim.

Also the fees and expenses of a liquidator or administrator can be paid from floating charge asset realisations, but these cannot be taken from a fixed charge asset without the lender’s agreement.

How do I know if there is a debenture against my company?

Debentures need to be signed by a director. Once the debenture has been signed, it will be filed at Companies House. To see if a debenture is lodged against your company you can use the Companies House website for free to find your company, just look under the heading of charges. This will list is in date order showing all debentures charged on your company.

Can you have more than one debenture registered?

Yes you can have more than one debenture register against your company. The order they are listed are usually the date they are created, unless one lender has given another a deed of priority.

You will find that a previous lender who has been repaid has not removed their debenture, even though it should be marked satisfied, its always best to request them to remove it.

What is a negative pledge?

A negative pledge is an agreement not to give a debenture to someone else.

Does a debenture give a lender control over my company?

Debentures only give lenders control over a company if you default on the loan. Lenders can appoint an administrator of their own choosing or block you appointing your own choice of administrator as well as stopping you going into liquidation. The debenture holder will not get involved in the day-to-day running of the business.

If you have given the bank a personal guarantee for company borrowing, you might be better off letting them have a debenture. This will allow them to use the company assets first to recover their loan before they crystalise your personal guarantee.

Do I need the debenture holder’s consent to sell assets?

If you wish to sell assets which are covered by a fixed charge, you will need the lenders permission to do so. If the floating charge assets are offered for sale, and this is out of the normal course of trade, for example, selling all the stock to a new business owner, and would normally need the lender’s consent.

If the sale takes place then the director who sells the business to find the sale may be invalid. However, the terms of the charge/debenture need to be checked for what consent is needed from the lender.

Does a debenture contain a personal guarantee?

A debenture usually contains a personal guarantee if issued by a high street bank or other business lender. You will have to check with the lender to ensure if there is a personal guarantee to be signed as all lenders vary. The lender will ask you to take independent legal advice if you are signing a guarantee.

Business Finance specialist at Invoice funding | + posts

Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.

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