What is a Debenture?
What is a Debenture – A legally binding agreement between a willing lender and a borrower. Registered at “Companies House,” noted against your Company’s assets.
Often called a ‘Floating Charge Debenture’. They cover all your company assets. The charge floats as assets change daily.
A “Registered Debenture” secures assets for the lender, securing against Insolvency.
In a “Liquidation”, charges remain ‘Fixed‘ on the value of the company’s assets.
As a director of your own company, you can file a floating charge debenture at companies house over your company when you lend it money. The floating charge document requires submission simultaneously and protects your position if your company becomes insolvent.
Banks and other financial institutions issue debentures to secure their interests when granting finance (if they believe they remain exposed). I registered with a “fixed and floating charge”, then it offers additional security to the bank or financial institution. Therefore, known as “Secured Creditor” in the event of “Insolvency” due to the inclusion of “FIXED”.
The risk to directors and your company
Registered Debenture implements security to a bank normally. Essential as a director that you understand the power afforded to the bank. Once registered, the bank can appoint its “Administrators” in the event the company suffers financial distress.
Can a Director have a division over the assets of my company?
Directors may protect their own limited company by filing a floating charge debenture at Companies House. For this to be legal, you carry this filing out simultaneously to lend money to your company as with a bank.
When you commit to lending your company money, you vote a dividend to you though you do not, then draw it down from your company. Therefore, a floating charge debenture then secures the dividend value. Therefore, if your company enters insolvency, you have a record so that you can be repaid before any unsecured creditor under your floating charge debenture. So, your director’s loan account is paid in full before, say, trade creditors or HMRC.
ENSURE you register your charge at the Registrar of Companies for it to be genuine and not challenged in insolvency.
Therefore, it remains a written contract between you, as the lender to your company, and your company, as the borrower. Debenture, though, does not always introduce clauses enabling you to do so.
Changes in UK Insolvency Law about debentures, registered after 15th September 2003, allow you as the secured lender to appoint an Administrator to your own company,
Can my company have more than one debenture registered?
Debentures requiring dating on the day filed. Then they rank on the date filed (created), unless a lender has arranged a deed of priority.
A negative pledge happens when you wish to give a dividend to another.
Can a debenture have a personal guarantee included?
When a high street bank or another business lender is involved, your lender will advise you they require a guarantee before executing the transaction and filing at the company house. When this takes place, you therefore need to seek independent advice before signature.
Debentures may then be enforced and realised typically due to insolvency. The floating charge assets usually remain set aside for unsecured creditors by an agreed amount.
This therefore ensures that unsecured creditors remain included, so the debenture does not, then encapsulates all the assets.
Floating charges secure preference claims for repayment when your Limited company enters insolvency.
Repayment preference though remains uncertain versus all other creditors. When your company enters insolvency, any receipt of money that becomes free for creditors of the company, remain shared in a set order. The order:
- Secured creditors. They either have a registered legal charge, mortgage, or fixed charge.
- Preferential creditors. Debt owed to former employees. (Arrears of wages and holiday pay).
- Then the “prescribed part” of the sum remaining is held for unsecured creditors.
- Next involves monies left to pay company creditors, which retain a debenture which grants a “floating charge“.
- Lastly. Creditors who have not received payment in any of the above categories, known as Unsecured Creditors. Often include HMRC and trade creditors.
The above demonstrates the security that a debenture gives.
The power to appoint an administrator
Once a debenture has been attached to a company, a floating charge is then registered on the company’s assets. Then the holder, usually in many cases, has the power to appoint an administrator, upon the company defaulting and unable to pay its debts as and when due.
The holder, however, requires no sanction from the court to appoint an administrator.
An administrator then attempts to rescue the company.
The administrator manages the company for the benefit of creditors, and may then sell it to ensure it’s rescued.
If the company in administration may not be rescued, the administrator may consider selling all or part of the assets to pay the creditors.
Registration Of a Debenture in the UK
When you have accepted a debenture charged on your company, you must ensure the charge has been registered at companies’ houses. The law requires registration takes place within 21 days from when created. If you fail to do this, then void.
Therefore, if your business then enters into liquidation, the duly appointed Liquidator may ignore the charge and deal with the entity as “Unsecured”.
A charge void means money secured by the charge, now then becomes repayable by the company immediately.
When a fixed charge has been applied over land, it must be registered at the HM Land Registry.
Details of all charges requiring noting in the companies register maintained at the registered office.
Can You Invest in Debentures?
Investing in debentures shows growth in the UK. However, you should be aware of the associated risks involved. Debentures offer therefore more security than investing in shares.
Debentures compared to shares offer guaranteed payments; additionally, they offer higher interest until matured. So, comparatively, a debenture then makes you money by interest compared to shares, which makes money on share value.
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