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What’s a Debenture?

What’s a debenture? Written by John A Waller. Director. We reviewed October 25th,2022.

  • A debenture remains a legally binding agreement between a willing lender and a borrower, registered at “Companies House,” noted against your  Company’s assets.
  • Corporations often use debentures as long-term loans.
  • 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.
  • A debenture remains a type of debt instrument.

As a company 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.

Types of Debentures

  • Secured and Unsecured:

Secured debenture creates a charge on the company’s assets, thereby mortgaging the company’s assets. Unsecured debenture holds no charge or security on the company’s assets.

  • Registered and Bearer:

A registered debenture remains a debt instrument filed and recorded in the register of debenture holders of the company. To process their transfer, a regular instrument of transfer is required. However, a debenture transferable by delivery remains referred to as a bearer debenture.

  1. Convertible and Non-Convertible:

The conversion of convertible debentures happens into equity shares after the expiry of a certain period. However, a non-convertible debenture cannot be converted into equity shares.

  1. First and Second:

A debenture repaid before the other debenture remains known as the first debenture. The second debenture is paid after the first debenture has been paid back.

What is a Debenture – loan-Secured.

Banks and other financial institutions issue debentures to secure their interests when granting finance (if they believe they remain exposed).The entity which holds the debenture is refereed to as a Debenture Holder. If registered with a “fixed and floating charge,” which 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 Company Directors and Your Company

Registered Debenture implements security to a bank normally. It remains essential as a company 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 Company Director have a Debenture over the assets of my company?

Company Directors may protect their 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 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 does not always introduce clauses enabling you to do so.

Changes in UK Insolvency Law about debentures, registered after September 15th 2003, allow you as the secured lender to appoint an Administrator to your own company,

Can my company have more than one debenture registered?

Yes.

Debentures requiring dating on the day filed. Then they rank on the date filed (created) unless a lender has arranged a deed of priority.

Negative pledge?

A negative pledge happens when you wish to give a dividend to another.

Can a debenture have a personal guarantee included?

Possibly!

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.

Treasury Bonds

Treasury bonds are debt securities issued by the UK government in order to finance government spending. You’re loaning money to the government by purchasing a bond at an interest rate usually over a long term and a see maturity date. The UK government will agree to pay you a fixed interest rate on your investment for a set duration of time.

Prescribed part

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.

The prescribed part therefore, ensures that unsecured creditors remain included, so the debenture does not then encapsulate all the assets.

Repayment Priority

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 the company’s creditors remains shared in a set order. The order:

  1.  Secured creditors. They either have a registered legal charge, mortgage, or fixed charge.
  2.  Preferential creditors. Debt owed to former employees. (Arrears of wages and holiday pay).
  3. Then the “prescribed part” of the sum remaining remains held for unsecured creditors.
  4. Next involves monies left to pay company creditors, which retain a debenture which grants a “floating charge“.
  5. 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.

What is the difference between Fixed and Floating Charges

The difference between fixed and floating charges.

  • Fixed charges relate to physical, identifiable assets. Assets secured with a fixed charge may only be sold with the lender’s authority.
  • Floating charges stay flexible and apply to business assets as a whole

The power to appoint an administrator

Once a debenture has been attached to a company, a floating charge 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 being 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.So  company directors must understand the process of  going into administrator.

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 charge on your company, you must ensure the charge has been registered at companies’ houses. The law requires registration to take place within 21 days from when created. If you fail to do this, then void.

Therefore, if your company liquidates, the duly appointed liquidator may ignore the charge and treat the company as “unsecured.”

So a competent company director must undesrstand what is a business  insolvency in the UK.

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 provide higher interest rates until they mature. So, comparatively, a debenture then makes you money by interest compared to shares, which makes money on share value.

Contact HBG Advisory on 0800 612 5547 Seven days a week. 8 am to 8 pm, or click VIRTUAL and arrange a safe, confidential virtual meeting online.

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