Solicitor Brighton

What are debentures?

Debentures offer an alternative way of investing in a company and give companies a means to raise capital.  They are generally more secure than shares, although a debenture holder will not have a share in the company, will not be entitled to receive dividends and or have any say in the running of the company.

When a company borrows money, the document which evidences the loan is called a debenture.  Like any debt, money borrowed under a debenture is payable at a later date.  The debenture holder can also receive interest.

How are debentures secured?

Typically, dentures will be secured by a charges on the fixed and floating assets of the company.  Naturally there are two types of charges: fixed and floating charges.

A debenture does not necessarily have to be secured by a charge, although it is certainly much safer to do so.

What are fixed assets?

Fixed assets are things which tend to have a permanent feature in the business – property, factories, machinery etc.  A fixed charge is fixed to specified fixed assets.

What are floating assets?

Floating assets are things which change from time to time.  Retail stock would be a typical example of floating assets.  A floating charge will not be fixed to any particular assets but rather over a class of assets.

How does a floating charge ‘crystallise’?

A floating charge will crystallise upon some specified event e.g. liquidation of the company.  When the charge crystallises, the assets against which the charge is secured will freeze and the company will no longer be able to deal with them in the same way they did before i.e. transfer them.

How long do debentures typically last?

It depends on the agreed payment date. Loans under a debenture can be paid at a fixed date or be repayable on demand.

What will typically be included in a debenture?

Debentures typically include:

• The terms and date of repayment of the debt
• Interest – is the rate fixed or does it change in-line with central bank rates?  How frequently is interest paid?
• Terms regarding receivers – if the company fails to pay back the loan, the debenture holder can appoint a receiver in accordance with the terms that have been agreed.  The receiver can take possession of assets covered by any charges related to the debenture and sell the assets to satisfy the debt, so long as the debenture gives a receiver the ‘power of sale’.
• Stipulation as to whether the debenture is secured by charge, what types of charges etc.

Do debentures have to be registered?

Debentures themselves do not have to be registered but any charges related to the debenture do.  Within 21 days of creation, it is the company’s responsibility to have a charge registered at Companies House.  However, the debenture holder will typically register the charges themselves as any failure to do so  will make it void in the event the company defaults on the loan under the debenture.