Debentures
Debentures
When loans are made to companies by banks, businesses or individuals the lender will want to ensure that the loan will be repaid. To do this the lender will make sure that he takes some type of security from the borrower. A good example of this type of security is a common mortgage. A bank will lend money to purchase a property and will put a charge over the property being purchased to ensure it can sell the property should the borrower not keep up with the monthly loan repayments.
A debenture is a security like a mortgage which is given to lenders when lenders make loans to companies. It differs from a normal mortgage because unlike a normal mortgage which is “fixed” on the property, a debenture is a “floating charge” and may apply to all of a company’s assets. This may include property, but will also include all stock in trade, intellectual property, debtors and cash in bank. Basically anything the company owns.
A debenture is often called a floating charge because it is not known what the charge will secure itself against until the debenture becomes crystallised by a default by the borrower. Imagine an empty hand always hovering over all of a company’s assets. Obviously these assets will change a lot over the course of a year for the company. Stock will be sold, new machinery brought etc. Once the debenture is crystallised then the empty hand will come down and close around the company. Whatever assets are in the company at the time the hand comes down can be used by the lender as security for repayment of the company’s loan.
Registration
Once the debenture has been created, the borrower company must register the debenture at Companies House within 21 days of the dare of the debenture. This is quite odd because if the debenture is not registered then it will rank behind any other creditor who later registers a charge against the company at Companies House. So although it is the company’s responsibility to register the charge, it is the debenture holder who suffers if the charge is not registered on time.
Therefore to prevent this from happening it is the lender who actually registers the charge on behalf of the company.
Sometimes in the debenture document there will be reference to property owed by the company and a creation of a fixed charge over that land. In these cases then this fixed charge needs to be registered at the Land Registry.
If you are Lender who wants further advice on taking security over loans made to companies or are a company who is being asked to enter into a debenture then we will be able to advise and assist you.
Please contact us now for further information.