What is A Debenture?
What is A Debenture – A legally binding agreements 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 assets of the company.
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 at the same time 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 are exposed). If 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 runs into financial distress.
Can a Director have a debenture over assets of my company?
Directors may protect their own limited company by filing a floating charge debenture at Companies House. In order for this to be legal, you carry this filing out at the same time 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, the dividend value due is then secured by a floating charge debenture. Therefore if your company enters insolvency, then you have a record, so you may be repaid prior to 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 Registrar of Companies for it to be real and not challenged in insolvency.
Therefore, it remains a written contract among 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 pertaining to debentures, registered after 15th September 2003 allow you as the secured lender though 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 then wish to give a debenture on your company to another.
Can a debenture have a personal guarantee included?
When a high street bank or another business lender involved. Your lender then will advise you they require a guarantee before executing the debenture, and filed 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 are set aside for unsecured creditors by an agreed amount.
This, therefore, ensures unsecured creditors remain included, so the debenture does not, then encapsulate all the assets.
Floating charges secure preference claims for repayment when your Limited company enter insolvency.
Repayment preference though is not certain 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 is:
- Secured creditors. They either have a registered legal charge, mortgage, or a 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, and 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 unable to pay its debts as and when due.
The holder, however, requires no sanction from the court’s 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, then 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, therefore, ensure the charge has been registered at companies house. The law requires that registration then takes place within 21 days from when created. If you fail to do this, then void.
Therefore if your business then enters into liquidation, then 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 has to 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. Though you should be aware then of 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, by comparison, a debenture then makes you money by interest compared to shares which make money on share value increase.