They give the lender some control over the company if it becomes insolvent. If the borrower defaults on the loan the lender can appoint their choice of administrator to sell the assets or run the business to get the best value.
A debenture also only allows a company to trade in the normal course of business. It cannot, for example, sell the whole business without the lender’s permission. In that case the buyer would not gain good title to the assets.
The debenture creates a fixed and floating charge. The fixed part of the debenture is a charge on fixed assets such as freehold property or machinery fixed to a factory floor. The floating charge is on assets that change during the normal course of trade such as movable equipment, stock and debtors. You do not have to define the split on making the loan.
If you are advancing new funds into a company, including your own company, you might decide to lend money under a debenture. This gives you more control over the company. A debenture should be drafted by a solicitor and registered at Companies House within 14 days of the loan being made.
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