A debenture is a loan agreement in writing between a borrower and a lender registered at Companies House.
A debenture is a legal charge and gives the debenture holder (the lender) security over the borrower’s assets. Typically, a debenture is used by a bank, factoring company or invoice discounter to take security over a limited company.
However, a director who has invested or lent money into their own company could take a debenture to secure the loan. A private lender can also take a debenture.
How does a debenture holder enforce their security?
A debenture holder has the right to appoint an Administrator to take control of the company if it defaults on the loan. This follows the lender calling in the loan for repayment. The threat of appointing an Administrator can often be enough to make a company repay the debt or agree terms to repay it.
How does the debenture holder get their money back if the company becomes insolvent?
The Administrator or Liquidator must hand over assets caught by the debenture to the lender. Usually the lender agrees for the Administrator or Liquidator to sell the assets for them for a fee. Assets can be in two classes. The first class are assets caught by the fixed charge such as book debts under a factoring agreement or freehold or leasehold property. The second class is floating charge assets – these are items not caught by the fixed charge of the debenture and are typically movable assets or assets needed to trade e.g. stock, equipment, furniture, computers.
I thought my debtors were a floating charge asset?
Debtors can fall into the fixed asset category under a factoring or invoice discounting agreement. This is because the lender has a lot more control over the debtors. Otherwise they are normally a floating charge asset.
Do other creditors have priority overfloating charge assets?
Yes, some creditors have a priority claim called a preferential claim. This includes arrears of employee wages. In addition, a Liquidator or Administrator can be paid their fees and expenses from floating charge asset realisations but not fixed charge assets without the lender’s agreement.
How do I know if the bank or lender had registered a debenture against my company?
You will have had to sign the debenture as a director. Once the debenture is signed it will be filed at Companies House and you can use the Companies House website for free to find your company and look under the heading of charges. This will list any debentures charged on your company in date order.
Can I have more than one debenture registered on my company?
Yes, that is possible. The debentures then usually rank in order of the date created unless one lender has given another a deed of priority. Sometimes you will find a previous lender who has been repaid has not removed their debenture. You should ask them to remove it.
What is a negative pledge?
That is an agreement not to give a debenture to someone else.
Does a debenture give a lender a lot of control over my company?
Yes, if you default on the loan. They can appoint an Administrator or block you appointing your own choice of administrator or stop you going into liquidation. The debenture holder does not normally get involved in your day to day trade though.
Do I need the debenture holders consent to sell assets?
Yes, if the sale is out of the normal course of trade. For example, selling a building or part or all of the business would count as out of the normal course of trade and need the lenders consent. It can be a surprise to a director who sells the business to find the sale maybe invalid.
Does a debenture contain a personal guarantee as well?
Often yes if issued by a high street bank or other business lender. You will have had to sign a personal guarantee and if you are unsure you will need to check with the lender. Normally the lender will ask you to take independent legal advice if you are signing a guarantee.
What is a prescribed part of the debenture?
When a debenture crystallises – for example because of insolvency – then floating charge assets can be used to have a portion set aside for unsecured creditors.
This rule was brought in to give something back to unsecured creditors where there is a debenture that would have caught all the assets.
How do I know if the debenture is valid?
Normally you would ask a solicitor to check its validity. Funds must be advanced at the same time as the debenture is created and registered to be valid. There is a 14-day time limit to do this.
Will the bank block me from appointing my own choice of Administrator?
It depends usually on the level of debt and how you have behaved. Many banks have a panel limit. If the debenture debt is over £250,000, they will want their own choice of Administrator not the one your chose. They may also want to avoid you using an insolvency firm that is too small.
The bank or lender will then negotiate the fees paid to the Administrator. The Administrator will need the consent of the lender for any fees taken from assets covered by the fixed element of the charge.
What is a Notice of Intention to appoint?
Under a debenture you must give five clear business days’ notice of your intention to appoint an Administrator. The bank or lender may then decide on appointing their own choice of Administrator.
Do I need the debenture holders’ consent for a pre-pack Administration?
Usually yes because the sale of the assets is outside the normal course of trade. Sometimes the lender will ask what the plan is for the outcome of Administration. If they find out the plan is a pre-pack back to the existing shareholders or directors they may block that by appointing their own choice of Administrator.