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A debenture is the traditional name given to a loan agreement where the borrower is a company. Typically, a debenture will set out the terms of the loan: the amount borrowed, repayment terms, interest, charges securing the loan, provisions for protecting and insuring the property etc., and terms for enforcement if the company defaults. Debentures are usually secured by charges on the company’s property, but do not have to be. There are different types of charges. Debentures, as such, do not have to be registered, but charges securing them do.

Fixed and floating charges are used to secure borrowing by a company. Such borrowing is often done under the terms of a debenture issued by the company. Charges on a company’s assets must be registered at Companies House and may also need to be registered in some other way, e.g. a charge on land and buildings must also be registered at the Land Registry.

A fixed charge is a charge or mortgage secured on particular property, e.g. land and buildings, a ship, piece of machinery, shares, intellectual property such as copyrights, patents, trademarks, etc.

A floating charge is a particular type of security, available only to companies. It is an equitable charge on (usually) all the company’s assets both present and future, on terms that the company may deal with the assets in the ordinary course of business. Very occasionally the charge is over just a class of the company’s assets, such as its stock.

The floating charge is useful for many companies, allowing them to borrow even though they have no specific assets, such as freehold premises, which they can use as security. A floating charge allows all the company’s assets, such as stock in trade, plant and machinery, vehicles, etc., to be charged.

The special nature of the floating charge is that the company can continue to use the assets and can buy and sell them in the ordinary course of business. It can thus trade with its stock and sell and replace plant and machinery, etc. without needing fresh consent from the mortgagee. The charge is said to float over the assets charged, rather than fixing on any of them specifically. This continues until the charge ‘crystallizes’, which occurs when the debenture specifies. This will include any failure to meet the terms of the loan (non-payment, etc.), or if the company goes into liquidation, ceases to trade, etc.

When the charge crystallizes it fixes on the assets then owned by the company, catching any assets acquired up to that date, but missing any which have already been disposed of. The debenture-holder may appoint an administrator whose job is to collect the assets charged to pay off the loan.

Can I have a debenture over the assets of my own company?

As a director of your own company you can obtain a debenture (floating charge) over the assets of your own company and in consequence obtain priority of repayment of your director’s loan account on any winding up of your company.

You can achieve considerable protection against any later insolvency of your company and benefits by filing a floating charge debenture at Companies House. The floating charge debenture document must be filed at the same time as you lend money to your company.

For instance you lend money to your company when a dividend is voted and you do not draw on that dividend at the time. The amount then owed to you can be protected by a floating charge debenture. The debenture document records that in any liquidation or any other insolvency process you will be repaid from company assets before any unsecured creditors under what is known as your floating charge debenture.

This means that your director’s loan account, when secured by a debenture, has to be repaid in full out of company assets in any insolvency before VAT, PAYE and trade creditors receive one penny.

The repayment priority is not absolute as against all other creditors. On the insolvency of your company the monies that become available for creditors are distributed in a set order. That repayment order is as follows:
– firstly to secured creditors. Secured creditors hold either a legal mortgage, a legal charge or a fixed charge;
– secondly to preferential creditors. Preferential creditors in the main are amounts due to employees for arrears of wages and holiday pay;
– then the sum remaining is paid to creditors such as you who hold a debenture which grants a “floating charge”;
– lastly to creditors who do not fall into any of the above categories. These reaming creditors are called “unsecured creditors”. Unsecured creditors include VAT, PAYE, CIS Tax, NI, Corporation tax, trade creditors and expense creditors. From this you will appreciate that “unsecured creditors” are often the main group of creditors in any insolvency.

Marek Niedźwiedź