What is a Debenture?
A Debenture is essentially an agreement by a company to pay to the lender any money owing on the terms on which the company has already agreed under the charges over individual properties etc. The company’s promises to repay, insure, repair etc are repeated in the Debenture so the bank can operate its rights under the Debenture if for any reason the company does not comply with its obligations.
Lenders like to have a Debenture once lending reaches a certain level as it gives them advantages if the company has financial difficulties in the future and defaults on its payments, for example, the authority to appoint an administrator or administrative receiver with wide powers to run the company’s business and realise its assets. In an insolvency or liquidation, a floating charge such as that contained in most Debentures gives a lender priority over unsecured creditors when it comes to the allocation of repayments.
Most Debentures will include a fixed charge over all of the company’s property assets, any plant and machinery, the benefit of insurance, money in bank accounts, book debts etc.
Debentures also include a floating charge over the rest of the company’s undertaking. The ‘floating’ nature of the charge allows these assets to change over time, so the company can sell trading assets during the normal course of business without needing the lender’s consent. It is only when the lender looks to enforce the debenture in a default situation that the floating charge ‘crystallises’ and effectively becomes a fixed charge. If this arises, the company will no longer be able to deal with its trading assets without permission from the lender.
If you have queries regarding Debenture and would like some advice then please contact Laura Sainsbury, Senior Associate on 020 8280 2712.