A debenture is effectively a charge given by a borrower (usually a company) to a lender in respect of a loan or other facility granted by the lender (the debenture holder) to the borrower.
A debenture usually creates a fixed charge over the assets of the company which are not disposed of in the ordinary course of business. In addition, it usually creates a “floating” charge over the rest of the company’s assets, meaning that the company can continue to trade on a day to day basis.
A debenture given by a company may be registered at Companies House within 21 days of its creation.
If the debenture is not registered within the period allowed it is void as against a liquidator, administrator or secured creditor who subsequently registers a charge. This would obviously be of great concern to the debenture holder as it would effectively render its security worthless. It is therefore very important to ensure that the debenture is registered within the period allowed.
The debenture will usually contain certain provisions limiting the ability of the company to dispose of assets. However, its existence should not prevent the company from trading in the usual manner as it creates only a “floating charge” over the company assets which are disposed of in the ordinary course of business e.g. stock.
A debenture will usually provide that the company must obtain the prior written consent of the debenture holder before granting any further security, even if ranks behind the earlier debenture.
If the company defaults on the underlying facility, then the debenture will generally “crystalise” and the debenture holder will have certain rights pursuant to the terms of the debenture e.g. to appoint a receiver.
Provided that the underlying borrowing has been repaid, it should be possible to have the debenture discharged. This is usually done with the agreement of the lender.
If the company breaches the terms of the debenture it may well be at risk of the debenture taking enforcement action against the company, including calling in any borrowing.
If you need any advice on debentures, please contact a member of our corporate and commercial law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.
To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.
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