What is a debenture?
A debenture is an instrument used by a lender, such as a bank, when providing capital to companies and individuals. It enables the lender to secure loan repayments against the borrower’s assets – even if they default on the payment.
A debenture can grant a fixed charge or a floating charge. A fixed charge is normally taken out against a tangible asset such as property. It enables the lender to take ownership of the borrower’s assets and sell them off in the event of a payment default. With a fixed charge, the borrower would not be able to sell the asset without the lender’s consent. That agreement then gives the lender security over the assets subject to that charge, which means that they have priority over other creditors in respect of those assets.
Can I have a debenture over the assets of my own company?
As a director of your own company you can achieve considerable protection against any later insolvency of your company 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.
For your charge to be valid it must be lodged ("registered") with the Registrar of Companies within set time scales and must also satisfy certain other basic requirements.
In essence, however, it is a written agreement between you, as lender, and your company, as borrower. A debenture does not always include a clause that you as the lender can appoint a receiver but more often that not such a clause is included in the agreement. Because of a change in insolvency law for debentures created after 15th September 2003 you as a secured lender can only appoint an Administrator to your company rather than an Administrative receiver.