Lenders often request that borrowers provide security for a loan in the form of a debenture. This note considers practical steps that a borrower needs to take in order to give effective security and attempts to respond to and allay some common concerns.
What is a debenture?
A debenture is a document that creates security over the whole or substantially the whole of a company’s assets. Typically a debenture creates a fixed charge over the assets of the company which are not disposed of in the ordinary course of business and a floating charge over the rest of the company’s undertaking. Often it also creates an assignment by way of security to ensure that the security provided is comprehensive.
One thing to remember about a debenture is that it is both far reaching and all-encompassing. If there are any assets over which a company is not able to provide security, they will need to be specifically carved out from the scope of the debenture.
If a borrower already has a debenture over its assets (sometimes historic debentures get “discovered” by searching Companies House website) then there are a few ways forward. If a debenture is truly historic and no longer secures any obligations then it can just be removed.
Alternatively, an incoming lender may take a second ranking security or negotiate with an existing security holder as to their respective rankings, which would then be documented in an intercreditor or a subordination agreement. A borrower will need to seek consent from an existing security holder as debentures usually contain negative pledge clauses.
Often a lender requires security not only from the borrower, but also from its parent, subsidiary or other companies in the group. The directors of such companies need to consider the corporate benefit carefully, and act in a way that would be most likely to promote the success of the company for the benefit of its members as a whole.
The directors must consider whether giving security which secures the other company’s obligations is justifiable. To achieve comfort, a lender would require at the very least a board resolution confirming corporate benefit and often a shareholders resolution too.
A debenture created by a company or a limited liability partnership needs to be registered at Companies House within 21 days of the document being signed. If a debenture is not registered then the consequences of non-registration is that the security created in the debenture is void against a liquidator, an administrator or any creditor of the company.
In addition to registration at Companies House, security created under a debenture may need to be registered at specific asset registries, such as Land Registry or the Intellectual Property Office.
Notices of security, such as bank notices, notices to insurers or contractors, must be given to the relevant third party. This is done to ensure priority (if notice is given, then this will secure priority over any subsequent security taken over the asset in question) and to create a legal assignment in cases of insurance policies and any contract assignments. The lender’s lawyers usually insist on having the signed notices to the account bank and insurers/relevant contractors as conditions precedent prior to drawdown of the loan in order to protect the lender’s priority position.
Borrowers are often concerned, for reputational reasons, that notices under a debenture are given to their account banks and try to resist giving such notices. However, the notices are usually drafted in a way that allows for the bank accounts to be operated by a company in a normal way until enforcement.
Often clients are concerned by the idea of a debenture, especially in terms of how it may impact them going forward, for example by appearing to cause reputational concerns when notifying third parties, such as insurers or banks. However, it is a common tool which is used in a variety of circumstances. Borrowers should nevertheless note that, once a debenture has been given, no other assets will be available to use as security to raise funds from other lenders; it is therefore important to assess whether a debenture is appropriate for the amount of debt being raised.
Our banking and finance experts regularly advise clients on the use of debentures. If you have any questions, please get in touch firstname.lastname@example.org.