Debentures: securing a borrower’s obligations to a lender

What is a debenture?

The term debenture is a derivation of the Latin word debere, which means to borrow/owe. Whilst there is no exhaustive definition in legal terms, the Court of Appeal in Fons Hf v (1) Corporal Ltd and another concluded that a debenture has “the ordinary meaning of an acknowledgement of debt recorded in a written instrument”.

In practice, a debenture is a legal instrument used to identify and document how a borrower’s assets will be utilised as security for finance provided by a lender. A debenture can also define the material conditions of the borrowing such as (but not limited to) the loan amount, the interest payable on the loan amount and the enforcement rights of the lender in the event of default.

What does a debenture include?

To secure a borrower’s obligations to a lender, a debenture is an umbrella document which incorporates various security over a diverse range of assets that a business may have at its disposal.  Typically, this will include the following:

• A legal mortgage over any real property owned by the borrower
• Fixed charges over any specific assets such as equipment or cars
• The assignment of any intangible assets owned by the business such as insurance policies and intellectual property rights
• A floating charge over all of the other assets and undertaking of the borrower such as inventory

How can a debenture be enforced?

In the event of the borrower defaulting on payments due under the debenture, the lender has the power to appoint an administrator to take control of the borrower’s business.  The administrator can then realise the borrower’s assets to repay the monies due to the lender.

Advantages and disadvantages of debentures

Advantages:

• As a lender’s risk profile is reduced by obtaining a debenture, borrowers can benefit from larger finance opportunities at competitive rates
• As debentures are registered against the limited company or limited liability partnership (LLP), directors/shareholders/members have protection regarding their personal funds

Disadvantages:

• The borrowing company or LLP will relinquish ultimate control of charged assets to the lender. In the event sale of any charged assets, permission must first be obtained from the lender
• The borrower has no flexibility in their requirement to make mandatory interest payments

If you are considering becoming a lender or borrowing any funds and would like to know more about debentures, please do not hesitate to call the Corporate team on 0113 207 0000.