What is a debenture? How lenders take security over a company

A debenture is a written acknowledgement of a debt by a company, setting out how interest is paid and how the capital is repaid. That is how the Insolvency Service describes it. In everyday business lending the word is used more narrowly, for the document in which a company gives a lender security over its assets in case the loan is not repaid.

The Companies Act 2006 uses the word widely. There it includes debenture stock, bonds and any other securities of a company, whether or not they create a charge over the company’s assets. So in law a debenture does not have to be secured. When a bank or business lender asks your company to sign one, though, it is asking for security.

This guide covers that lending sense: what the charges mean, how registration works and what the lender can do if things go wrong. It is general information, not legal advice.

No. The loan agreement sets the amount, the interest and the repayments, and the debenture sets what the lender can claim if those repayments stop. One is the borrowing and the other is the security for it.

A debenture has no interest rate of its own. The cost of the borrowing comes from the loan agreement, so secured offers are still compared in the usual way, on the total you will repay. Our guide explains how to compare business loan lenders on cost, terms and security.

The word can also describe bonds and loan stock that a company issues to investors, which is the wider Companies Act meaning. That is a different use, and it is not what a business lender means when it asks for a debenture.

A fixed charge is security over definite, identifiable assets, and a floating charge is security over a changing pool of assets that the company can go on using and selling. A lender’s debenture commonly contains both kinds, and the difference decides what the company can do with each asset and how the lender ranks later.

A floating charge is said to hover over the assets until some event occurs, or some act is done, that causes it to settle. This is called crystallisation. From that point the company can no longer sell the charged property without the charge holder’s consent.

A charge created by a company has to be delivered to Companies House within 21 days, and the 21 days start the day after the charge is created. Companies House describes a charge as the security a company gives for a loan, and a mortgage is one type.

• Who files. Any person interested in the charge can register it. In practice that is usually the lender or its solicitor.
• The form. Form MR01 registers a charge created by an instrument, which is what a debenture is.
• The fee. Registering a charge costs £14 online and £24 on paper.
• If the deadline is missed. The charge can then be registered only with a court order. Only the court can extend the time.

Registered charges are public. The free Companies House service for looking up a company includes its mortgage charge data, so a supplier, a buyer of the business or another lender can see that a charge exists. Lenders also differ in the security they ask for, so read how several business lenders compare before you accept the first offer. Limited liability partnerships register charges on their own separate forms.

A charge is satisfied when the debt it secures is paid off, and the public record can then be updated to show it. Form MR04 is a statement that a charge has been satisfied in full or in part. Form MR05 records that property has been released from the charge.

Filing is not compulsory. Companies House says you do not have to tell it when a charge is satisfied, and also warns that satisfied charges left outstanding on its records could have a negative effect on your company. Ask the lender to confirm the release in writing when you repay, then check the register.

The holder of a qualifying floating charge can appoint an administrator of the company. Under the Insolvency Act 1986 a lender qualifies where its security, including at least one qualifying floating charge, covers the whole or substantially the whole of the company’s property.

Administration changes who runs the business:

• The administrator must be an insolvency practitioner.
• Control of the company and its assets passes to the administrator.
• The company is protected from legal action by people or organisations it owes money to.

The events that allow the lender to act are set out in the debenture and the loan agreement. Read the default clauses as carefully as the price.

It depends on the charge. A fixed charge holder is paid from the proceeds of the assets under that charge, while a floating charge holder is paid only after several other claims. In outline, these are met first from floating charge assets, after the costs of the insolvency:

• Preferential debts. Ordinary preferential debts, which include certain employee claims, rank first. Secondary preferential debts follow. Both have priority over the holder of a floating charge.
• HMRC’s secondary preferential debts. For insolvencies starting on or after 1 December 2020, these are VAT, PAYE Income Tax, employee National Insurance contributions, student loan repayments and Construction Industry Scheme deductions. Corporation Tax and employer National Insurance are not included.
• The prescribed part. Where the floating charge was created on or after 15 September 2003, a share of the company’s net property is set aside for unsecured creditors: 50% of the first £10,000 and 20% of the rest, capped at £800,000. The older £600,000 cap still applies to a first-ranking floating charge created before 6 April 2020.

Unsecured creditors otherwise rank behind the floating charge holder, and shareholders come last. This is an outline drawn from the legislation, not a full order of priority. An insolvency practitioner can explain how it applies to a particular company.

It is one reason unpaid VAT and PAYE matter to a secured lender. If tax arrears are building, look early at a Time to Pay arrangement with HMRC.

A debenture is security given by the company over the company’s assets. A personal guarantee is a promise by an individual, usually a director or owner, to repay the loan personally if the business defaults or becomes insolvent.

The distinction matters because a limited company’s owners are normally responsible for its debts only up to the value of their investment. A debenture leaves that position alone. A guarantee does not, because the person who signs it takes on the guaranteed debt personally. Lenders may ask for one, the other or both, so read our guide to personal guarantees for business loans before you agree to the second.

Asset finance works differently again. Under a hire purchase agreement the lender owns the vehicle or machine until the agreement is completed, so its security is the asset itself.

Check what the document covers and what it stops the company doing, because a debenture lasts as long as the borrowing does. The points that catch businesses out are these:

• Scope. Whether the charges cover named assets or all of the company’s assets, present and future.
• Consent. What the company would need the lender’s agreement for, such as selling a charged asset or giving security to someone else.
• Triggers. The events that let the lender enforce, and those that crystallise the floating charge.
• Existing charges. What is already on the register against the company. A new lender will look, and an old satisfied charge still showing can raise questions.
• Other security. Whether a personal guarantee is being asked for alongside the debenture.
• Release. How and when the lender will release the charge, and who updates Companies House.

A debenture is not always the right price for the money. For a small or short-term need, security over everything the company owns may be more than the borrowing justifies, and it can limit what a later lender is able to offer. Have a solicitor read the document before the company signs.

Capzy is a credit broker, not a lender, and gets paid by the lender. We introduce businesses to lenders, and it is the lender that decides what security it needs, including whether it asks for a debenture.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and all funding is subject to status and lender criteria. Capzy does not give legal advice.