What is a Debenture?

Debentures are an instrument available to business lenders in the UK, allowing them to secure loans against borrowers’ assets. Put simply, a debenture is the document that grants lenders a charge over a borrower’s assets, giving them a means of collecting debt if the borrower defaults.

Fixed charge – With this type of charge, a lender can ensure it is the first creditor to recoup any outstanding debt if a borrower defaults on a loan. In essence, it grants the lender possession and ownership of a borrower’s asset in the event of non-payment, with any subsequent sale being used to pay off the remaining debt. The most common form of fixed charge is against property.

Floating charge – A floating charge can be attached to all of a company’s assets, or specific classes of asset, including stock, raw materials, debtors, vehicles, fixtures and fittings, cash, and even intellectual property. The ‘floating’ nature of the charge means these assets might change over time, with the borrower able to move or sell any assets during the normal course of business.

Debenture -  Paper work with graphs and figures

It is possible for a lender – or lenders – to have multiple debentures on the same borrower. These can either be multiple fixed debentures against different specific assets, multiple floating debentures, or a mixture of both. When the first lender places a debenture on the company, they often prevent a second lender adding another without their consent.

Where there are multiple lenders with debentures that have recourse against the same borrower’s assets, the lenders will agree priority of payments between themselves. This is usually documented between the lenders and borrower by way of a Deed of Priority.

Finance Act 2020

Under the finance act 2020, HMRC regained its status as preferential creditor for insolvencies which commenced after 1st December. This now means HMRC will now receive funds that would previously of been shared equally between unsecured creditors. 

The change means any lender with a floating charge or unsecured creditors will be leapfrogged.