Debentures are an alternative form of making an investment in a company. They are more secure than investing in shares as interest payments must be made by the company and paid before dividends, which are paid at the discretion of the company.
Debenture holders also become preferential creditors should the company that issued the debenture fail. One disadvantage is that debenture holders have no share in the company and therefore have no control. If a company borrows money it will issue a document confirming the existence and term of the loan – this is the debenture.
Karen Edwards, Commercial Solicitor, says “Under the terms of this document the amount borrowed is payable at a future date. The company has to pay interest to the creditor (the debenture holder) in the same way that people pay interest to banks on their mortgages.”
A creditor may take a charge over some or all of the assets of the company as a precaution against recovering his debt should the company fail. The creditor then has a legal interest in that asset and the company cannot sell it without either first paying off the debt or getting the consent of the debenture holder. This increases the creditor’s chance of being repaid on the insolvency of the business as it has a preferential claim on money from the insolvency.
Although there is no requirement that a debenture must be secured by a charge over some or all of the company’s assets, most debentures will include some form of security.
Once a company has formally entered into a debenture it is their responsibility to register particulars of any charge contained in the debenture to Companies House, and this must be done within 21 days of the creation of that charge. It is in the debenture holder’s interest to ensure that the charge is registered in time as it will become void against a liquidator of the company after the 21 days. In practice it is usually the debenture holder who will register it.
For a free initial meeting please call 01202 499255 and Karen or a member of her team will be happy to discuss any questions you may have.
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