What is a debenture?

A debenture is a legal document that gives a lender security over a company’s assets, through fixed charges over named assets and a floating charge over the rest. It must be registered at Companies House, and it decides where the lender stands if the company becomes insolvent.

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What a debenture does

A lender asks for a debenture when it wants security over the whole business. The document sets out the charges the company gives, the debts they secure, the promises the company makes while the money is owed, and what the lender can do if the company breaks them.

The debts secured are often every sum the company owes the lender, now or later: an all monies debenture. The company promises not to give security to anyone else without the lender’s consent, to keep the assets insured, and to supply accounts. If the company defaults, the debenture lets the lender demand repayment and enforce its charges.

A lender holding a qualifying floating charge, one that covers the whole or substantially the whole of the company’s property, can appoint an administrator out of court under the Insolvency Act 1986. That gives it a strong hand if the company gets into difficulty.

Fixed and floating charges

Fixed charge
Security over a named asset, such as a property, a machine or the company’s goodwill. The company cannot sell or dispose of it without the lender’s consent.
Floating charge
Security over assets that change in the course of trade, such as stock and cash. The company deals with them freely until the charge crystallises.
Crystallisation
When the floating charge fixes on the assets the company holds at that moment, on an event the debenture sets out, such as insolvency or the lender’s demand.
Negative pledge
The company’s promise not to give security over its assets to anyone else without the lender’s consent.
All monies
Security for every debt the company owes the lender, present and future, and for more than one loan.

The order of payment on insolvency

Source: HM Revenue and Customs as a preferential creditor, gov.uk. The tax debts rank as secondary preferential in insolvencies that began after 1 December 2020. Penalties and interest on them rank with unsecured debts.

The prescribed part

Illustrative example

A company in liquidation has £500,000 left from assets under a floating charge after the costs and the preferential creditors are paid. The prescribed part is 50% of the first £10,000 and 20% of the rest, up to a maximum.

50% of the first £10,000
£5,000
20% of the remaining £490,000
£98,000
Prescribed part for unsecured creditors
£103,000
Left for the floating charge holder
£397,000
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Registration at Companies House

Each charge a debenture creates must be delivered to Companies House for registration. Section 859A of the Companies Act 2006 allows 21 days, beginning with the day after the charge is created. If it is not delivered in time, the charge is void against a liquidator, an administrator and the company’s creditors (section 859H). The money stays owed, but the lender loses its security. The court can extend the period (section 859F).

The prescribed part has had a maximum of £800,000 since 6 April 2020, for floating charges created on or after that date, and £600,000 before it. A net property figure of about £3,985,000 reaches the £800,000 cap.

Before you sign one

Read the negative pledge. It means the company cannot give security to another lender, including an asset finance provider, without asking first. If you plan to finance equipment or take invoice finance later, ask the lender now whether it will agree to release those assets or sign a deed of priority with the other lender.

Check whether a personal guarantee is being asked for alongside the debenture. The debenture puts the company’s assets behind the loan, and the guarantee puts yours. Read what a personal guarantee means for a director.

When the debt is repaid, ask the lender to confirm in writing that nothing is owed under the debenture, then file form MR04 so the charge shows as satisfied. Removing a satisfied charge explains the filing.

Questions people ask

Is a debenture the same as a personal guarantee?

No. A debenture is security given by the company over its own assets and registered at Companies House. A personal guarantee is a promise by a director to pay the company’s debt from their own assets, and it is not registered against the company. A lender can take both for the same loan.

Can a company give more than one debenture?

Yes, with the first lender’s consent if its debenture contains a negative pledge. Where two lenders hold charges over the same assets, they sign a deed of priority or an intercreditor agreement to settle who is paid first. Without one, the law sets priority by the type of charge and the order of creation.

What happens to a debenture when the loan is repaid?

An all monies debenture continues while the company owes the lender anything, including an overdraft or card facility. When everything is repaid, ask the lender for a written release and file form MR04 at Companies House so the charge shows as satisfied.

Does a debenture give the lender my house?

No. A debenture charges the company’s assets. Your home is at risk only if you give a personal guarantee and the lender enforces it against you, or if you charge your property to the lender directly. Check what you are signing in each case.

What is a qualifying floating charge?

A floating charge that covers the whole or substantially the whole of a company’s property, created by a document that gives the lender the power to appoint an administrator. Its holder can appoint an administrator out of court if the company defaults.

Should I take a secured or unsecured business loan?

A secured loan gives the lender a charge over an asset, such as property, equipment or everything the company owns, and that security can support a larger loan over a longer term. An unsecured loan has no charge over a named asset, and a lender can still ask a director for a personal guarantee. The full answer.

How do I remove a satisfied charge at Companies House?

You file form MR04, a statement of satisfaction, at Companies House. The charge then shows as satisfied on the company’s public record, so a lender, a buyer or a supplier reading the register can see the debt behind it has been repaid. The full answer.

What happens if my business cannot repay a loan?

Missed repayments put the loan into default. The lender can demand the whole balance, enforce its security, call on any personal guarantee and, if the company still cannot pay, use insolvency procedures. Talk to the lender before the first missed payment, and take advice from a licensed insolvency practitioner if the company cannot pay its debts as they fall due. The full answer.

Secured business loans

A secured business loan is backed by a charge over property, equipment or the company’s assets as a whole, which the lender can sell if the loan is not repaid. Security lets a lender offer larger sums, longer terms and lower pricing than unsecured lending. In return the charged assets, and often a director’s personal guarantee, stand behind the debt. The full answer.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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