If a private loan is given by a lender to help finance a business, then there are different types of charges that the lender may take under the loan documentation (“Debentur”) and each has a different possible effect on the business.
The lender will also want some form of “security” in exchange for giving the loan, which is designed to protect the lender’s position in the event the borrower fails to repay the loan.
This two-part guide attempts to provide a brief outline of what a Debenture is and the types of charges involved with it.
What is a Debenture?
This is the document that records the details of the parties to the loan and it sets out the type of charge the lender will have (i.e. “fixed” or “floating” charge) over the assets of the business (the “borrower”) and the terms and conditions of the agreement.
The types of Charges
Fixed Charges – If the lender has provided money to acquire an asset, then the lender will have a fixed charge over the asset which will prevent the borrower from selling that asset(s) without the lender’s permission. In order to sell or dispose of the asset, the borrower will usually need to repay the loan. The fixed charge scenario is similar to when a person takes a mortgage to buy a house. The mortgage is effectively a form of fixed charge. In this situation the borrower does not own the house outright until the debt is repaid in full, and s/he cannot sell the property without the lender’s permission. Another example would be the assignment of a business’s debtor book through factoring or invoice discounting.
In Part 2, I will outline the “Floating Charge” and the registration requirements where the borrower is a company in the England.
NB – Please note that the above should not be taken as legal advice. If you would like legal advice for a Debenture, then please contact our Commercial Department and speak to one of our solicitors advice and assistance.