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.
In this part (2 of 2) guide will provide a brief outline of the “Floating Charge” and the registration requirements where the borrower is a company in the England.
Floating Charges – If a lender provides a general loan to a business to help it generate business, then a general type of charge is required which can cover a wide variety of assets and/or stock of the company, such as the fixtures and fittings, cash, stock, finished or raw materials, work in progress, unfactored debtors, assets not subject to fixed charges, or changing assets. In a situation such as this, it is not practical to place a fixed charge over each item of asset and/or stock.
Crystallisation of the Floating Charge
The floating charge will become, or crystallise into, a fixed charge over specific assets when a certain event occurs, in accordance with the terms and conditions in the Debenture deed. Under English Law, it is an implied term that crystallization will automatically occur when the business is unable to deal with the assets in the ordinary course of business. Most agreements contain default terms which define when crystallization will occur, such as for example, non-payment of the debt, invalidity of any of the lending or security documents, liquidation or insolvency.
Where the borrower has had more than one loan, then a Deed of Priority will be required, which will set out the order of priority of the loans, in the event of a default.
Sometimes an existing lender will require a Deed of Postponement to be signed by another new lender, so that the existing lender’s debt is services and/or repaid first.
Registering the Debenture
Where the borrower is a company, then the Debenture must be registered with the Companies House. The lender must send the original debenture deed and loan deed with the relevant Form and fee to Companies House. This must be done within 21 days of the date of the Debenture deed.
It is important that the Debenture is registered at Companies House as this will notify other parties obtaining a higher ranking security against the business/company.
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.