Debenture/loan - what's the difference?

[eteb3]

If a company issues debentures these need to be registered, right? So does anyone know the difference between a debenture and an ordinary loan?

The usual answer I hear is "a debenture is secured". But the Companies Act gives a really wide definition to debentures, and it includes "any ... securities of a company, whether or not constituting a charge on the assets of the company".

I'm trying to avoid the hassle of registering debentures - obviously would take appropriate security precautions in lieu. (If possible would also like the freedom to issue bearer documents*---with extreme caution.)

Can this be done without falling within the Companies Act definition of a debenture? Or in other words there any loan document that is not also a "security"?

Context: I'm a charity trustee looking to raise a lot of capital for a building purchase. At least some of that will probably have to come from loans, hopefully from supporters, on favourable terms.

Thanks.

*Something like this, though I can imagine regulations may have got a weeny bit more complex since it was issued.

 

[Ozzy]

Not sure how much detail you want to go into; simply put a debenture holder can start the winding up for a company and the fire sale of all its assets if they have reason to believe they are not going to get their money (loan) paid back.

 

[Ian J]

If a company issues debentures these need to be registered, right? So does anyone know the difference between a debenture and an ordinary loan?

The usual answer I hear is "a debenture is secured".

A debenture isn't secured as it is the security itself whereas a loan can be unsecured or secured by personal guarantee or by a charge (also known as a debenture) on assets

 

[Lisa Thomas]

If the debtor enters insolvency proceedings, an ordinary loan will rank as an unsecured creditor and is unlikely to be repaid.

In order to have priority over the unsecured creditors, a debenture needs to be validly registered at Companies House and funds lent after the charge has been created.

 

[eteb3]

Thanks for all these replies. I think where I'd misunderstood is that a debenture doesn't have to have a charge associated with it - I think these are called 'naked debentures'? But a holder of a naked debenture still has better control over the company if the company defaults than if they were an 'ordinary' lender.

I've also gathered from Prof. Google that naked debentures are almost unheard of in the UK - which is presumably why whenever anyone in the UK says 'debenture' they mean it has either a fixed or floating charge, even though the Companies Act says a deb. needn't have a charge. (And I think Ian J is right: the debenture is a form of security in itself, charge or not, bc you have rights to appoint an administrator.)

Thanks for all replies.

 

[Gyumri]

"Or in other words there any loan document that is not also a "security""

Yes - its called a bond.
"A bond is a fixed-income investment that represents a loan made by an investor to a borrower, ususally corporate or governmental."

You can issue unsecured or secured bonds for your purpose. The bond holder sits back and does nothing. You can pay interest on the bond or not - depending on the terms of the bond - and set the redemption date if there is one and make it transferable or not.

It a great shame that there aren't bond platforms for buying or selling bonds in the UK as many companies would be able to attract badly needed investment. The AIM market and stock exchange offers very limited opportunities for investors whereas there are many exicting companies who could offer a return to investors who hardly earn 1% on their money in a bank.
Look up mini-bonds:
https://www.fscs.org.uk/news/investing/mini-bonds-should-you-invest/

 

[eteb3]

Looks like it's worth investigating. FCA seems to suggest mini-bonds are securities, though: see "Chapter 2: Overview of the NTDS market" here.

 

[Gyumri]

They are like retail bonds debt securities but are not regulated so stringently as shares or other securiities which provide security over a company's assets. You can buy a bond for example which entitles the bondholder/investor to a crate of whiskey each year rather than a monetary return. The investment is used to develop the whiskey and the bondholder and company are both happy bunnies.

 

[eteb3]

This is interesting: https://www.franciswilksandjones.co.uk/registration-of-debentures/

TLDR:

• when a charge becomes void, the money secured by it becomes repayable immediately by the company;

@Lisa Thomas , how would a charge become void? is it as simple as not registering the debenture properly? guessing a lender would want to have a lawyer do all this, not a question of just reading up on it and following the process?

 

[Gyumri]

Companies Act: 859H (4) "Subsection (3) is without prejudice to any contract or obligation for repayment of the money secured by the charge; and when a charge becomes void under this section, the money secured by it immediately becomes payable."

So the onus is on the company to register the charge - if it doesn't the charge is immediately enforceable. That's a risk for the company if it doesn't register the charge.

 

[eteb3]

Gotcha, thanks. Just one quibble - I think once the window for registration closes, the charge is void and unenforceable. So while the money is repayable immediately, the creditor is unsecured.

 

[Gyumri]

I think you are right as far as the charge being voided is concerned. If its not registered it is not protected as against a liquidator or administrator who could dispose of the charged asset. The debenture holder would however still have a right to claim their money from the company on demand or I suppose per any contract.
There's also plenty of advice on the internet:

If your security becomes unregistered at Companies House, is it void, including as against an administrator? - Stevens & Bolton LLP

For a lender, it is imperative that any English security that is granted over a corporate borrower s assets is registered at Companies House. Section 859H of the...

www.stevens-bolton.com

 

[Ian J]

So the onus is on the company to register the charge - if it doesn't the charge is immediately enforceable. That's a risk for the company if it doesn't register the charge.

No. It is up to the lender who has taken the charge to register it. If it were up to the company no-one would actually register it would they?

 

[Gyumri]

The Form MR01 can be delivered to the registrar by any person. A prudent lender would certainly ensure that they register the debenture. However, on the other hand if the company undertook to register it but didn't, do so, that would leave the company exposed to the risk that the lender could then call for the loan, which might have been obtained for a term of years, to be repaid on demand.

If I were a company director with a viable business I wouldn't want to take that risk with my business by providing the lender/investor with a pretext for calling in the loan on demand simply because I forget to deliver the documents to companies house. I would make doubly sure that the debenture was registered.

So it works both ways.

 

[Ian J]

The Form MR01 can be delivered to the registrar by any person. A prudent lender would certainly ensure that they register the debenture. However, on the other hand if the company undertook to register it but didn't, do so, that would leave the company exposed to the risk that the lender could then call for the loan, which might have been obtained for a term of years, to be repaid on demand.

If I were a company director with a viable business I wouldn't want to take that risk with my business by providing the lender/investor with a pretext for calling in the loan on demand simply because I forget to deliver the documents to companies house. I would make doubly sure that the debenture was registered.

So it works both ways.

I'm happy to defer to your greater experience of working with debentures and charges

 

[Gyumri]

Hello Ian - I think we are singing from the same hymn book (hope I am allowed to use that phrase on an open forum - it is Christmas after all). The poster is a charitable trustee "looking to raise a lot of capital for a building purchase. At least some of that will probably have to come from loans, hopefully from supporters, on favourable terms." I would think that issuing bonds (ie., IOU') would be an efficient and simple way to raise money. I stand to be corrected however if the opposite proves to be the case. "Wonders never cease."

 

[eteb3]

Looping back here, seems I'd misunderstood what is meant by 'registration' of debentures. You don't have to keep a register, but we surely would in order to keep track of them all.

You *don't* have to register them with the Registrar: you just have to update the company's own register (of debentures). At least, that's what I understand to be the case.

Since we'd be doing that anyway, no extra hassle.

 

[Lisa Thomas]

No. It is up to the lender who has taken the charge to register it. If it were up to the company no-one would actually register it would they?

I don't believe the lender has the capacity to amend a company's register?

 

[Ozzy]

I don't believe the lender has the capacity to amend a company's register?

They do have the right to file a mortgage/debenture on the register for a company yes. We, my main business, were approached by Companies House a few years ago to write the online tools for banks to do this.

 

[Ian J]

I don't believe the lender has the capacity to amend a company's register?

Factoring companies take a charge over their client's assets and the charge is always registered at Companies House by the factoring company

 

[eteb3]

I don't believe the lender has the capacity to amend a company's register?

I think some of my own puzzlement has come from the two different senses of register:
- The company usually keeps a register of debentures. That's open to inspection at the registered office in the usual way. Only the company can edit that.
- Charges to be enforceable must be registered at Companies House, and either the lender or the company can do that.

(Not all debentures entail a charge, except insofar as they are a security over the assets ranking ahead of the shareholders, I think? So a debenture with a floating charge will rank ahead of a debenture without, but a debenture without a charge will rank ahead of the unpaid milkman. Am I right?)

 

[Ian J]

(Not all debentures entail a charge, except insofar as they are a security over the assets ranking ahead of the shareholders, I think? So a debenture with a floating charge will rank ahead of a debenture without, but a debenture without a charge will rank ahead of the unpaid milkman. Am I right?)

I have never heard of a debenture that doesn't contain a charge as a debenture is a charge

 

[eteb3]

a charge as a debenture is a charge

Not quite always: as far as I've been able to work out, a debenture without a charge is called a 'naked debenture' and is rare in the UK. But it must exist, as shown by the Companies Act:

738 Meaning of “debenture”​

In the Companies Acts “debenture” includes debenture stock, bonds and any other securities of a company, whether or not constituting a charge on the assets of the company.

https://www.legislation.gov.uk/ukpga/2006/46/section/738

 

[Lisa Thomas]

Factoring companies take a charge over their client's assets and the charge is always registered at Companies House by the factoring company

Thanks, it must just be the settlement document they are unable to file then.

 

[Lisa Thomas]

They do have the right to file a mortgage/debenture on the register for a company yes. We, my main business, were approached by Companies House a few years ago to write the online tools for banks to do this.

Thanks for clarifying Ozzy.

 

[eteb3]

The usual answer I hear is "a debenture is secured". But the Companies Act gives a really wide definition to debentures, and it includes "any ... securities of a company, whether or not constituting a charge on the assets of the company".

Found my answer here:

https://uk.practicallaw.thomsonreuters.com/7-107-6043

TL;DR, "debenture" has slightly different meanings depending on context.