What is the difference between a Debenture and a Mortgage?

[kkid]

If they are both long-term sources of finance and are both secured against a property, how are they different?

Why would one be chosen over another?

 

[Scalloway]

It is my understanding that a debenture is secured by a floating charge, ie the company agrees to put up assets as security but the charge only crystalises when the lender decides to call in his loan, eg on insolvency, and thus ranks before unsecured debtors for funds when the company is liquidated.

A mortgage on the other relates to a particular asset, generally land or buildings. When the debt is called in the lender gets the proceeds of the sale of the asset and is an unsecured creditor for any shortfall.

 

[faradaykeynes]

Also I think in case of liquidation mortgage creditors take preference over debentures. Debentures can be converted to shares but mortgage cannot

 

[Insolvency123]

Also I think in case of liquidation mortgage creditors take preference over debentures. Debentures can be converted to shares but mortgage cannot

That is interesting. I have been looking at something that also involves a share charge. I have just assumed the share charge is an extra charge aswell as the floating charge. Do you know how would be able to tell?

Also, with the share charge would it normally be over ALL the companies shares (If a Plc?) or just partial. What I'm asking is would the bank the right to do that over private traders shares?

I had absolutely no idea Debentures can be covereted to shares. Do you mean as in a share charge? As that would answer alot of questions.

 

[Scalloway]

In my experience debentures are converted to shares when it appears that the loan is unlikely to be repaid and the company can be viable when the burden of repayment has been lifted. Having shares also means the former debenture holder has some influence over the running of the comany.

I have no experience of a share charge but I suspect that it has nothing to do with this. Why would the ex-lender put a charge over their own shares?

 

[faradaykeynes]

A deed creating a charge over securities (including shares) which are in registered form, title to which is recorded in a register and represented by a certificate.
The deed creates a first fixed charge over existing and future registered securities in certificated form, and over interests accruing from those securities.

 

[Insolvency123]

A deed creating a charge over securities (including shares) which are in registered form, title to which is recorded in a register and represented by a certificate.

FK, slightly over my head here... so just so I'm understanding correctly.

I have 2 documents a few years apart, both obtained from Companies House where registered as you have said. 1st document is the floating charge re the assets. 2nd document is the a share charge.

I don't know if this a transfer to shares. I'm assuming the document is the certificate but I don't know so I really shouldn't assume.

The deed creates a first fixed charge over existing and future registered securities in certificated form, and over interests accruing from those securities.

Therefore, JK is this over everyones shares then? Just wanting to make sure I am understanding the specifics.

The company was delisted, could this be a possible reason then as trading the shares on the Stock Exchange would be impossible I would suspect.

I'm not hugely knowledgable in securities area but from what you have it suggests to me anyone who has bought shares as a private shareholder, once this share charge was in place then they would be undable to sell until the charge was lifted? Is that correct?

Thank you for replying.

 

[Insolvency123]

In my experience debentures are converted to shares when it appears that the loan is unlikely to be repaid and the company can be viable when the burden of repayment has been lifted. Having shares also means the former debenture holder has some influence over the running of the comany.

Thank you for your reply and you must be really blown away today in the Shetlands cause it's pretty windy today.

Would you be able to expand on that statement please if possible? More detail to how a debenture is to shares, if you know. Is the financier lifting the original debenture charge? Are the shares a fraction of the value of the debenture?

The reason I ask. The company did go down the insolvency route and as many has thought the charge would crystalise when the loan was pulled. However, the financier has only received a fraction of the original loan according to the reports even though assets were sold on administration to the value of the loan. This has left some unexplained questions.

I am just wondering if a conversion to shares has taken place then this would maybe answer a few unanswered questions.

I do suspect another financier has been paid but it's been kept secret as some the information connected to the sale of the assets on administration has been kept secret. The receivers went to court.

 

[Scalloway]

If more than one person lent money secured by a flaoting charge there may have been a ranking agreement in place. This would have had to have been agreed by all lenders.

How debentures are converted to shares depends on mutual agreement. If someone has converted loan to shares they would be last in the queue to get money out tje liquidation and only if all creditors had been paid in full.

 

[Insolvency123]

The other financier appears to have some kind of bond in place. Im thinking the money has went in that area. Can't get the details on it. Have you ever come accross a bond agreement? I think it's connected to a loan but no charge over assets with it. Nothing registered at Companies House any for it.

Re the conversion. How can you tell if the loan has been converted shares? Where could/would I find that info? If I was wanting to search for it, well I would. Would I see it in the bulk shareholding? Not looked at it for a while but could re-visit a microfiche reader again soon.

They did seem to receive something but not the heavey amount expected. Maybe part of their agreement?

The company did buy a number of it's own shares in the last year (final months) of it trading. Could this maybe be connected to it in someway?

Thank you again for replying and your time.

 

[Scalloway]

It could be a bond and floating charge. That will be secured over the assets of the company but will only crystalise when the company goes into liquidation.

If the loan was converted to shares there will be an increase in the share capital on the balance sheet coupled with a reduction in liabilities.

A company can only buy its own shares if there is distributable profits.

 

[Insolvency123]

It could be a bond and floating charge. That will be secured over the assets of the company but will only crystalise when the company goes into liquidation.

There would appear to be 2 financiers. One with the bond and the other which was meant to be connected to the floating but there is a number of questions around that now. Whe your saying a bond and floating charge are talking of the both financiers or just the one that holds the bond?

Sorry I'm slightly confused by your reply. I know what a Debenture/floating charge is. I'm looking to find out about the bond. It appears to be connected to some kind of loan agreement but nothing is recorded at Companies House suggesting it was a floating charge. Have you come accross a bond agreement? It's connected to another organisation that was a body for the company and the bank. It's on the Insolvency documentation.

If the loan was converted to shares there will be an increase in the share capital on the balance sheet coupled with a reduction in liabilities.

A company can only buy its own shares if there is distributable profits.

The point in time that I am wondering if the convertion has happened taken place this is after it's last published accounts. I will I have look on the bulk shareholding some point soon.

I take it you mean spare cash as in money there/available to buy shares?

Thanks again for your help.