What is a Debenture and its purpose? What is a floating charge?

Obtain priority of repayment in any insolvency by filing at Companies House a floating charge debenture document

A debenture (sometimes called a fixed and floating charge) is little more than a written agreement between a lender and a borrower which is filed at Companies House.  A basic and simplified fixed and floating charge can be viewed by clicking on the link.

That agreement then gives the lender security over the assets subject to that charge, which means that they have priority over other creditors in respect of those assets.

Can I have a debenture over the assets of my own company?

As a director of your own company you can achieve considerable protection against any later insolvency of your company by filing a floating charge debenture at Companies House. The floating charge debenture document must be filed at the same time as you lend money to your company.

For instance you lend money to your company when a dividend is voted and you do not draw on that dividend at the time. The amount then owed to you can be protected by a floating charge debenture. The debenture document records that in any liquidation or any other insolvency process you will be repaid from company assets before any unsecured creditors under what is known as your floating charge debenture.

This means that your director's loan account,  when secured by a debenture, has to be repaid in full out of company assets in any insolvency before VAT, PAYE and trade creditors.

For your charge to be valid it must be lodged ("registered") with the Registrar of Companies within set time scales and must also satisfy certain other basic requirements.

In essence, however, it is a written agreement between you, as lender, and your company, as borrower.  A debenture does not always include a clause that you as the lender can appoint a receiver but more often that not such a clause is included in the agreement. Because of a change in insolvency law for debentures created after 15th September 2003 you as a secured lender can only appoint an Administrator to your company rather than an Administrative receiver.  To find out more about Administration and appointing an Administrator please click on the link.

It is worth repeating that a floating charge gives you, as the holder of that document, priority rights for repayment should the your company become insolvent.

The repayment priority is not absolute as against all other creditors. On the insolvency of your company the monies that become available for creditors are distributed in a set order. That repayment order is as follows:

  • Firstly to secured creditors. Secured creditors hold either a legal mortgage, a legal charge or a fixed charge.
  • Secondly to preferential creditors. Preferential creditors in the main are amounts due to employees for arrears of wages and holiday pay.
  • After preferential creditors are paid in full a "prescribed part"  of the sum remaining is put to one side for unsecured creditors
  • Then the sum remaining is paid to creditors such as you who hold a debenture which grants a "floating charge".
  • Lastly to creditors who do not fall into any of the above categories. These remaining creditors are called "unsecured creditors". Unsecured creditors include VAT, PAYE, CIS Tax, NI, Corporation tax, trade creditors and expense creditors. From this you will appreciate that "unsecured creditors" are often the main group of creditors in any insolvency.

From the above notes you will see that there is tremendous value and benefit to you in holding a debenture (floating charge) over the assets of your own company. If you would like a free meeting to discuss the matter please contact Chris Parkman on 01305 458 383 or email him at chris@purnells.co.uk.

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