What is a Debenture and its purpose? What is a floating charge?
Obtain priority of repayment in any insolvency by filing at Company House a floating charge debenture document
Can I have a debenture over the assets of my own company?
Once you know the definition of "what is a debenture" and "what is a floating charge" you will realise that as a director of your own company you can obtain a debenture (floating charge) over the assets of your own company and in consequence obtain priority of repayment of your director's loan account on any winding up of your company.
A debenture (sometimes called a floating charge debenture) is little more than a written agreement between a lender and a borrower and which agreement is then filed at Companies House. As a director of your own company you can achieve considerable protection against any later insolvency of your company and benefits 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 receive one penny. What a benefit for you!
Your debenture agreement to be valid 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.
It is worth repeating that a floating charge debenture agreement 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 remainng 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 remaing 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 in you holding a debenture (floating charge) over the assets of your own company. Equally more benefits can arise If, by agreement, your company registers a debenture over one of your debtor customer companies. Contact me, Chris Parkman, by email for FREE advice to better understand what a debenture is and how the creation of such a floating charge gives you the important benefit of a material degree of priority in any company winding up. I will be pleased to answer any queries that you have by e-mail or by telephone.