debenture

A debenture is a form of long term security interest, granted over the assets of a company in exchange for a loan to the company or to secure previous loans. They are usually granted in the form of a deed.

According to the Companies Act, debentures:

1. include debenture stock, bonds and any other securities of a company, whether or not constituting a charge on the assets of the company;
2. may be irredeemable or redeemable after the happening of a specified event or after a specified period of time;
3. must be registered with Companies House;
4. must be recorded in the Register of Debenture Holders kept by the company, and kept available for inspection at its registered office.
5. may be requested by members of the public. Provided the request is made in the prescribed form, the company must produce copy of the debenture within 5 days.

Typical Debentures

Debentures usually:

1. attract a fixed rate of interest, which is lower than other forms of loans (such as an overdraft) because the lender’s interest is secured and the loan is repayable over a longer period of time;
2. provide that the interest is payable in advance of dividends to shareholders;
3. where a security interest is granted, it is in the form of a fixed and floating charge of the assets of the borrower;
4. are granted by deed, but do not have to be other than for individuals and clubs;
5. are almost invariably granted over the entire property of a company.

Priority

Where the debenture is secured, which will almost certainly be the case where the bank is lender, the debenture holder takes priority over the general pool of creditors. Accordingly, debentures are amongst the best form of security interest over the assets of a company.

[Latin: To owe]