Debenture: What the UK Security Document Does

A typical bank debenture works through a company's balance sheet. Land is taken by legal mortgage. Plant, shares in subsidiaries, intellectual property and goodwill are taken by fixed charge. Receivables, bank accounts, insurances and material contracts may be charged or assigned. Everything not caught by those is swept into a floating charge, which lets the company keep buying and selling stock and paying from its accounts until the charge crystallises. The deed adds the working parts: a promise to give further security when asked, a power of attorney, restrictions on other security and on disposals, and the lender's power to appoint a receiver or an administrator.

That last power is why lenders want the floating charge even where the fixed charges cover the valuable assets. The Insolvency Act 1986 lets a lender appoint an administrator without going to court if it holds a qualifying floating charge: one that, alone or with its other security, covers all or almost all of the company's property. The debenture gives the bank a hand in choosing who runs the company if it fails.

A company's charge has to be delivered to the registrar of companies within 21 days, counted from the day after it was created, unless the court allows longer. If it is not, the security cannot be relied on against a liquidator, an administrator or the company's creditors, and the debt it secured falls due at once. The loan survives; the security does not. A lender therefore registers every debenture it takes and searches the register before relying on anyone else's.

The second test is substance. Calling a charge fixed does not make it so. Courts look at whether the lender actually controls the asset: a charge over receivables whose proceeds the company can bank and spend as it likes operates as a floating charge, whatever the deed says. The distinction matters because, under the Insolvency Act, floating-charge realisations bear the costs of the insolvency, preferential creditors and a prescribed part set aside for unsecured creditors, before the lender is paid. Fixed-charge assets do not carry those claims in the same way.

A manufacturer in England, constructed for this page like every figure in it, owes its bank US$8.0m under a debenture that charges its factory and plant by fixed charge, its receivables by fixed charge, and everything else by floating charge. It enters administration. The receivables realise US$2.4m and the stock US$0.8m. Collections went into the company's ordinary account, which it was free to use; the first column shows what the bank would have taken had it controlled that account. The allocation of costs below is simplified, and the prescribed part is the example's figure. Figures in US$m.

The deed is the same in both columns. What differs is how the company was allowed to run its receivables. Because the bank did not control the collections, the administrator treats the receivables as floating-charge assets, and US$0.9m that the bank expected to take ahead of everyone goes instead to the preferential creditors and the unsecured creditors' prescribed part. A charge over receivables written as fixed is, in practice, often treated as floating unless the lender controls the account the money goes into.

In New Zealand and Australia, the general security agreement does the same work under the personal property securities laws. It creates security interests over all present and after-acquired personal property, registered on the PPSR rather than at Companies House, and land is mortgaged separately. Those laws do not use the fixed and floating labels for priority in the same way, but each market still gives certain claims a call on circulating assets ahead of the lender: Australia's law speaks of a circulating security interest, New Zealand's of receivables and inventory.

The word itself has a second meaning everywhere. The UK Companies Act defines debenture broadly enough to take in a company's bonds and other debt securities, secured or unsecured. Australian law limits how debentures offered to investors may be described, chiefly as mortgage debentures, debentures or unsecured notes; New Zealand's securities law calls them debt securities. So when a borrower's accounts show a debenture, it may be borrowing from investors rather than a bank's charge, and a lender reads which before it reads anything else.

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At approval, the Companies House register shows whether another lender already holds a debenture, and its negative pledge decides whether new security needs the existing lender to agree, and a deed of priority to settle the ranking. At a refinance, the outgoing debenture is released and a statement of satisfaction filed, or the new lender finds the old charge still on the register. During the loan, the definitions decide what the bank controls: which accounts are blocked, which assets cannot be sold without consent. And in a workout, the qualifying floating charge gives the bank its say in whether, and by whom, the company is put into administration.

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