A debenture creates a fixed charge over certain assets on its creation.
Fixed charge assets can vary but include
- plant and machinery;
- intellectual property such as copyrights, patents and trade-marks;
- goodwill; and
- book debts.
A business that borrows does not typically sell these fixed assets and therefore the fixed charge is applied to protect the repayment of the company debt. The simplest way to put it into perspective is to think of a mortgage, a company cannot sell their office without the lender’s permission, as the company will have not yet paid the debt off and therefore these assets must be retained as security for the loan.
With fixed charge debentures, the lender has full control of the company asset. Therefore, should the company want to sell that particular asset, they must have the lender’s approval to do so or pay off the debt.
The fixed charge in a debenture ranks before that of a floating charge in a debenture on company insolvency.
While a fixed charge in a debenture charges assets that can be easily identified, a floating charge debenture is a charge that floats above ever-changing assets.
The floating charge in a debenture, creates a security interest over changing company assets and by its nature must allow for more freedom for a business, so the borrower can buy and sell those assets in the ordinary course of its business.
The floating charge gives more scope for the company to sell, transfer or dispose of their assets, without seeking approval from the financier. If otherwise, the borrower likely could not trade. From the lender’s point of view, it leaves them a little more exposed but it is a compromise between being secured and have a trading client.
Floating charge assets can vary, but typically will include assets such as:
- stock and inventory;
- trade debtors;
- cash and currency;
- movable plant and machinery (such as vehicles); and
- raw materials and other consumable items used by the business.
Our expert team of solicitors at Francis Wilks & Jones are here to help you with any issues you might be facing in relation to debentures and clarification that you will require for fixed and floating charges. As banking and insolvency solicitors, our knowledge on fixed and floating charges is very broad and we have dealt with hundreds of enquiries. Our practical daily experience and legal expertise means that we can assist whatever the nature of your enquiry on debentures.