Updated: 3rd January 2021
The reluctance of some banks in offering business loans, as well as a potentially onerous administrative procedure, has resulted in more directors lending to their own company.
Without the security of a debenture, however, it is often too late to call in the loan if the company becomes insolvent. As a result, directors can find it very difficult to recoup their money.
A debenture outlines the terms of lending, and has to be lodged with the Registrar of Companies when the loan is agreed. It generally details the total loan amount, interest rate, repayment amounts, the charges securing it (if any), and whether the loan will be repaid on demand or on a fixed date.
Directors can further protect their money by securing a fixed or floating charge on the debenture. Fixed charges involve tangible assets such as property, land, or plant and machinery. These assets cannot be sold without the company either repaying the loan in full, or obtaining consent for sale from the debenture-holder.
A floating charge covers a class of asset, such as stock, and can be traded without the lender’s agreement. The debenture should specify that the floating charge will ‘crystallise’ upon certain conditions, however, such as loan default or insolvency.
This is when it becomes a fixed charge in essence, and from then on, the company needs the lender’s permission to trade or otherwise deal with the asset.
For more guidance on the advantages and disadvantages of debentures for company directors, contact Begbies Traynor and a member of our expert team will be able to advise.