What is a debenture?

If your company has been asked to give a debenture or security agreement as part of a financing arrangement, it is worth taking some time to consider the implications of that document, which will give the lender security over all assets of the company, which if a loan or debt is not repaid on demand, gives the lender the ability to appoint an administrator to sell the company’s assets.

What assets does it charge?

A debenture typically grants security over all of the assets of the borrower, in particular things like contractual rights due to the company, insurance policies, shares owned by the company, any cash in bank accounts, intellectual property, fixed plant and machinery, receivables, book debts and land.

What points might we need to negotiate as a borrower?

A debenture will contain undertakings from the borrower in respect of assets, for example, to keep assets in good repair or to keep assets insured. Borrowers should carefully check these undertakings and ensure that they are comfortable that they will be able to satisfy them, as any breach of the terms of the debenture typically triggers a right of the lender to demand immediate repayment of the loan (known as acceleration). Likewise, it may also contain representations (statements of fact in respect of the borrower or lender), which if untrue at any point during the life of the loan could trigger the lender’s right of acceleration, so it is something that should be checked carefully by borrowers.  Finally, it is important to consider whether the company is able to charge each assets; for example some contracts may contain restrictions on assignment, or other financing arrangements such as mortgages over property, invoice financing arrangements, hire or leasing arrangements may conflict with the terms of the debenture.

What is third party security?

If there are multiple companies within the group, the lender may not just ask for security from the borrower, they may also ask for it from the other companies within the group (known as third party security).  In this scenario, the directors of these companies must carefully evaluate the corporate benefit and act in a manner that is most likely to promote the success of the company for the benefit of its members as a whole. They need to determine whether providing security for another company's obligations is justifiable. To provide assurance, a lender would typically require, at a minimum, a board resolution confirming the corporate benefit, and often a shareholders' resolution will also be required.