What is a debenture? Fixed and floating charges explained for UK companies

A debenture is a legal document in which a company gives a lender security over some or all of its assets, usually through a mix of fixed and floating charges. If the company fails to keep to the terms of its borrowing, the debenture gives the lender rights it can enforce against those assets.

In UK commercial lending, the word debenture is most often used for an all assets security document taken by a bank or other lender alongside a loan, overdraft, revolving facility or invoice finance arrangement. In other contexts, debenture can also mean a type of debt instrument issued to investors, but this guide focuses on the lending meaning that most company directors meet.

A debenture does not transfer ownership. The company keeps its assets and continues to trade with them. What changes is that the lender has a claim over them, and the company's freedom to sell, charge or borrow against them is usually restricted.

A fixed charge attaches to specific, identifiable assets and stops the company dealing with them freely without the lender's consent. A floating charge covers a changing pool of assets, such as stock, which the company can buy and sell in the ordinary course of business until the charge crystallises.

Fixed charges

Fixed charges are typically taken over assets the company keeps for the long term. Depending on the lender and the business, these might include:

• Plant, machinery and equipment that is owned outright.
• Goodwill and uncalled capital.
• Intellectual property such as trade marks or software rights.
• Shares the company holds in subsidiaries.
• Book debts, although whether a charge over debts is genuinely fixed depends on how much control the lender has over the money collected.

Because the company cannot sell or deal with fixed charge assets without consent, a fixed charge gives the lender stronger protection.

Floating charges

A floating charge hovers over assets that change day to day, such as stock and raw materials. The company can use and sell those assets normally. If a specified event happens, such as a default or the start of insolvency proceedings, the charge crystallises and becomes fixed over whatever assets fall within it at that moment.

Most debentures contain both types of charge, so that specific assets are fixed and everything else is caught by the floating charge.

Under the Companies Act 2006, a charge created by a company must be delivered to Companies House for registration within 21 days, beginning with the day after the date the charge was created. GOV.UK confirms that only a court can extend this time limit.

Registration is usually handled by the lender or its solicitors, but it is the company's charge and directors should make sure it has been done correctly. GOV.UK explains that the filing includes a statement of particulars and a certified copy of the charge document, and is normally made online using form MR01.

What happens if a charge is not registered in time

The consequences of missing the deadline are serious for the lender. Section 859H of the Companies Act 2006 provides that an unregistered charge is void, so far as it gives security over the company's property, against a liquidator, an administrator and the company's creditors. The same section says the money secured then becomes immediately payable. In practice, this is one reason lenders are careful to register promptly.

Keeping the public record up to date

Registered charges are visible to anyone who searches the company on Companies House. When a debt is repaid, the company can file a statement that the charge has been satisfied. GOV.UK notes that this is not compulsory but that leaving satisfied charges on the record could harm the company's standing, so it is worth checking.

A debenture usually restricts what the company can do with its assets and how much more it can borrow. Before signing, read these clauses carefully, as they can shape your finance options for years.

• Negative pledge: a promise not to grant any other security over the company's assets without the lender's consent.
• Restrictions on disposals: fixed charge assets usually cannot be sold without consent, and some debentures also restrict selling the business or major assets.
• Further borrowing limits: the facility agreement may cap other borrowing or require consent for it.
• Information covenants: you may need to supply management accounts, forecasts or other information at set intervals.
• Events of default: breaching any of these terms can allow the lender to demand repayment or enforce its security.

This matters most when a company wants to add a second type of finance. For example, an invoice finance provider usually needs a first ranking claim over the company's book debts. If an existing debenture already covers those debts, the two lenders will normally need to agree how their security interacts before the new facility can start.

Some types of finance are affected less. With hire purchase or leasing, the finance company typically owns the asset until the agreement ends, so it does not rely on a charge in the same way. Even so, the existing lender's consent may still be needed under the terms of the debenture, so always check.

Priority decides which lender is repaid first from which assets if the company cannot pay everyone. A deed of priority is an agreement between lenders, usually signed by the company too, that sets out that ranking in writing.

Without a deed of priority, the ranking generally depends on the type of charge and the order in which the charges were created and registered. In broad terms, a fixed charge over an asset ranks ahead of a floating charge over the same asset. On an insolvency, floating charge holders also rank behind certain costs and preferential creditors, so a floating charge alone usually gives a lender less protection than a fixed charge.

A deed of priority can change the default position. It might, for example, give one lender first ranking over book debts and another first ranking over everything else. These agreements are often called intercreditor deeds where the arrangements are more complex. They are legal documents, and the company's own solicitor should review them.

A debenture secures the company's assets, while a personal guarantee is a separate promise by a director or other individual to pay the company's debt if the company does not. Lenders often ask for both.

The two serve different purposes. The debenture gives the lender a claim over company assets; the guarantee gives it a claim against the guarantor personally. Read our guide to what a personal guarantee is before you agree to give one, and take independent legal advice.

1. Check the company's current charges on Companies House, so you know what security is already in place.
2. Ask which assets will be under fixed charges and which under the floating charge.
3. Read the negative pledge and consent clauses, and ask how the lender would approach a request for future finance.
4. Check the events of default and what the lender can do if one occurs.
5. Ask whether a personal guarantee is also required, and on what terms.
6. Confirm who will register the charge and ask for confirmation once it has been filed.
7. Ask what the release process will be when the debt is repaid.
8. Take independent legal advice, particularly if a deed of priority is involved.

Business finance for limited companies, LLPs and partnerships of four or more partners is generally unregulated, and Consumer Credit Act protections generally do not apply. The debenture and facility documents therefore set out most of your rights, which makes reading them carefully all the more important.

Lenders often take a debenture for secured business loans, invoice finance, revolving credit facilities and larger term loans. Some unsecured lenders do not take a debenture at all and rely on a personal guarantee instead. Our guide to secured vs unsecured business loans explains the difference in more detail.

If your company already has a debenture with one lender and needs to restructure, business debt refinancing may involve the new lender repaying the old one, with the existing charge released and a new one registered.

Welcome Finance is a commercial finance broker, not a lender. We work with UK limited companies, LLPs and partnerships of four or more partners, and we can help you understand what security lenders on our panel are likely to ask for, including whether a debenture is involved and how it might affect the company's other facilities.

Every client has a dedicated relationship manager, a real person available by phone, email and chat, from the first enquiry until the lender pays out. We are not lawyers and cannot give legal advice on a debenture, so we will always suggest you have the documents reviewed independently.

We do not charge you a fee. We are paid a commission by the lender when your finance completes. You can read more on how we are paid, or check your eligibility in about 60 seconds without affecting your credit score.