Company Law: Loan Capital

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1 Loan Capital

• A debenture is ‘the written acknowledgement of a debt by a company’

• May be secured or unsecured

• May be a single debenture or a series of debentures

• If issued as a series, debenture holders rank ‘pari passu inter se‘

• Security / the charge may be fixed or floating

• A registrable charge must normally be registered within 21 days, beginning with the day after its creation

• If there are 2 charges over the same property, a fixed charge will take precedence over a floating charge

• If there are 2 fixed charges (or 2 floating charges) over the same property, the earlier one will take precedence

• Priority is not reduced to filing order: consider creation date, notice, fixed or floating status and any effective negative pledge

• Debenture holders are creditors of the company, not members

2 Fixed Charges

• Attaches to specific assets

• Company is not free to deal / dispose of those charged assets

• There is no blanket six-month invalidity rule for fixed charges; preferences and transactions at undervalue have their own statutory tests, while s245 targets floating charges

• A liquidator may challenge a transaction under the applicable statutory avoidance provision

• Validity depends on the specific statutory test, not merely on which office-holder seeks to prove it

  • The s245 new-value qualification applies to floating charges

  • Solvency at creation matters only where the relevant statutory avoidance provision requires it

• In the event of a liquidation, the fixed charge debenture holder ranks number one in the sequence of asset distribution

• Where a floating charge exists over an asset, there may be a negative pledge clause

• The effect is to ensure that a floating charge debenture holder has to be notified of any proposed fixed charge over the same asset

3 Floating Charges

• Unlike fixed charges, floating charges do not attach to specific assets

• Defined in the case re Yorkshire Woolcombers as:-

  • A charge on a class of assets of a company, present and future

  • Where the class changes from time to time in the ordinary course of business

  • And the company may deal with these assets until the charge crystallises

• Typically applies to the current assets of inventory and accounts receivable

• Whether a charge is fixed or floating is a matter of commercial reality rather than how it has been named

• In re Tunbridge a ‘fixed’ charge was held by the court to be floating because all three Yorkshire criteria were met

• In re Cimex a ‘floating’ charge was held to be fixed because the assets did not change from time to time in the ordinary course of business

• Under s245, the relevant period is generally 12 months for an unconnected person and two years for a connected person, subject to insolvency and new-value qualifications

4 Debentures Compared with Shares

• Fixed rate of interest

• Payable even though no profits

• No votes

• Security (not always)

• Preferential entitlement to return of money

• Possession of the charged asset

• Rights when company defaults

  • Apply to court for liquidation order

  • Apply to court for administration order

  • Receiver appointment depends on the security and statutory route; Enterprise Act restrictions limit administrative receivers, while contractual or Law of Property Act receivers may still be available