A debenture is a document which provides a creditor with the benefit of a charge giving them security over certain company assets. If the creditor goes unpaid they can look to enforce their security to recover their money.
The nature of the charge is determined usually by words within the charge documentation looking at the rights and obligations intended.
What Is The Use Of A Debenture?
A debenture is a contract between a company and a credit provider or lender that is registered at Companies House (“CH”).
The debenture charge has to be registered within 21 days at CH of creation. Under Section 859A of the Companies Act 2006 CH must keep a register of all such charges in relation to each company.
It will entitle the lender to security over company assets and is often referred to as a floating charge debenture. It is however very common for the debenture documentation to make provision for charges to be both fixed and floating. However, the debenture would need to take a charge over floating charge assets.
Debenture details will usually cover the amount lent by the lender, the term, interest rate, repayment date and other terms and conditions such as the ability to appoint an Administrator if the debt goes unpaid to recover the monies lent.
The label debenture is not conclusive but the intention of the parties is. It is a good start as to their intentions but it is what is in the document that counts not the heading itself. Once that has been discovered then the determination of whether the charge is a fixed or floating charge can be resolved.
What Is A Fixed Charge?
Where there is a fixed charge the assets secured are attached to the sum lent under that security. The effect of this is that the assets are used by the borrower but until released they are in effect the property of the lender.
So long as the lender goes unpaid for any amount they will not usually (subject to terms and conditions) be required to release their charge. The company therefore is answerable to the lender to deal with the assets under a fixed charge.
The lender has considerable power and control.
What Is A Floating Charge?
In the case of a floating charge, the lender does not have the same measure of interest and control over the assets.
The assets of a floating charge can be dealt with by the borrowing company and as a result, unless the lender looks to enforce its security, the borrower can sell them. Typically this will form part of the company’s trading processes and therefore change where for example stock is sold in exchange for cash with the floating charge moving from the stock into the money.
UK Cloud Ltd And The Debenture Charge
The case of Re UK Cloud Ltd [2024] EWHC 1259 (Ch) considered the difference between a fixed and floating charge in a debenture document.
Notably, the judge in this case said the matter was “far from easy” which considered the matter of a fixed or floating charge over internet protocol addresses. The realisations in the case could be used to discharge expenses of the liquidation if the charge at large was a floating charge as opposed to fixed.
In concluding that the debenture in this case gave rise to a floating charge the judge looked carefully at the matter of control:
In my view, in the absence of any challenge to Mr Allen’s evidence I am bound to conclude that Harbert did not exercise control or seek to do so. Sometimes the absence of evidence is as powerful as the presence of evidence. This is such a case. It is also a case where some regard should be had to post-contractual conduct. The control provisions in the debenture were, then, a “sham,” not in any fraudulent sense, but in the sense used in Re Avanti. In reaching that view I also take into account the apparent ability of the Company to carry on its business without the consent of Harbert (see the passages from Agnew v HMRC, Re ASRS and Re Spectrum cited in paragraphs 25, 27 and 28 above).
