Debentures and charges | Lanbuk on the Law of Companies

In simple terms

Companies borrow as well as raising share capital. A lender usually takes a and a charge over the company's property as security.

Debentures

A debenture is a document that creates or acknowledges a debt owed by the company. Section 142 gives a company power to borrow money, to charge its property and to issue debentures. Debentures may be perpetual, convertible into shares, secured or unsecured, and redeemable, under sections 143 to 146. A debenture holder is a creditor, not a member.

Fixed and floating charges

Section 150 explains floating and fixed charges.

Fixed charge: a charge on specific property, such as land or machinery. The company cannot deal with the property free of the charge without the chargee's consent.

Floating charge: a charge on a class of assets, present and future, that changes in the ordinary course of business, such as stock. The company can deal with the assets until the charge crystallises. In Re Yorkshire Woolcombers Romer LJ described the marks of a : it is a charge on a class of assets present and future; that class changes from time to time in the ordinary course of business; and the company may carry on business in the ordinary way with those assets until the chargee steps in.

Control is the test: in Re Spectrum Plus the House of Lords held that a charge over book debts was floating, though called fixed, because the company was free to use the proceeds. What matters is the company's freedom to deal with the assets, not the label.

Crystallisation: a floating charge crystallises and attaches to the assets then held, for example on , on the appointment of a receiver, or on another event the debenture provides for.

Priority: section 151 gives a fixed charge priority over a floating charge.

Registration

Sections 170 to 172 require charges created by a company to be registered with the Commission. The company must also keep copies of instruments creating charges and its own register of charges, under sections 163 and 164.

Enforcing security

A debenture holder can enforce security through a receiver or manager, or by applying to the court, under sections 152 and 180 to 181.

Words and Latin in this note

Floating charge: A charge over a changing class of a company's assets that it may deal with in the ordinary course of business until the charge crystallises. A fixed charge has priority over it: section 151.
Winding up: The process of ending a company's life: collecting and selling its assets, paying its debts and distributing any surplus, before dissolution. It may be by the court, voluntary, or subject to the court's supervision: section 343. Open the note.
Debenture: A document that creates or acknowledges a debt owed by a company, often secured by a charge. A debenture holder is a creditor, not a member.

Memory map

Debentures and charges

Fixed and floating charges

Fixed charge
Floating charge
Control is the test
Crystallisation

Key points

A debenture creates or acknowledges a debt
A fixed charge attaches to specific property
Whether a charge is fixed or floating depends…

More points

A fixed charge has priority over a floating…
Charges must be registered with the Commission

Cases

Re Yorkshire Woolcombers…
Re Spectrum Plus Ltd

Key terms

Debenture
Floating charge
Winding up

Take-home points

A debenture creates or acknowledges a debt; the holder is a creditor, not a member: section 142.
A fixed charge attaches to specific property; a floating charge hovers over a changing class of assets until it crystallises: section 150; Re Yorkshire Woolcombers.
Whether a charge is fixed or floating depends on the company's freedom to deal with the assets, not the label: Re Spectrum Plus.
A fixed charge has priority over a floating charge: section 151.
Charges must be registered with the Commission: sections 170 to 172.