In this brief guide, we are going to talk about a mortgage debenture, what it is and what considerations you may want to make.

What is a mortgage debenture?

Mortgage debentures are now seen as standard security which banks take when lending to businesses but most people still don’t understand their place in the lending market.

In the past, a debenture was required only from big companies which had significant assets and were borrowing significant amounts of money.

Most lenders did not bother doing this for smaller companies requiring smaller loans as it wasn’t seen as cost-effective.  

This was mainly due to the fact that the cost of recovering assets from smaller companies was seen as being high and most lenders did not believe that smaller companies will have any assets to recover should they default on their loans.

Times have now changed and a debenture is more common than most people realise. Peer to peer platform lenders even uses debentures when giving out loans.

Buy to let landlords who look to borrow money using their limited companies have now also increased the popularity of debentures.

Mortgage lenders who lend to companies with a property portfolio will almost always ask for a mortgage debenture.

What is a debenture?

A debenture is a written agreement between a lender and a borrower (a company) which is signed and filed at companies house and gives the lender priority over other creditors in the event of a failure of the company.

A debentures document provides the lender with two types of legal charges.

The first is a fixed charge:

The fixed charge is a charge over nominated assets to the business. This could be property( which will be specifically listed in the document) but will also include a fixed charge over the companies debtor books. 

This means the lender will be able to take ownership of all monies owed to the company and go after those owing such funds and collect them to recoup the loan in the event of a default.

If you are seeking to take out invoicing finance from a provider and already have a bank loan you may find that this could create a conflict between yourself and the bank as the bank may already have a debenture in place due to an existing bank loan and will now have to give the invoice finance provider priority on the debenture so you can do business and repay both parties.

It is important to note that the debenture not only provides a right for the lender to take ownership of the assets the company owns at the time of the loan but any assets which the company buys in the future.

The second is a floating charge

A floating charge gives the lender rights to all other assets the company might own at any time.

The floating charge provides some sort of umbrella security for the lender. They still allow the company to trade these assets as they feel to but if the lender should at any point want to recall the loan then they would have rights over these assets as long as the company owns them at that point.

The floating charge covers all assets so it could include intellectual property.

One of the main reasons why lenders take these rights is actually due to the other rights which they give e.g the “step in rights”.

Such rights could give the lender the authority to appoint a receiver (when they can justify it) who can then enter the business premises and take control over it.

The receiver could work towards disposing of assets to repay the bank debt, At the point in which this is happening, both charges are said to be crystalized and the receiver becomes known as a fixed charge receiver.

Another important element of a debenture is that they cover all monies, this could be existing loans, prior loans and future loans or overdrafts.

A lot of company directors enter into mortgage debenture agreements without fully understanding what they are getting into and take no legal advice on the matter.

This is mostly due to the fact that it is the companies assets which a charge is being signed off on and if it were to be a personal charge over the director’s assets then they will have been informed to take legal advice.

When taking out a mortgage debenture, the bank will not insist that legal advice is sought although they may suggest it.

It is therefore very easy for directors to sign debenture forms without fully understanding their impacts and in many cases, directors have no other choice when looking to access funds.

Another important note to make is that company directors can also take out a mortgage debenture on their own company when the company owes them money. This could be when they have provided a directors loan.

This situation could arise from where a director has voted to take on dividends from the company but does not draw those funds from the company and is then owed that money by the company.

This means that if the company is wound up, the director’s loan could take priority over other loans even preferential creditors such as HMRC. You will of course not need to have given a denture to another lender with the same company.

A company director could also take out a mortgage debenture on another company who they are in business with if the director’s company has provided a loan to this other company.  Legal advice should be sought before entering into such agreements.

In this brief guide, we talked about a mortgage debenture, what it is and what considerations you may want to make.

If you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.