Security Finance and Debentures Flashcards
What is a debenture?
The the contractual agreement of an acknowledgement of a debt to a lender.
What are registered debentures and what features does it have?
Most common form of debenture.
Most are redeemable, and company may make early repayment.
Registered in company books and with registrar of companies.
Includes terms such as repayment date, interest, charges, ability to pay off etc.
What are convertible debentures?
Grants the holder an option to convert to shares at stated times or fixed rates.
What is a fixed charge?
Mechanism to enforce repayment by guaranteeing against most valuable asset company owns (usually). Company retains asset but cannot dispose without lender’s consent. Must be registered at Companies House and H.M. Land Registry.
What is a floating charge?
A general charge over company’s assets, which becomes a fixed charge when it ‘crystallises’.
When does crystallisation occur?
The company ceases business or is wound up. (Re Woodroffes Musical Instruments Ltd 1986)
A receiver or administrator is appointed.
Default or breach of contract terms
Whenever the debenture or charge document says so. (Re Brightlife Ltd)
Woodroffes Musical Instruments Ltd 1986
This was a case where there were preferential creditors, floating charge for a bank and floating charge for a director, subordinated to the bank.
The director tried to use a loophole to turn her floating in to a fixed charge, which would have given her priority.
However due to the terms of her charge, the bank was then given preferential treatment first, followed by the preferred creditors, and then finally the director.
The loophole was then blocked by Insolvency Act 1985 amendments.
What are disadvantages of floating charges?
Rank behind fixed charges and some preferential creditors in insolvency.
Retention of title causes may affect assets covered by the charge.
When are floating charges invalid?
If created less than 12 months before the winding up or administration. Extended to 2 years if a connected person. (Not invalid if already paid off)
What happens if floating charges are not registered?
They remain valid prior to liquidation, but become void against a liquidator or Administrator and holder becomes an unsecured creditor.
