Debentures- benefits and drawbacks | Splinter

Debentures- benefits and drawbacks


It has become increasingly difficult for businesses to obtain finance; consequently, more directors are deciding to lend their personal money to their companies, so naturally, they would like to secure their loans to the company. One way they can do this is by arranging a denture.

One essential component of this tendency is the absence of security based on debentures. Directors may find that it is frequently too late to call in the loan should a business stumble and find itself on the verge of bankruptcy. Directors looking to recoup their capital investments may face a hard task as a result of this circumstance.

A debenture is a legally binding agreement that precisely outlines the loan’s terms and is typically a charge set against all the assets of a company.

Ordinarily, the use of debentures has a number of advantages. One benefit is that it increases the chances of creditor recovery. Directors may also benefit from increased financial security and confidence in their own investments.

So imagine my surprise when I discovered that a highly profitable business client of ours had a debenture registered against his company. When I made inquiries, I was informed that it was registered at the behest of a supplier because of the high value of goods that the business was holding 12 months ago. If that was necessary before, it certainly is not necessary now. My advice was to instruct their solicitor to remove it.

Given these situations, it is wise for businesses to frequently check their company house registration to make sure no outstanding debts or charges are still listed. Another business owner of ours was advised to repay two bank loans. We noticed that the charges were still registered against the company two years later. Banks are very slow to remove charges, even after loans have been fully repaid.

Directors and business owners must carefully consider the benefits and downsides of debentures and should only opt for a debenture if it is consistent with the company’s strategic aims.

Edgington v Fitzmaurice (1885), 24 Ch. D 459

“The directors of a business provided a prospectus, which contained a range of debentures, in order to invite subscriptions. The directors stated that the debentures were in order to enable the business to complete alterations to the buildings of the company, to develop trade, and to purchase vans and horses. However, it was later discovered that the real reason for issuing the debentures was for the directors to pay off other liabilities.

The plaintiff forwarded money for the debentures that had been offered, having relied upon the statements contained in the prospectus. However, he was also mistaken, as he thought the debenture was to provide him with a charge on the company’s property. The company later became insolvent, and the plaintiff claimed the money he believed he was owed.

The court held that the misstatement of the reasoning behind issuing the debentures was a material misstatement of fact. The directors were found liable for an action of deceit, despite the fact that the plaintiff had also been influenced by his own mistake regarding the debentures.”

Source: The Law Teacher.

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