Legal charges over a property that fully secures your debt – why would you want a debenture?
This is a common theme. Where a lender provides finance to a company which is used mainly for the purpose of purchasing property and the property is worth (or at least valued) more than the amount advanced, the lender will often be happy to have a charge over the property as their only security.
In theory, this should be fine. The company sells the property and the lender is paid in full. However, where a borrower becomes insolvent, the lender may wish to appoint an administrator rather than a receiver or, alternatively, take control of an appointment process someone else has started. A debenture will contain what is known as a qualifying floating charge (QFC). A QFC provides the holder with the following benefits:
- The ability to appoint an administrator without having to attend court hearings even after a winding up petition has been issued against the company.
- The requirement for the directors, the company or the holder of a subsequent ranking QFC to provide notice of their intention to appoint an administrator and obtain the holder’s consent before appointing an administrator. This means the prior ranking QFC holder can opt to take control of the appointment process if they wish to nominate an administrator of their own choice.
- The ability to appoint administrators out of court if the directors start the voluntary winding up process.
- The ability to file a notice of intention to appoint an administrator to obtain an interim moratorium which prevents other creditors taking enforcement action for a short period of time.
It is worth noting that there has been increased use of the winding up petition as a debt collection tool. The existence of a QFC can therefore be of significant benefit in the scenario where administration is the more appropriate form of insolvency process. Without a QFC, where administration is desirable, a court order is needed. While this can be done on the application of the directors, the shareholders or any creditor of the company, the process is much more expensive than the out of court route. In addition, at an administration hearing, the Judge has discretion to make orders other than placing the company into administration.
For more information email email@example.com