What is a debanture/Types of debenture and examples
Debenture is a written acknowledgment of debt, usually given by companies. It is a loan to the company often secured with assets of the company.
A debenture holder is a creditor to the company and not a shareholder. When a debenture incorporates a charge over land, it is called mortgage debenture. Sometimes, a convertible debenture stock is issued which gives the holder right to convert his stock to ordinashares at a specific price and time.
Types of debentures
There are many types of debenture, but the popular ones include:
• Fixed debenture
• Floating debenture
• Pair-passu debenture
• Trust deed debenture
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Fixed debenture
This is a debenture that creates charge on the current assets of the company including uncalled capital, where it exists. These current assets-stock, debtors and cash floats (changes or rises &falls) from time to time during the operating cycle of the business.
Although the definition of floating charge relates it to a current assets, it is possible on any type of property including fixed assets and this is what bank floating charge does.
Pari-passu adventure
This is a debenture executed in favor of two or more lenders in which non has prior claim over the other.
Trust deed debenture
This type of debenture involves a charge on the fixed and floating assets of the company executed in favour of two or more lenders. It usually has trustees for the adventure holders.
When a trust deed adventure is issued in favour of banks it then means that a consortium of banks is involved in the lending. In such situation, the function of the trustee included among others are
• To aarnage meetings of the member banks of the consortium.
• To receive payment of principal and interest when due where no lead bank is appointed. In most cases, members of the consortium appoint a lead bank.
• To ensure that the borrower complied with the yearns of treat deed.
• To enforce the security at the appropriate time. Trust deed arrangement has a lot of advantage, which includes
1. The trustee has power to sale mortgage property without resource to court just like a legal mortgage.
2. All little documents of the mortgage this precluding the possibility of a subsequent charge.
3. The trustees ensures that, mortgage properties are ensured and it’s insurance kept alive.
4. He acts collectively for the debenture holders this obviating the need for individual action.
How to take Debenture from a company
The company on application for facility in which it will create debenture in favour of the bank will avail the bank the following document:
a. Memorandum and articles of association of the company it’s not yet in the bank’s possession.
b. Board resolution authorizing the creation of the charge duly signed by the company secretary and a director under seal.
c. Board resolution authorizing the borrowing duly sign by the company secretary and a director. Both (b) and (c) can be embodies in one resolution.
d. Copy of the certificate of incorporation
e. Certified copy of form CO7
f. Current tax clearance certificate
g. Property rate when building in involved.
h. Audited accounts of the company (sometimes up to 3 years)
i. Projected cash flow and financials.
The process of perfecting the debenture takes the form of legal mortgage as discussed above . The debenture holder enjoys all the rights of a legal mortgage but one mostly in use is the appointment of a receiver/manager who will have the Power to do others.
