October 29th, 2012 / Insight posted in

Use debentures to secure loans

SH writes: I have a long-standing profitable business and a new venture that is in a standalone company. My existing company has lent £35,000 to the new venture, and I have personally lent another £17,000. I want to protect these loans and think it should be done through a debenture issued by the new venture. Is this the best way forward?

The best way is to draw up a loan agreement and have this signed by both parties so that the debt is formally acknowledged, and thus easier to enforce, writes Jon Sutcliffe, partner at Kingston Smith LLP. It is also prudent to draw up some board minutes for the company. 

You must then register the debenture within 21 days of its creation at Companies House, which can be done for £13, using form MG01. If you do not do so, the security created by the debenture will be unenforceable. Please note that the time limit is strict; if you miss it, you will need a court order to permit late filing.

You will need to provide a description of the charge, and details of the amount secured. Assuming there isn’t any property in the new venture, the debenture would be ranked as a fixed and floating charge over the company’s assets, and the amount secured will be the loan amount. The form can be signed by you, and the charge will then show on the public record at Companies House.

As there are two loans, you will need two loan agreements and two debentures. You might also want to think about the repayment terms. If the new venture needs credit, it is worth considering structuring the loan so that it can be presented in the company accounts as payable after more than one year. When repaid, the charge is removed from Companies House by the completion of form MG02. Both forms can be downloaded from www.companieshouse.gov.uk