16th April 2025
When reviewing investment opportunities, investors will often encounter a range of legal and security structures. One such structure is the debenture, which is commonly used in private debt and growth finance. This article provides a general, educational overview of debentures and how they are typically used. It is not intended to offer investment advice or comment on the suitability of any specific opportunity.
A debenture is a form of secured lending under which a lender takes security over a company’s assets. Unlike unsecured lending, debentures provide lenders with defined legal rights and enforcement mechanisms if a business experiences financial difficulty. The presence and structure of a debenture can materially affect creditor ranking and recovery outcomes, particularly in insolvency scenarios.
In many cases, a debenture holder will rank ahead of unsecured creditors if a company becomes insolvent. This higher ranking means that, subject to the specific terms of the security and applicable insolvency law, debenture holders may have preferential rights over certain assets before general creditors are paid. The extent of this priority depends on the nature and scope of the security granted.
Debentures often combine fixed and floating charges. Fixed charges typically relate to specific, identifiable assets—such as property, machinery, or equipment—which generally cannot be disposed of without the lender’s consent. Floating charges, by contrast, usually apply to changing or circulating assets such as stock, receivables, or cash, allowing the business to continue trading in the ordinary course of business. This combination can provide broad asset coverage while preserving operational flexibility.
Another feature commonly associated with debentures is the lender’s ability to appoint an administrator or receiver following certain default events. This may allow the lender to take control of secured assets, preserve their value, and manage the enforcement process in accordance with the terms of the security and relevant insolvency legislation. These rights are structural in nature and differ materially from those available to unsecured creditors.
If a company enters insolvency, a debenture holder may be able to enforce its security, recover proceeds from the sale of secured assets, or benefit from preferential rights depending on the charge structure. However, recoveries are not guaranteed and will depend on factors such as asset values, total liabilities, and the specific circumstances of the insolvency.
At Crowd2Fund, safeguarding investors remains a priority. As part of this ongoing focus, we have increased the proportion of selected deals that include debenture-backed security, where appropriate. Investors who wish to understand how security is structured are encouraged to review the credit commentary for each opportunity, which outlines the key terms, security arrangements, and relevant risk considerations.
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