Pari Passu Debenture UK: Loan Security Guide

What this document is

A debenture is a written instrument granted by a company that gives a lender security over the company's property and undertaking. It usually sits behind a separate loan agreement, which sets out the commercial terms of the borrowing itself, such as interest, repayment dates and events of default.

The debenture is the security layer that makes the loan enforceable against assets if the borrower stops paying. In the UK, most debentures are drafted on an 'all monies' basis. That means the security covers every sum the borrower owes the lender under any arrangement, now or in the future, rather than a single named loan.

The instrument will typically contain a fixed charge over specific assets such as land, plant, book debts and intellectual property, along with a floating charge across the rest of the business. 'Pari passu' is Latin for 'on equal footing'. A pari passu ranking clause says that the security created by this debenture will rank equally with other security of the same class, rather than being subordinated to it.

How to use this document

1. Agree the commercial terms first. Before drafting the debenture itself, the lender and borrower need clarity on the loan amount, interest, repayment schedule and any conditions precedent. These commercial points belong in the loan agreement. The debenture then reflects the security package that supports those commercial terms, so getting the headline deal settled first avoids rework later. 2. Decide the charge structure. Work out which assets will be covered by fixed charges and which will sit under the floating charge. Fixed charges usually attach to property, specified equipment, shares and book debts, while the floating charge catches stock and other assets the company needs to deal with day to day. The wording here affects priority on insolvency, so it needs care. 3. Draft the pari passu wording carefully. A pari passu clause should make clear which other security, if any, ranks equally, and should restrict the borrower from granting senior security to anyone else without consent. This is commonly backed up by a negative pledge. Without this, a later lender could leapfrog the original security and take priority on enforcement. 4. Execute the debenture correctly. The document must be signed in line with the company's constitution and section 44 of the Companies Act 2006. Most debentures are executed as deeds, which means the execution formalities, including witnessing where required, have to be observed. A defectively executed debenture can be challenged later, which undermines the whole point of taking security. 5. Register the charge at Companies House within 21 days. Under section 859A of the Companies Act 2006, a charge created by a company must be registered at Companies House within 21 days of creation. Miss that window and the charge is void against a liquidator, administrator or other creditor. Where land is involved, further registration at HM Land Registry may also be needed.

Common questions