Part E Capital and the financing of companies 16: Loan capital 2452 Debentures and loan capital
2.1 Loan capital
Loan capital comprises all the longer term borrowing of a company. It is distinguished from share capital
by the fact that, at some point, borrowing must be repaid. Share capital on the other hand is only returned
to shareholders when the company is wound up.A company's loan capital comprises all amounts which it borrows for the long-term, such as, permanent
overdrafts at the bank, unsecured loans, from a bank or other party and loans secured on assets, from a
bank or other party. Companies often issue long-term loans as capital in the form of debentures.2.2 Debentures
A debenture is a document stating the terms on which a company has borrowed money. There are three
main types.
A single debenture
Debentures issued as a series and usually registered
Debenture stock subscribed to by a large number of lenders. Only this form requires a debenture
trust deed, although the others may often incorporate oneA debenture is the written acknowledgement of a debt by a company, normally containing provisions as to
payment of interest and the terms of repayment of principal. A debenture may be secured on some or all
of the assets of the company or its subsidiaries.A debenture may create a charge over the company's assets as security for the loan. However a document
relating to an unsecured loan is also a debenture in company law.2.3 Types of debenture
A debenture is usually a formal legal document. Broadly, there are three main types.
(a) A single debenture
If, for example, a company obtains a secured loan or overdraft facility from its bank, the latter is
likely to insist that the company seals the bank's standard form of debenture creating the charge
and giving the bank various safeguards and powers.
(b) Debentures issued as a series and usually registered
Different lenders may provide different amounts on different dates. Although each transaction is
a separate loan, the intention is that the lenders should rank equally (pari passu) in their right to
repayment and in any security given to them. Each lender therefore receives a debenture in
identical form in respect of their loan. The debentures are transferable securities.
(c) The issue of debenture stock subscribed to by a large number of lenders
Only a public company may use this method to offer its debentures to the public and any such
offer is a prospectus; if it seeks a listing on The Stock Exchange then the rules on listing particulars
must be followed. Each lender has a right to be repaid their capital at the due time (unless they
are perpetual) and to receive interest on it until repayment. This form of borrowing is treated as a
single loan 'stock' in which each debenture stockholder has a specified fraction (in money terms)
which they or some previous holder contributed when the stock was issued. Debenture stock is
transferable in multiples of, say, £1 or £10.
A company must maintain a register of all debenture holders and register an allotment within two
months.Key term
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