Loans to the company 319Loans to the company
It is possible that the members of the company will contribute all the capital which the com-
pany needs. However, most companies also borrow money, either as a loan or by buying
goods on credit.
A debentureis a document issued by the company which acknowledges that the
company owes a debt. It will state the date on which the debt is to be repaid and the rate of
interest which is payable. Debenture holders are not members of the company, they are
creditors of the company. Debenture holders will want security for their debts in the form
of a company charge.
A company can give security to any creditor by granting a charge over some or all of the
company’s assets. If the debt is not repaid the lender will be able to sell the charged assets
and take what is owed. Companies can give two types of charges; fixed charges and float-
ing charges.
Fixed charges
A company can provide security for a loan by granting a fixed charge on certain assets. In
effect this means that it mortgages those assets to the creditor. Consequently, the company
will not be able to dispose of, or change the nature of, the property charged without the
permission of the charge holder.
For example, Dash Ltd wants to borrow £400,000 from the bank. The bank lends the
money but takes a fixed charge on the company’s factory. As long as the company is
repaying the loan as agreed it will retain possession of the factory and can use it in the
ordinary way. The company cannot however sell the factory without the bank’s permission.
Furthermore, if the company fails to repay the debt the bank can sell the factory and deduct
what it is owed from the proceeds of sale.
Figure 11.1What is their role?