So…what is a Mortgage Debenture?

Banks routinely ask for a ‘Mortgage Debenture‘ for lending of almost any size (there was a time when it was mainly for larger commercial lendings). A client who recently provided the bank with this security asked me to explain what it was – a bit belated but he is not the only one who understood it generally and was happy to sign the standard document provided (it was also a condition of a much-needed overdraft) but didn’t fully explore the rights that it gives the bank.

Again, keeping it as simple as possible (if I can understand it etc……) when you provide the bank (or any other supplier) with a Mortgage Debenture you are handing them the following:

A ‘fixed charge’ over nominated assets of the business. In some cases that will include a legal mortgage over property that is owned by the company and scheduled in the legal paperwork. Most commonly however it is a charge over the ‘book debts’ of the business – your outstanding invoices. This is why if a business takes up an invoice discounting facility with another lender their bank will have to ’defer’ their charge over the book debts to the new lender – and that often leads to their security position being weakened causing a review of the support that they give.

It is not always appreciated that this fixed charge can include a charge not only over the assets that the business own now – but a charge over any assets acquired in the future. Again this can act as a bit of a constraint with future asset funding although the bank will always be amenable to discuss any problems it causes.

 As well as this ‘fixed charge over current and future assets’ the mortgage debenture document includes a ‘floating charge’ over other assets the company may own at any time. This ensures that as a business you have the flexibility to buy and sell assets but also that even if the assets change then they will all be caught under the banks charge – even if the bank had no knowledge of them. It is as ‘strong’ security as a ‘fixed charge’

Other provisions: the most important thing about a mortgage debenture for a bank is that it effectively gives them ‘step in’ rights. That is the bit that is not always understood by businesses. It means that if the bank believes that it has justification (and particularly if it judges that it’s position is deteriorating) then it has the power to appoint a Receiver who can enter your business and take control of the assets – including the collection of your remaining debtors, when it can use the proceeds to reduce the bank debt – in preference to any other creditors. This is often referred to as when the charge is ‘crystallised’.

The bankers view? It is only right that when lending to a company (on the back of a positive assessment of its assets) that they have a charge over those assets and that caters for any changes to the assets. Also that as overdrafts are most commonly a tool to deal with the cashflow implications of delays in invoices, that they have control over the debtor book. The reality is that by the time that they exercise any ‘step in’ rights it may be too late to take ownership of any valuable assets so a mortgage debenture has limited real value – other than the powers it provides.

The business owners view?: The bank have asked for this and made it a condition of the funding we cannot do without, it is a standard thing, so we have to give it. In this way it becomes almost a formality. Always however be aware of what you are signing and seek legal advice if required.

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