Manufacturing Assets And Security

• Published date: 06 June 2023
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Charges, Mortgages, Indemnities, Corporate and Company Law
• Law Firm: Myerson Solicitors LLP
• Author: Myerson Solicitors LLP

When a company receives a loan from a lender, it is common that a lender would require security (also referred to as a charge) over that company's assets.

A lender would often take security in the form of a debenture, which has particular nuances that should be considered in the context of a manufacturer.

What is a debenture?

It is a form of security agreement that grants charges (on a fixed and floating basis) over all of a company's assets.

This can include:

1. A legal mortgage over real estate/property owned by the company;
2. Fixed charges over specific assets, which in a manufacturing context is likely to be particularly relevant in the context of plant and machinery, raw materials and stock; and
3. A floating charge over all the company's other assets (such as stock or bank account).

What is the difference between a fixed and floating charge?

A fixed charge is a charge over a particular asset where the lender controls any dealing or disposal of the asset by the company.

A fixed charge will rank ahead of a floating charge in any potential insolvency proceedings.

A floating charge is a charge taken over all the assets or a class of assets owned by a company.

The main benefit to a company of the lender taking a floating charge over a fixed charge is that it does not prevent the company from buying and selling those particular assets in the course of business (without reference to the lender).

Fixed security over plant and machinery

A debenture will usually capture/create a fixed security over a manufacturing company's property, fixed plant and machinery.

In the case of plant and machinery, whether fixed security can be given depends upon whether the plant and machinery are classed as a fixture or a fitting.

It is important to note that any security regarding land (captured by a legal mortgage) will automatically extend to any fixtures that form part of the land (unless otherwise expressed in the debenture).

Fittings (moveable) do not necessarily form part of the land and will not be automatically included.

Therefore, it is important to specifically outline any fixed plant and machinery which is to be secured to avoid any doubt.

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