Debentures commonly come with security arrangements. These security arrangements can take the form of either a fixed charge or a floating charge over the company's assets.
Fixed Charge: When debentures have a fixed charge, specific assets of the company (such as real estate or machinery) are pledged as collateral to secure the debenture. This means that if the company defaults on its debt, the debenture holders have a first claim on these specified assets.
Floating Charge: In the case of a floating charge, the debenture covers a broader category of assets, such as inventory or accounts receivable. These assets can change over time as the company conducts its regular business operations. If a default occurs, the debenture holders have a claim on the assets covered by the floating charge at the time of default.
In both cases, this security arrangement provides protection to debenture holders. If the company faces financial difficulties and cannot meet its debt obligations, the debenture holders have a legal right to the specified assets (fixed charge) or a flexible claim over a class of assets (floating charge) to help recover their investment. |
