Manufacturing Assets and Security

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).

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.

When considering stock and raw materials, it is usually the case for the lender to capture these by both fixed and floating means, albeit they are more likely to actually be caught by the floating charge.

As mentioned above, the company can still buy and dispose of its stock and raw materials if it is subject to a floating charge, without reference to the lender, and can carry out its ordinary business more effectively.

There must be a balance struck with the lender wishing to maximise the level of control it has and the company wanting to function as a business without the need to refer to the lender on each disposal or dealing.

If the lender seeks to enforce its security over the company, often assets such as plant, machinery and raw materials could be removed from the business, seized and sold.

In a manufacturing context, this could be detrimental to the running of the business without those assets.

The company would not be able to generate profit.

Therefore, it is important to consider those assets that are subject to which type of charge and what level of control is given to the lender.