What debenture means
A debenture is a company saying, in writing, that it owes money and setting out the terms.
At its simplest it is a document acknowledging a debt. In practice it usually does more: it creates security over the company's assets, so the lender is not merely a creditor but a secured one.
The security takes two forms. A fixed charge attaches to specific identified assets, such as a particular building or a named machine, and the company cannot dispose of them freely. A floating charge hovers over a changing pool of assets, such as stock in trade or receivables, letting the company trade normally until a default causes the charge to crystallise and fasten on whatever is in the pool at that moment.
Most commercial debentures combine both. Fixed charges over the things that do not move, a floating charge over everything else.
How it is used
Banks lending to Nigerian companies commonly take an all assets debenture, giving them fixed charges over land and specific equipment and a floating charge over the rest.
Companies also issue debentures to raise money from investors, in which case there may be many holders. A debenture trust deed is used, appointing a trustee to hold the security and act for all of them, which avoids each holder having to enforce separately.
A debenture typically sets out the principal, the interest rate and payment dates, the assets charged, the events of default, the lender's right to appoint a receiver, and any covenants restricting what the company may do, such as taking on further borrowing or disposing of charged assets.
Those covenants are where the real control sits. A company that has given an all assets debenture usually cannot borrow elsewhere or sell significant assets without the lender's consent.
Key features
- A written acknowledgement of company debt, usually creating security
- Fixed charges attach to specific assets, floating charges to a changing pool
- A floating charge crystallises on default and fastens on the assets then held
- Must be registered at the CAC within the statutory period to be effective
- A trust deed and trustee are used where there are multiple holders
- Usually carries covenants restricting further borrowing and asset disposals
How this works in Nigeria
Registration is the point on which everything turns. CAMA requires charges created by a company to be registered at the CAC within the statutory period after creation, and a charge that is not registered in time is void against a liquidator and against other creditors. The company still owes the money, but the lender drops from secured to unsecured, which usually means recovering a fraction.
This is not a theoretical risk. Missed registrations are among the most common and most expensive mistakes in Nigerian secured lending, and the deadline is short.
On insolvency, ranking matters. Fixed charge holders look to their specific assets first. Preferential claims, including employee wages within limits and certain taxes, are paid ahead of floating charge holders out of floating charge assets. Floating charge holders then take what is left, and unsecured creditors come after that.
CAMA 2020 also introduced administration and company voluntary arrangements, which affect how and when a debenture holder can enforce, so the older assumption that a lender simply appoints a receiver and takes over no longer tells the whole story.
Debenture vs loan agreement vs share
Two of these make you a creditor and one makes you an owner, and the difference decides what you get back.
A loan agreement is the contract to lend. It can be unsecured, in which case the lender ranks with ordinary creditors.
A debenture is the company's acknowledgement of the debt with security attached. The holder is a creditor with a claim on assets, ranking ahead of shareholders and, depending on the type of charge, ahead of unsecured creditors.
A share makes you an owner. You take the upside if the business succeeds and you rank last if it fails, behind every creditor.
So an investor choosing between a debenture and shares is choosing between a fixed return with priority and an uncertain return with ownership. Investors in early stage Nigerian companies sometimes take convertible instruments precisely to avoid choosing at the outset.
Limits and risks
A debenture is only as good as its registration and only as valuable as the assets behind it.
An unregistered charge is void against a liquidator, which is the single most serious risk. A charge over assets that turn out to be worth little, or that were already charged to somebody else, is not much better.
Floating charges rank behind preferential claims, so employees and certain taxes are paid first out of those assets. A lender relying on a floating charge over stock in a failing business often recovers far less than the book value suggested.
Enforcement takes time and value leaks during it. Receivership costs come out of the assets, and a business in receivership usually sells for less than one sold as a going concern.
For the company, the covenants bite hard. An all assets debenture can leave a company unable to raise money anywhere else without the existing lender's permission.
Worth knowing
Diarise the CAC registration deadline the day the debenture is signed, and confirm the filing. A charge registered late is void against a liquidator, and the lender who discovers that during an insolvency has usually lost everything they thought they had secured.
Questions people ask
What is a debenture?
A written acknowledgement by a company that it owes a debt, usually creating security over the company's assets by way of fixed and floating charges. It makes the lender a secured creditor rather than an ordinary one.
What is the difference between a fixed and a floating charge?
A fixed charge attaches to specific identified assets which the company cannot freely dispose of. A floating charge covers a changing pool such as stock or receivables, letting the company trade normally until default causes it to crystallise.
Does a debenture need to be registered in Nigeria?
Yes. CAMA requires charges created by a company to be registered at the CAC within the statutory period. A charge not registered in time is void against a liquidator and other creditors, leaving the lender unsecured.
Who gets paid first when a company with a debenture fails?
Fixed charge holders look to their specific assets first. Preferential claims including employee wages within limits and certain taxes rank ahead of floating charge holders. Floating charge holders come next, then unsecured creditors, then shareholders.
What is the difference between a debenture and a share?
A debenture makes you a creditor with a claim on the company's assets and a right to interest. A share makes you an owner, entitled to dividends and to whatever is left after every creditor is paid.
What is a debenture trust deed?
A document used where a debenture is held by many investors. It appoints a trustee to hold the security and act on behalf of all holders, so each does not have to enforce separately.