Our previous piece about debentures gave an overview of these written loan agreements. Now we’re going to look at a specific kind: irredeemable debentures.
Put simply, an irredeemable debenture is a loan agreement where there is no time period in which the borrower must pay the lender back. Typically, such a loan would continue until a 'contingent event' such as insolvency or the company winding up.
Irredeemable debentures, or perpetual debentures as they can be known, are an agreement made between the lender and borrower, usually with a favourable interest rate. They benefit borrowing companies because they’re a more cost-effective way to service debt. For lenders, it’s about peace of mind in case the company experiences financial headwinds. That’s because the written debenture document secures the loan by ensuring the holder of that agreement is first in the line of creditors during a future insolvency.
A business lender and farm machinery manufacturer make a perpetual debenture agreement for a large sum. The debenture agreement lodged with Companies House prevents the manufacturer from selling its premises and part-built tractors, without the lender’s agreement — or before repaying that sum.
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As if debentures weren’t complex enough — two kinds have similar names. The irredeemable debentures we’ve looked at here and their soundalike, redeemable debentures. Here’s the difference:
Irredeemable debentures: Here’s the key takeaway about an irredeemable debenture (or perpetual debenture). Generally this loan won’t be due for repayment with a company assets unless it goes into liquidation.
Redeemable debentures: Very simply, these written loan agreements cover how and exactly when companies must repay loans to the original lender or debenture holder.