Irredeemable debentures explained
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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.
What is an irredeemable debenture?
Put simply, an irredeemable debenture is a tool used to outline the conditions of a loan agreement. In this case, there is no specific 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.
How do irredeemable debentures work?
In simple terms, an irredeemable debenture is an agreement made between the lender and the borrower, usually with a favourable interest rate. In the case of a company becoming insolvent, the debenture ensures that the lender is first to receive their funds.
This form of debenture gives lenders piece of mind in case the borrowing company faces financial difficulties, and is also more cost–effective for the borrowing company.
An example of an irredeemable debenture
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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What's the difference between irredeemable and redeemable debentures?
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. For example, a business overdraft is likely to have an irredeemable debenture.
Redeemable debentures:Very simply, these written loan agreements cover how and exactly when companies must repay loans to the original lender or debenture holder.
More on loan security types:
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