What is a Debenture?
A few Leeds United fans have asked me to explain what the Debenture that GFH has over the club is and what it means to the club. MB asked me again tonight and I said I’d try and give a quick explanation without going into great detail. This essay in indicative and does not explore any subtle intricacies of law but attempts to put it into a realistic context. All of this is how I understand it; do not rely on this in any legal context.
A debenture is nothing more than a piece of paper. This paper lays out the obligations that exist between someone who owns an asset and those s/he or it owes an obligation to.
Many of us know that when we buy a car on credit that we don’t own the car until we’ve paid off all of the repayments. We also know that as part of that agreement the company we owe the money to can take the car off us.
In legal terms the loan company has a CHARGE over the car until the debt is paid off.
In the context of what we are discussing here a CHARGE means that someone is “in charge” of something you own – something you own that has a value is called an Asset.
In practice it normally says that someone other than the person who owns the Asset is able to control how that Asset can be used, especially upgraded or sold off.
The details of what the charge conditions are will be written down in the debenture document.
Many of us have a CHARGE over us. Those of us who are buying a house are doing so via a mortgage.
To do this we took out a loan to buy a house and got a “mortgage” – we understand that we must repay the loan or the loaner takes possession of the house.
The document we signed to get the mortgage is a Debenture document that specifies which Charges the Asset (our house) is subject to.
For a house purchase the bit of the CHARGE we remember most is likely to be just that if you stop paying the monthly cash payments then the house will be taken back by the bank or building society but it will also say you MUST have house insurance in case of fire or other problems, repair any damage that occurs and lots of little small print we all ignore.
What does this mean?
It means nothing more than what we used to call “bricks and mortar”. It refers to anything solid that is not easy to change.
What does this odd term mean?
It means all the things that go into and out of a “fixed asset” over a few hundred years… in other words: the fixed asset is your house and the floating bits are your sofa and cushions, bed and mattress, carpets, pots and pans, children, wallpaper, paint, etc.
When we take on a loan we expect to give some security: a pawn broker takes a watch as security and gives it back when the loan is repaid; a building society takes a CHARGE over the property, such as your house. It means you can use your house and benefit from it but you definitely cannot sell or modify your house without permission in case you reduce the value of the house.
With business loans the CHARGES over Assets are just the same as for personal purchases except businesses want to buy stock to sell or something other than “bricks and mortar” – remember the difference between “FIXED” and “FLOATING” charges?
We all know that when we buy a £500,000 house on a mortgage we can’t sell it a week later and fly to Barbados with £500,000 in our pocket.
We know the mortgage Company has the “first call” on the property and we cannot sell the property without the written and explicit agreement of the building society so it gets its money back: we can only fly to Barbados with any net gain in value after fees have been deducted.
The person or company who has control of the Asset through a Charge written into a Debenture (such as GFH has with LUFC) can stop any activity that it feels is going to reduce the chances of it getting its money back.
In the case of a house, the mortgage company will not allow you to take structural walls out in case the house collapses, however it will allow you to add a conservatory that will add to the value of the house. You MUST ask though – so Radz has to ask GFH and get written agreement.
In the recent case of LUFC/GFH, when the debenture at issue was written up and filed, the Charge and conditions listed in the Debenture allow GFH to stop the owner making business decisions that potentially might lead to the club going bust again – this would have led to GFH losing money and they are perfectly within their rights to stop such actions. GFH can stop risky business decisions such as buying a player whose value they do not feel is a true reflection of the price paid.
The new owner, Andrea Radrizzani, wanted to rid us of GFH but the immediate cost demanded by GFH was too high and would have drained money from the transfer pot. This unfortunately means GFH retain a valid reason for leaving the charge over us in place and, as written in the debenture, can potentially can step in to change what Radrizzani is doing.
If Radrizzani fails to repay GFH’s loans then GFH can apply to the courts to have their debt converted into shares in the club or even take over altogether.
I’ve written in general terms so far – I have the GFH debenture and may update this essay later.
Greenfield Investments and Elland Road
It is important to realise that the debenture GFH has over us only applies to any assets directly owned by the club – Leeds United Football Club Limited.
The news today that Radrizzani has bought the stadium back from Adler by using his holding company, Greenfield Investments, means that GFH have absolutely no claim over Elland Road.
It is important to anyone thinking of buying an Asset, such as a house or football club, that they know what charges exist over the Asset. It is now a legal requirement that any charge over property is registered at the Land Registry and any charge over fixed or floating assets are filed at Companies House.
Release From a Charge
There is rather “odd” feature to the cancellation, or release, from an obligation under a filed charge.
Most charges are written and agreed to be in perpetuity without an end date – a quirk of law means that the person or entity subject to such charge cannot cancel the charge (ie wipe the debenture record clean) but it can only be done by the person or company who took out the charge in the first place – yes, this means it stays until GFH chooses to file that there is no longer valid a charge. LUFC had a charge from the Bank of Ireland for many years that remained filed at Companies House for many years after there were no longer any dealings – that didn’t mean that a retrospective claim couldn’t have been made so the charge, as written in the debenture, remained in place.
Never, ever agree to a personal charge against you, be it a mortgage or any other security for a loan, without formal legal advice from a solicitor.
The terms and conditions that apply to any charge over a property or person or loan are many and varied. The GFH Debenture Document is just one example – I may discuss the exact terms later.
Why take out a Charge over something?
This is quite simple really: if I lent you £1000 to buy a car and you were going to repay me over time then I’d take out a charge on the car.
While I saw that car on your drive I could take it from you to get my money back if you stopped paying.
The legal Charge I have means you cannot sell the car and spend the money on a holiday in Magaluf or wherever: you do that and I can take legal action to get my money back.
A debenture is just a document that lists all the restrictions that are placed upon a person or company. In the case of property or businesses the charges written down in the debenture must be filed at Companies House or the Land Registry so that investors know what risks they are subject to.
If we keep paying our bits back to GFH on time and the Club makes progress towards promotion then we’ve nothing to fear now from GFH. I feel they are now little more than an irritant after Radrizzani’s successful intervention but as a Leeds fan I believe we need to ever vigilant at the board level to any change that could affect the Leeds Fans of the Future.
29th June 2017