How to cancel a debenture charged to bank ?

There are several ways a debenture can be cancelled.

1. To settle the outstanding loan in full and cancel the facility.
2. Submit a formal request to bank to cancel the debenture by offering additional security. Sometime bank may consider removing the debenture without asking for additional security if the borrower has long borrowing relationship with the bank and has maintained a good repayment record throughout the period.
3. Apply a fresh bank facility from another bank to redeem the existing loan from the debenture holder. For eg. a borrower can apply a RM2.0 mil facility from Bank B to redeem the existing RM1.0 mil. facility from Bank A.
   
   
   

What is the implication of charging debenture ?

In early chapter, although I have advised borrowers not to charge debenture to bank, a borrower sometime has no choice especially when the borrower is a start-up company or unable to present a strong financial statements.

Most of the time, borrowers accepted the terms without knowing the implication of charging its debenture to banks.

What exactly the implication of charging debenture to banks ?

1. After charging debenture to a bank for some bank facility, other bank who wish to grant additional facility to the company may need to obtain consent from the debenture holder before the new facility is released. Whether the debenture holder agreeable to grant consent will depend on the policy of the bank. Debenture holder can either refuse to grant consent or take long time to process the request before consent is given.
   
2. In worst scenario, other banks may even refuse to grant additional facility to the company.

Should you charge your debenture to banks ?

Sometime borrowers are requested to charge its debenture to bank as an additional security. This is very common when the approved loan amount is not fully secured. For eg. an approved loan of RM 1.0 mil. secured against a fixed deposit of only RM200,000.

What is debenture in layman's term ? For a loan secured against a property or fixed deposit, the lending bank will create a charge on the property or fixed deposit receipt, whereas a debenture is a charge created over the fixed and floating assets of the company, meaning on fixed asset and current assets (stock, debtors and desposits). The debenture holder has the priority in liquidating the company's assets to recover the loan in default.

It is NOT advisable to charge your debenture to any bank. A borrower can offer more collateral in order to waive the debenture charge. After charging your debenture, the only way to remove the debenture is to full settle the outstanding loan.

Only a Sdn Bhd can charge its debenture to bank. A debenture cannot be created on a sole-proprietor or partnership company.