This briefing sets out a high level review of issues relevant to secured lending in Ireland.
LENDING IN IRELAND
Commercial lending is generally not a regulated activity in Ireland, although lending to natural person 'consumers' may trigger a licencing requirement. Banks licensed in other EU Member States may be compelled to use their passport to carry on a lending activity in Ireland that would otherwise be unregulated.
Many lenders in the Irish market are regulated for other reasons (i.e. by virtue of taking deposits or conducting insurance or intermediary business), those lenders are subject to the Central Bank of Ireland's ("CBI") codes of conduct such as the Code of Conduct on Business Lending to Small and Medium Enterprises, the Code of Conduct on Mortgage Arrears and the Consumer Protection Code. Provision of credit in the form of cash loans to natural person individuals may require authorisation by the CBI as a 'retail credit firm' subject to certain exceptions.
In general, tax at the standard rate of income tax (currently 20 per cent) is required to be withheld from payments of Irish source interest However, many withholding tax exemptions exist as a matter of Irish law, including in respect of interest paid in Ireland on a loan from a bank carrying on a bona fide banking business in Ireland, or by where the beneficial owner of the interest paid is a company that is resident for tax purposes in an EU Member State (other than Ireland), or in certain countries with which Ireland has entered into a double taxation agreement. However, this exemption does not apply where the interest is paid to the recipient company in connection with a trade or business carried on in Ireland by it through a branch or agency.
There are no specific controls or taxes levied on spot FX transactions in Ireland. However, foreign currency is an asset for Irish capital gains tax purposes, and any movement in the value of currency in the hands of an Irish resident between acquisition and disposal will generally give rise to a taxable gain or allowable loss, as appropriate. For Irish resident companies, foreign exchange gains and losses, whether realised or unrealised, are generally subject to corporation tax in Ireland and in the case of trading companies the tax treatment generally follows the accounting treatment.
In Ireland, debt is normally transferred pursuant to contractual provisions which mirror those contained in the Loan Market Association's standard documents.
Secured lending is well established in Ireland with security being taken in the form of a mortgage, charge or security assignment. Depending on the type of borrower and/or type of asset the subject of the security, filings may be necessary to ensure validity and/or priority e.g. corporates, regulated funds, co-operative societies and in terms of assets land, aircraft, agricultural assets.
Enforcement is largely by way of self-help remedy through the appointment of a receiver or the exercise of statutory or contractual powers of sale. Formal insolvency procedures may also be used as part of an enforcement or restructuring. More details on these below.
There is a well-established court system in Ireland, which is experienced in lending and security arrangements, enforcement associated insolvency procedures.
There are two systems of registration in Ireland, registration of documents in the Registry of Deeds known as "Unregistered" Title and "Registered" Title, registered in the Land Registry. In 2006 both were merged such that same are governed by the Property Registration Authority ("PRA") where all records are retained, most of which have been digitalised.
Under the Registry of Deeds system the deed to the Purchaser is registered but returned to the Purchaser who retains same with the balance of the title documents. On purchasing a property with this type of title there are often several deeds and documents of title.
The most recent deed to the purchaser may not evidence the Vendor's title. The Purchaser must investigate each relevant deed and document on title to confirm its validity, construction and legal effect. Pursuant to section 56 of the Land and Conveyancing Law Reform Act a period of at least 15 years' title commencing with a good root of title is the period for proof of title which the purchaser requires. Registration of a Vendor's title to Unregistered land is not conclusive evidence of their title and title to Unregistered property is not guaranteed by the State. Since 1 June 2011, all acquisitions of Unregistered Title after that date became subject to compulsory registration under the Registered Title System (referred to below).
Under the Registered Title system the deed to the purchaser is lodged with the Land Registry section of the PRA and retained by the PRA with the balance title documents which are recorded by the PRA on a "folio". Each folio has a map or maps attached from which the property can be identified. However, the PRA maps are not conclusive evidence of the boundaries. When purchasing a property with a Registered Title the purchaser investigates the relevant folio or folios and in the ordinary course of events investigations of title can be straightforward. The folio(s) are conclusive evidence of title except for certain burdens incapable of registration which are addressed by the purchaser's solicitor separately. Registered Title is guaranteed by the State.
Compulsory registration of title with the PRA was brought into specified counties on a phased basis commencing on 1 January 1970 and is now compulsory throughout the Republic of Ireland since 1 June 2011. In the purchase of a property in Ireland which consists of an Unregistered Title this title must now be registered with the PRA by way of an Application for First Registration. It should be noted, however, that compulsory registration does not relate to voluntary conveyances. 93% of the total land mass of the Republic of Ireland and almost 90% of the legal titles are now registered in the PRA as Registered Title. Dublin, with over 59% coverage, and Cork, with over 86% coverage, (being the two last counties to become compulsorily registerable in 2011), lag behind as the other 24 counties have over 96% registered title (in terms of land mass).
Receivership in Ireland is largely a contractual matter. Receivers are generally appointed under a security document which sets out the procedure for the appointment of a receiver (with the relevant facility letter), receivers' powers and how recoveries are to be dealt with. Once a receiver is appointed, the directors powers cease so far as the receiver is acting. The receiver usually signs for the company under power of attorney in the security document. Receivers can be appointed as receiver or as receiver and manager (in the latter case with power to run the business of the company).
The main corporate insolvency proceedings under Irish law are as follows:
- compulsory winding up by the court;
- creditors' voluntary liquidation (with confirmation of the court); and
- company examinership.
Liquidations of insolvent companies are either (a) creditors' voluntary liquidations started by the directors and members on grounds of insolvency or (b) by court order in a court liquidation started by members or creditors on insolvency or just and equitable grounds. The directors' powers cease fully on a winding up and the liquidator can seal documents with the company seal. The function of the liquidator is to take control of all the property vested in the company, to realise the assets and to pay the creditors in accordance with the priorities at law. In fulfilling these obligations the liquidator is subject to a varying degree of supervision by the court, creditors, shareholders and the Director of Corporate Enforcement depending on the type of liquidation. At the end of the process of liquidation, the company is dissolved.
Examinership is a procedure in respect of insolvent companies started by the directors, members or creditors lasting up to 100 days (subject to extension) and during it no action may be taken by creditors other than set off rights. The examiner's function is to examine the affairs of the company to see if he can devise a scheme to facilitate the survival of the company and its business. He does not take on any director functions unless he gets the approval of the court.
MIXTURE OF PROCEDURES
It is possible to have a company in receivership and liquidation, however an examination occurs on a stand alone basis and a receivership and liquidation can occur after an examination. If a receiver is appointed there is a window of three days during which an examiner can be appointed. If appointed the receiver ceases to act.
IMPLICATIONS OF INSOLVENCY
- Improper Transfer of Assets: The court has the power to order the return of property or the proceeds thereof if the effect of the disposal had the effect of a fraud on the company e.g. a landlord taking stock after a company was insolvent was invalidated. It is not necessary to prove fraud. This provision is potentially wide ranging.
- Frederick Inns: This case established the principle that the assets of insolvent (or near insolvent companies) are held on trust for its creditors.
- Shadow Director Risk: Personal liability can exist for directors on grounds of reckless or fraudulent trading, misfeasance or failure to keep proper books and records. These provisions apply to shadow directors which banks are at risk of being if they are seen to direct the directors in the management of the business of the company.
EFFECT OF EXAMINATION
- No enforcement of security
- If you hold guarantees get immediate advice as time critical deadlines exist.
- Pre-petition contracts cannot be repudiated by the examiner save for negative pledges or restrictions on borrowing.
- As part of a scheme the company with court approval may repudiate a contract under which some performance obligations exist other than the repayment of money.
- If an examiner forms the view that a company is capable of survival he must then formulate proposals for a scheme of arrangement and put it to meetings of members and creditors. The court can confirm proposals and make them binding on the members and creditors provided at least one class of impaired creditor votes in favour of the scheme and provided it is fair and equitable and not unfairly prejudicial. The benchmark test which the scheme must satisfy is that it must provide for at least the same return as the creditor would have received on a winding up. Therefore if on a winding up a creditor would be repaid 100% of its debt then the scheme should provide that its debt remains intact and is not written down.
EFFECT OF LIQUIDATION
- Unfair Preference: Any security granted or disposal of an asset made when the company is insolvent is invalid if made with intent to prefer during the 6 months (or 24 months if made to a connected person) prior to an insolvent winding up.
- Floating Charge without additional advance: taken within the 12 months before a winding up can be invalidated.
- Disclaimer: a liquidator can with sanction of the court disclaim or set aside onerous contracts on terms set by the court. Successful cases to date relate to long term obligations that are out of the money either in the form of leases of land or environmental licences with onerous conditions.
- Pooling and Contribution Orders: if two or more group companies are being wound up, the court has power to require both companies to be wound up together as if they were one company aimed at situations where they were effectively run as the one company. A pooling order does not affect the rights of any secured creditor of any companies. Further, a group company not in liquidation can be required to pay to the liquidator of another group company in liquidation an amount equivalent to the whole or part of all or any of the debts provable in that winding up depending on the involvement of the solvent one in the affairs of the insolvent one.
- Court Liquidation: In a court liquidation any disposal of assets after the date of the presentation of the petition and before the making of the winding up order is invalid.
- Pari Passu treatment of creditors: Irish law provides for the distribution of assets to the unsecured creditors pari passu to claims. This is subject to certain exceptions such as security, set off (in certain circumstances) and subordination. Insolvency triggers causing the company to hand over property are at risk e.g. some netting arrangements have been set aside. However Irish law recogises that the liquidator takes no better title to the property of the company than the company itself had. Consequently, he should take the assets subject to any pre-existing enforceable right of a third party in or over them.
Broadly the priorities at Irish law are:
- fees, costs and expenses of an examiner;
- fees, costs and expenses of a receiver;
- payment due to the holder of a fixed charge;
- amounts due under section 1001 of the Taxes Consolidation Act 1997 where the holder of a fixed charge over book debts may be obliged by the Revenue Commissioners to pay all or part of Revenue Commissioner claims for arrears of PAYE and VAT out of the proceeds of the charge;
- amounts certified by an examiner as liabilities of the company incurred during the protection period certified by the examiner as necessary to ensure the survival of the company as a going concern;
- costs, charges and expenses of the liquidation;
- Certain social welfare contributions;
- any claim by preferential creditors (generally taxes, rates and employee entitlements);
- payment due to the holder of any floating charge;
- payment to unsecured creditors; and
- claims of subordinated creditors.
NOTICES OF ATTACHMENT/FIXED CHARGE ON BOOK DEBTS
If (a) a lender has the benefit of a fixed charge on book debts but it is not a valuable part of the security package and (b) if significant amounts of PAYE and VAT are outstanding to the Revenue Commissioners, consider releasing your fixed charge. Cash on deposit may become subject to a notice of attachment requiring it to be paid to the Revenue Commissioners in discharge of arrears of taxes. Appointment of receiver defeats a subsequent notice of attachment.
The Insolvency Regulation applies in Ireland as in other EU member states such that even though a company is Irish if its centre of main interests ("COMI") (i.e. where effective management is located) is outside of Ireland and in another EU member state, then it must be subject to certain insolvency procedures under the laws of this other country. If assets are located in other EU countries then certain insolvency proceedings may be started in other EU member states but only in relation to assets located in those jurisdictions. Exceptions exist for enforcing security and set off. Specific EU regimes exist for credit institutions and insurance companies and are not dealt with here.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.