Most of the Companies Act 2014 came into force on 1 June 2015. This legislation both consolidates Irish company law and also introduces various changes. Some of these will make real estate transactions between (1) companies and (2) directors and connected parties, easier to implement while maintaining creditor protection.
Overview of the Changes
Under the Companies Act 2014 (the "2014 Act"), certain previously restricted transactions can now avail of a streamlined summary approval procedure.
In addition, guarantees and the provision of security by companies in such transactions are no longer prohibited if they fall within certain threshold and business transaction rules.
Restricted Real Estate Transactions
The practical effect of the relevant provisions of the 2014 Act from a real estate perspective is that a company can now:
(i) sell land under a conditional sale agreement;
(ii) grant a lease or licence for the use of land in return for periodical payments; or
(iii) dispose of land for deferred consideration;
to its director(s) or director(s) of its holding company or other connected parties where it complies with the requisite steps of the new summary approval procedure.
This procedure includes passing a special resolution to approve the restricted transaction and requires a declaration of solvency to be sworn by the company's directors. Importantly, the independent auditor's report previously required is no longer needed.
The above transactions continue to fall outside the scope of the prohibition if they satisfy the terms of the threshold and business transaction exceptions described below and which are re-stated by the 2014 Act with some changes.
Guarantees and the Provision of Security
As mentioned above, guarantees and the provision of security by companies in the restricted real estate transactions are no longer prohibited if they fall within the threshold and business transaction rules.
The threshold rule applies where the value of the transaction and the total amount outstanding under any such earlier transactions are, together, less than ten per cent of the company's net assets for the last preceding financial year (arrangements entered into in accordance with the summary approval procedure are not reckoned).
The business transaction exception applies where a company enters into the transaction concerned in the ordinary course of its business and the value of the transaction is not greater, and its terms no more favourable, than those which the company ordinarily offers (or which it would be reasonable for it to offer), to a party of the same financial standing as the debtor under the arrangement.
Both restricted transactions and guarantees and the provision of security between certain group companies benefit from the intra-group exception. The 2014 Act fixes some unintended complications arising from the previous statutory wording.
In addition, the applicability of the threshold and intra-group exceptions under the old law varied depending on the types of directors and connected persons and corporate entities which were party to the transaction. This is no longer the case under the 2014 Act.
The definition of connected parties has been extended to include directors' civil partners and children of directors' civil partners.
The 2014 Act also re-states the previous restriction on the acquisition of a non-cash asset of requisite value either by a director or connected party from a company and vice versa. The transaction must be approved by a resolution of the company in general meeting.
The requisite value of the non-cash asset has been amended slightly. It now either exceeds (i) €65,000 or (ii) ten per cent of the company's net assets for the last preceding financial year but is at least €5,000.
The new law expressly provides that disposal of a company's assets by a receiver in such circumstances is not prohibited.
New Evidential Requirements for Loans between Companies and Directors
Some real estate transactions between companies and directors and connected parties involve loans between the parties.
The 2014 Act introduces new company-friendly evidential requirements for loans between such parties. From 1 June 2015, it is advisable to fully document the terms on which such loans are entered into. In the absence of a clear and unambiguous documented agreement certain presumptions can apply in some circumstances:
(i) a company loan to a director or connected party can be
presumed to be repayable on demand and bear interest at the
appropriate rate; and
(ii) conversely, a director loan to a company can be presumed on some occasions to be a gift and, even where it can be shown that the loan is in fact a debt, it can be presumed that the debt is interest free, unsecured and subordinated to the debts of other creditors.
In summary, the 2014 Act re-states the previous law regarding real estate transactions between companies and directors and connected parties to some extent, but with some improvements.
The new law and its operation are of equal interest and importance to companies, directors, connected parties and funders with the main legal implication for non-compliance, in addition to other civil and criminal consequences, being that transactions can be voidable at the instance of the company in some circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.