The Companies Act 2014 (the Act) is due to commence on 1st June 2015 and as this date fast approaches, lenders should be aware of some of the practical changes to the law introduced by the Act which will impact on their commercial lending transactions with Irish corporations.
Registration of charges
- Priority of Security
The Act provides for two methods of registration of charges with the Companies Registration Office (CRO). The first method consists of filing a Form C1 in the CRO. This Form C1 must be filed within 21 days after the creation of the relevant charge. After the commencement of the Act, it will not be necessary to include on the form the amount the charge secures or the fact that the charge contains a negative pledge.
The second method of registration of a charge involves the new two stage process. This consists of filing a Form C1A in the CRO, which gives notice of intention to create a charge. In order to be accepted by the CRO, the Form C1A must contain the full particulars of the charge. The second step in this two stage process is the filing of a Form C1B which must be filed within 21 days of the filing of the Form C1A. The Form C1B will reference the date of the charge and the submission number contained in the corresponding Form C1A. If this Form C1B is not filed within 21 days of the filing of the Form C1A then the corresponding Form C1A will lapse.
Under the Act, priority of security speaks from the date of registration at the CRO and not the date of creation of the charge itself as was previously the case under the Companies Act 1963 (the 1963 Act).
The Act will also allow for e-filing in order to register the charge at the CRO. This aims to create a more intuitive online filing environment and enable filing procedures for the registration of charges to operate more efficiently.
- Definition of a 'Charge'
The Act also sets out a new detailed definition of a charge pursuant to which registration is required with the CRO. As a result of the changes made by this definition, there will no longer be a requirement to ensure registration with the CRO in respect of a charge over a bank account or a charge over shares. Lenders should note however, that a filing ought still be made at the CRO in respect of a debenture which contains security over a mix of registrable and non-registrable assets.
- Loan Agreements - Lender consent required
Under the Act, amended constitutions must be filed to the CRO upon re-registration as one of the new forms of private companies. Therefore, lenders may soon receive requests from corporate borrowers asking for their consent in respect of any loan agreements containing covenants which restrict the borrowers from amending their constitutions.
- Principal Purpose Test
The Act introduces widescale revisions to the existing financial assistance prohibition contained under Section 60 of the 1963 Act. Section 60 prohibits a company giving, either directly or indirectly, any financial assistance 'for the purpose of or in connection with a purchase or subscription...for any shares in the company, or, where the company is a subsidiary company, in its holding company.'
There has been much discussion as to the legal definition of 'in connection with', little of which has provided clarification as to the instances in which a company can enter into such transactions. This was the impetus for reform and section 60 has been replaced by section 82 of the Act which states that 'It shall not be lawful for a company to give any financial assistance for the purpose of an acquisition made or to be made by any person of any shares in the company, or , where the company is a subsidiary, in its holding company.'
The scope of the prohibition is narrowed with the deletion of the 'in connection with' criteria and the inclusion of a 'principal purpose' test as the means of determining whether the transaction is permissible under the section.
Summary Approval Procedure
A key innovation under the Act is the introduction of a new Summary Approval Procedure (SAP), providing a standardised method to authorise, amongst others, the giving of financial assistance that may fall foul of the prohibition under Section 82 of the Act.
The SAP, which is modelled on the 'whitewash' procedure in section 60 of the 1963 Act, may be used to validate this and other restricted activities.
The procedure to be followed in implementing the SAP differs somewhat from the traditional whitewash procedure. The SAP procedure includes the making of a declaration by the company directors as to the post-transaction solvency of the corporate borrower, following which the transaction is approved by special resolution of the company's shareholders. The directors' declaration must be in writing and made at a meeting of directors not more than 30 days before the shareholders' meeting and/or signing of the shareholders' written resolution. Failure to deliver the declaration to the CRO within 21 days of the giving of financial assistance invalidates the activity in question and from a lender's perspective the relevant transaction shall be voidable against any person who had notice of the facts which constitute the contravention.
Lenders need to be well-informed of these and a number of other changes introduced by the Act in order to ensure that their lending transactions proceed as smoothly as possible.
This article first appeared in Business & Finance Magazine's May issue.
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.