The following guide sets out 5 key steps relating to the enforcement of security in default situations in Irish commercial lending. There are of course many other aspects which would need to be considered when reviewing any particular case.
The steps below relate to the enforcement of security in commercial lending arrangements and will not be applicable to the enforcement of security in connection with residential or housing loans.
Step 1: Default
Generally speaking a lender is entitled to demand repayment of a loan (together with all interest and costs) following the occurrence of an event of default which has not been waived by the lender or cured by the borrower. Some other facilities are described as on demand facilities meaning that the lender can demand repayment of the loan at any time. Notwithstanding the entitlement of a lender to demand a loan facility without default having occurred, it is not advisable for a lender to demand the repayment of a loan facility or to take steps to enforce its security, without an event of default having occurred.
The events of default include but are generally not limited to non-payment. Other common events of default are insolvency of the borrower, breach of warranties or representations and other events which the lender believes will have a material impact on the borrower's ability to meet its obligations under the loan agreement.
It should be noted that some agreements provide for a limited number of cures over the term of a loan.
The lender's security will generally become enforceable on the occurrence of an event of default (if not sooner).
Step 2: Security Reviews
Once a default is deemed to have occurred, the lender is strongly advised to review its security to ensure that it is robust. Such a security review would involve reviewing each of the material loan and security documents entered into in connection with the loan (including, but not limited to, the loan agreement, mortgages, debentures, share charges, guarantees and intercreditor arrangements). The review would cover key elements such as execution, registration, perfection, priority, enforcement powers, detail of secured assets and receivership powers.
In terms of property assets it is also advisable to carry out a review of the title to the property to ensure that there are no issues which will delay or prevent the lender realising the security.
Note: The completion of a security (and title) review prior to commencing enforcement action is strongly advised to avoid any delays, once the enforcement process has commenced.
Step 3: Demand
The lender must issue a demand letter to the borrower once the facility is deemed to be in default. The demand letter will generally set out the event(s) of default that have occurred. The lender may also issue letters of demand to any guarantors who have provided guarantees for the borrower's debt. The letter of demand must set out all amounts which are being demanded (principal, interest and any expenses) and be served on the borrower (and/or guarantor). The requirements for the issuing of notices and demands are usually set out in the finance documents. The lender should ensure that the provisions of the loan and security documents regarding service of notices are carefully followed.
Once the demand letter has been issued the lender must wait no longer than is practicable for the borrower to arrange for repayment. 48 hours is usually deemed sufficient.
Step 4: Enforcement Options
The lender's options for enforcement are based both on the relevant legislation and the provisions of the security documentation.
The most common means of enforcement is the appointment of a receiver to the assets secured by the security documents (e.g. property, shares, bank accounts). The powers of receivers can be quite varied and the security review of the relevant documents will clarify what powers the receiver may have at his or her disposal (to sell, lease, manage a business, insure etc). The power to sell is key, if the intention of the receiver is to sell the asset but nonetheless can be overlooked in both bespoke and standard documentation.
The receiver is appointed by a deed of appointment and care must be taken to ensure that the appointment is valid as borrowers can apply to the High Court to remove receivers due to an invalid deed of appointment.
It is very important when appointing a receiver, to ensure that the deed of appointment describes precisely the type of receivership being created and the assets over which the receiver is to be appointed. A security instrument will provide for the appointment of a receiver and manager, where a floating charge is created. A well drafted security instrument will give a receiver and manager extensive powers including the power to operate a trading business.
Where a fixed charge is created, a lender is entitled to appoint only a fixed charge receiver, who will be entitled only to take possession of and sell the fixed asset. Notwithstanding the entitlement to appoint a receiver and manager, a lender may decide to appoint a receiver over fixed assets only.
Great care should be taken when drafting a deed of appointment, to ensure that the receiver is described using the precise language contained in the security instrument and further, that the deed of appointment is executed by the lender in accordance with the requirements of the security instrument.
The costs of any such enforcement action will be added to the amounts owed by the borrower.
Step 5: Other Considerations
There a number of other matters to consider when it comes to enforcement such as:
Priority / Intercreditor / Subordination
- Is the lender's security first ranking security? The lender may have first ranking security but it may be subject to a subordination or intercreditor arrangement whereby the lender has agreed to subordinate its interests to those of another lender. It may have agreed not to take any enforcement action without the consent of the other lender. If the lender does not have a first ranking charge it may still enforce its rights but the amounts owing under the first ranking charge will be paid first.
- Is the lender making a claim for default interest? The courts have held that excessive default interest which does not relate to a genuine pre-estimate of loss may be deemed to be a penalty clause and so unenforceable.
- The lender may have agreed that recourse to some security providers and guarantors is limited or capped in some way.
Originally published by BHSM, October 2020
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.