ARTICLE
18 April 2024

Lending & Secured Finance Comparative Guide

DE
Dillon Eustace

Contributor

Dillon Eustace is one of Ireland’s leading law firms focusing on financial services, banking and capital markets, corporate and M&A, litigation and dispute resolution, insurance, real estate and taxation. Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo (2000), New York (2009) and the Cayman Islands (2012).
Generally speaking, no. Neither lending to (larger) corporate borrowers nor taking the benefit of security over assets located in Ireland requires a foreign or nonbank lender to be licenced...
Ireland Insolvency/Bankruptcy/Re-Structuring
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1. Do foreign lenders or non-bank lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?

Generally speaking, no. Neither lending to (larger) corporate borrowers nor taking the benefit of security over assets located in Ireland requires a foreign or nonbank lender to be licenced in Ireland, provided the lender is not carrying on other regulated activities in Ireland. However, lending to "consumers" is a regulated activity; while the definition of "consumer" varies, one commonly cited definition defines a "consumer" as: (i) an individual acting otherwise than in the course of their business; and (ii) micro enterprises within the meaning of European Union ("EU") Commission Recommendation 2003/361/EC of 6 May 2003. A micro enterprise is one which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed €2,000,000. Only appropriately authorised lenders may lend to natural persons in Ireland.

All lenders are required to consider the extent to which they are obliged to comply with anti-money laundering/counter-terrorist financing ("AML/CTF") requirements under the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended). Lenders with an Irish base which are not otherwise regulated by the Central Bank of Ireland (the "CBI") may need to register as a so-called "Schedule 2" firm with the CBI for AML/CTF purposes. The CBI also maintains the Central Credit Register to facilitate the credit scoring of borrowers. Currently, non-EU lenders are not obliged to register and report under the Credit Reporting Act 2013 as long as they are outside of Ireland.

Banks licensed in another European Economic Area ("EEA") country may be required to passport into Ireland in order to carry on their activities in Ireland. A bank authorised in another EEA country (the home state) can passport its services through establishing a branch in Ireland (subject to the CBI's notification requirements), or by providing its services in Ireland (the host state) on a cross-border basis (e.g. services are provided in Ireland without establishing a physical presence in Ireland) (again, this is subject to the CBI's notification requirements). Since 1 January 2021, UK-regulated lenders have no longer been able to offer their services on a cross-border basis using passporting arrangements.

A foreign lender lending to persons in Ireland would generally be subject to the same conduct of business rules as an Irish lender, and both foreign lenders and non-bank lenders are also required to hold the appropriate licence/authorisation if carrying on a regulated activity (albeit the regulatory status of a foreign lender in their home country may have a bearing on the latter, for example passporting rights – if carrying on passportable activities).

The European Union (Credit Servicing and Credit Purchaser) Regulations 2023 implemented the EU Directive on Credit Servicers and Credit Purchasers into Irish law, so applying the EU's credit servicing regime for non-performing loans in Ireland. Given Ireland had a preexisting domestic regime for credit servicing under the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (as amended), lenders should be aware that there are now two separate regimes which credit servicers must navigate and how the two regimes will interact is not yet entirely clear.

In addition to the above, there are certain other laws and codes that apply in the context of lending to consumers and/or small and medium sized enterprises ("SMEs") (and the enforcement of such loans), many of which must be adhered to by foreign or non-bank lenders lending in Ireland such as in relation to data protection.

2. Are there any laws or regulations limiting the amount of interest that can be charged by lenders?

Generally, no, there are no laws or regulations in Ireland applicable to corporate (as opposed to consumer) lending transactions. However, there are potential restrictions on a lender's ability to charge interest at an increased rate where the borrower is in default ("Default Interest").

In two judgments in July 2018 (Sheehan v Breccia [2018] IECA 286 / Flynn and Benray v Breccia [2018] IECA 273), the Court of Appeal addressed the issue of whether, under Irish law, an obligor's agreement to pay Default Interest was unenforceable because it was not a "genuine pre-estimate of loss caused by such default". Essentially, the court held that if a Default Interest provision is contained in the lender's standard terms and conditions, it will be considered to be a penalty and therefore unenforceable.

Accordingly, it would be prudent for lenders to include a tailored / negotiated term in the loan agreement relating to Default Interest (rather than relying on the Default Interest provisions contained in the standard terms and conditions) to avoid the relevant provision being considered to be a penalty (and potentially unenforceable).

From a consumer lending perspective, protection against excessive interest rates is afforded to consumers in Ireland by the Consumer Credit Act 1995 (as amended).

3. Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?

Generally speaking, no as there are no foreign exchange or currency control restrictions in Ireland which restrict loans being made or repaid in a foreign currency.

4. Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?

(i) real property (land), plant and machinery;

Yes. Security over plant, machinery and equipment is most commonly taken by way of a fixed charge and, since the enactment of the Land and Conveyancing Law Reform Act 2009 (as amended) (the "2009 Act") security over Irish real estate must be taken by way of charge. A charge represents an agreement between a creditor (chargee) and a debtor (chargor) to appropriate and look to an asset and its proceeds to discharge indebtedness. The principal difference between a mortgage (as discussed below) and a charge is that a charge need not involve the transfer of ownership in the asset. A charge may be fixed (e.g. security attaches to a specific asset) or floating (e.g. security floats over the asset (or a class of assets) leaving the chargor free to deal with it until, upon the occurrence of certain defined events, the charge crystallises into a fixed charge) in nature. A fixed charge over land essentially precludes the chargor from disposing of the land without the chargee's prior consent or the discharge of liabilities owed to the chargee. Where security is created over real estate which is registered in the Property Registration Authority of Ireland ("PRAI"), an additional prescribed form is also required to validly create the security (discussed at question 8 below). In addition, the following forms of security were taken historically over real estate:

  • Legal Mortgage: A legal mortgage involved the transfer of legal title to an asset by a debtor, by way of security, upon the express or implied condition that legal title would be transferred back to the debtor upon the discharge of its obligation; and
  • Equitable Mortgage: Equitable mortgages were created in situations where a chargor only had an equitable interest in the land. The beneficial interest in the asset was transferred to the chargee with legal title remaining with the chargor and, as such, only an equitable security interest was created.

A floating charge over land is quite rare and is more suitable in respect of other assets such as inventory (discussed at (iii) below).

(ii) equipment;

Yes. Security may be created over equipment by way of either a fixed charge or floating charge.

(iii) inventory;

Yes. Security over inventory typically takes the form of a floating charge given that the chargor trading company needs to retain sufficient freedom to deal with inventory in the ordinary course of business. The security "floats" over the asset and remains dormant until some further step is taken by or on behalf of the chargee, at which point the floating charge crystallises into a fixed charge. The crystallisation of a floating charge into a fixed charge may occur on the happening of a specified event (that is, an event of default) or on the insolvency of the borrower.

(iv) receivables.

Yes. Security over receivables most commonly takes the form of a legal assignment and is permitted so long as the underlying contract creating the receivable does not contain a prohibition on assignment. A legal assignment is similar to a mortgage in that it transfers the legal or beneficial ownership in an asset to the creditor, upon the understanding that ownership will be assigned back to the debtor upon discharge of the secured obligations owing to the creditor.

In order to be a valid legal assignment, as opposed to an equitable assignment, certain requirements must be adhered to, including, inter alia, the provision of written notice to the third party from whom the assignor would have been entitled to receive or claim the assigned right (the "Underlying Debtor"). It is important to note that one of the disadvantages of an equitable assignment is that the rights of the assignee will be subject to any equity (such as rights of set-off) already vested in the Underlying Debtor. In addition, should the Underlying Debtor pay off a debt due to the assignor and claim a good discharge of this debt, in circumstances where no notice of the assignment was given to the Underlying Debtor, then the assignee would be solely reliant on the assignor passing this payment on.

(v) shares in companies incorporated in your jurisdiction.

Yes. Security can be granted over shares in a company incorporated in Ireland. There are two key types of security over shares: a legal mortgage and an equitable mortgage. An equitable mortgage – which does not transfer legal ownership and as such does not require the chargee to be recorded in the company's share register as the owner of the shares – is the most common. This is effected by the delivery of share certificate(s) together with signed (but undated) share transfer forms, irrevocable proxies and various other deliverables which authorise the chargee to complete the undated stock transfer form and any formalities required to become legal holder of the shares if the security becomes enforceable. Prior to the security becoming enforceable, all voting rights, dividends and any communication in connection with the shares will remain with the chargor.

It is also common for a chargee to take a fixed charge over shares issued by an Irish company, which is commonly taken alongside an equitable mortgage. Although Irish law does not strictly require that share security be granted under an Irish law governed document, it is frequently the case that Irish law governed security is taken over shares in an Irish incorporated company, on the basis that Irish law is likely to govern the validity and perfection requirements of the security.

(vi) can such security be created under a foreign law governed document?

As a general comment, all Irish assets (assets located/deemed to be held in Ireland) can and should be charged under an Irish-law governed document whether by an Irish chargor (individual or corporate entity) or a non-Irish chargor. It is possible, but not advisable, to create security over Irish assets under a non-Irish law governed document. All non-Irish assets can be charged under an Irish-law governed document by a chargor (individual or corporate entity). How effective that charge will be will depend on the nature of the asset charged and its location. It is more prudent to charge non-Irish assets under the laws of the place where they are located/deemed to be held.

5. Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?

Yes. The floating charge element of an "all-assets" debenture will normally encompass the existing assets of the company and any assets which may be acquired by the company at some point in the future. In addition, it is also possible for a fixed charge or mortgage to cover future assets to the extent that these assets are sufficiently identified in the relevant security document. In this regard, the charge will be "equitable" rather than "legal" in nature until the assets come into being and come into the ownership of the relevant borrower.

6. Can a single security agreement be used to take security over all of a company's assets or are separate agreements required in relation to each type of asset?

Security over all, or substantially all, of a company's assets usually takes the form of an "all-assets" debenture. This is a single security document entered into by a company in favour of the secured part(y/ies) to create security (e.g. a combination of mortgages, assignments and/or fixed and floating charges) over all of the assets of the borrower. Accordingly, the debenture will typically include: (i) a fixed charge over specific assets which are identifiable and can be controlled by the lender (e.g. buildings, restricted accounts, intellectual property assets); (ii) a floating charge over fluctuating and less identifiable assets (e.g. inventory, agricultural stock, goods, plant and machinery); (iii) an assignment of any interest in receivables, contracts, insurance policies and bank accounts; and (iv) a mortgage and/or charges over real estate and shares.

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Originally published by The Legal 500

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.

ARTICLE
18 April 2024

Lending & Secured Finance Comparative Guide

Ireland Insolvency/Bankruptcy/Re-Structuring

Contributor

Dillon Eustace is one of Ireland’s leading law firms focusing on financial services, banking and capital markets, corporate and M&A, litigation and dispute resolution, insurance, real estate and taxation. Headquartered in Dublin, Ireland, the firm’s international practice has seen it establish offices in Tokyo (2000), New York (2009) and the Cayman Islands (2012).
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