1. Structurally Embedded Laws of General Application
1.1 Insolvency Laws
Ireland is a leading domicile within Europe for securitisation activity and the leading European jurisdiction by value for securitisation special purpose entities (SPEs). While the legislative regime incorporates a number of supportive taxation measures, no equivalent measures exist in the area of insolvency law. Issuers and originators in Ireland are subject to the general insolvency law and utilise well-established structures to insulate the underlying assets from the balance sheet (and insolvency estate) of the originator. See 1.3 Transfer of Financial Assets.
While we have seen an increase in synthetic securitisations, an Irish securitisation of receivables is typically structured as a "true sale" via an assignment from the originator directly, or through an intermediary vehicle, to the issuer. True sale transactions are subject to two principal risks in an originator insolvency: recharacterisation of the sale as a secured loan and clawback on originator insolvency. Both true sale and synthetic securitisations may be impacted by rules on consolidation of assets, avoidance of certain contracts and examination of companies.
Recharacterisation as Secured Loan
A transfer of assets purporting to be a true sale may in certain circumstances be recharacterised by an Irish court as a secured loan. In determining the legal nature of a transaction, a court considers its substance as a whole, including economic features and the parties' intention; and irrespective of any labels.
Recharacterisation was considered by the High Court in Bank of Ireland v ETeams International Limited  IEHC 393 (subsequently upheld by the Court of Appeal in Bank of Ireland v ETeams (International Ltd)  IECA 145), which endorsed the principles set out in the English cases of Re: George Inglefield  Ch.1, Welsh Development Agency v Export Finance Co. Limited  BCLC 270 and Orion Finance Limited v Crown Financial Management Limited  BCLC 78.
Re: George Inglefield prescribed three indicia distinguishing a sale from a security transaction.
- Return of the asset – a security provider is entitled, until the security has been enforced, to recover its secured asset by repaying the sum secured; whereas a seller is not entitled to recover sold assets by returning the purchase price.
- Sale at a loss – if a secured party realises secured assets for an amount less than the sum secured, the security provider is liable for the shortfall; whereas a purchaser bears any loss suffered upon a resale.
- Sale at a profit – if a secured party realises secured assets for an amount greater than the sum secured, it must account to the security provider; whereas a purchaser is not required to account to the seller for any profit made upon a resale.
None of the above indicia of a security transaction is necessarily inconsistent with a sale; a transaction may be a sale notwithstanding that it bears all three features. The following are generally considered as being consistent with a sale:
- a seller acting as servicer for, or retaining some credit risk on, sold assets;
- a seller repurchase obligation on breach of asset warranties;
- extraction of profits for the seller via the waterfall after transaction expenses have been met.
A sale transaction will be upheld unless it is (i) in substance, a security arrangement (for example, the transaction documents do not indicate a sale); or (ii) a sham (for example, the transaction documents do not reflect the parties' intentions).
Consequences of recharacterisation
Subject to the list of "excluded assets" set out in Section 408(1) of the Irish Companies Act 2014 (as amended) (the Companies Act), the particulars of security created by an Irish company must be registered with the Registrar of Companies within 21 days of creation. In practice, this is done at closing to secure priority under the Companies Act, which confers priority by time of registration. Failure to register within this timeframe renders the security void as against any liquidator or creditor of the company. It is not the practice in Ireland to make precautionary security filings. Consequently, a true sale which is recharacterised as a secured loan would constitute an unregistered security interest of the originator and render the issuer its unsecured creditor as regards the assets.
The issuer would rank pari passu with other unsecured creditors and behind the claims of secured and preferential creditors, the costs and fees of the insolvency process and certain insolvency officials, and certain amounts deducted from employees' remuneration.
Several provisions of Irish company law entitle a liquidator to seek to set aside pre-insolvency asset transfers.
Any transaction in favour of a creditor of a company which is unable to pay its debts as they become due, which occurs during the six months prior to the commencement of the company's winding-up, and with a view to giving that creditor a preference over other creditors constitutes an unfair preference and is invalid. Case law indicates that the company must have a dominant intent to prefer one creditor over its other creditors. No question of unfair preference can arise where the originator is able to pay its debts as they become due at the transaction date. An originator therefore certifies its solvency at closing.
The six-month period is extended to two years for transactions in favour of "connected persons" (including directors, shadow directors, de facto directors and "related companies" (as defined in Section 2(1) of the Companies Act)).
Any conveyance (including an assignment, charge or mortgage) made with intent to defraud a creditor or other person is voidable by any person thereby prejudiced. However, this does not apply to any estate or interest in property conveyed for valuable consideration to any person in good faith not having, at the time of conveyance, notice of the fraudulent intention; or affect any other law relating to bankruptcy or corporate insolvency.
Invalidity of floating charge
A floating charge on the property of a company created during the 12 months before the commencement of its winding-up is invalid unless it is proved that the company, immediately after the creation of the charge, was solvent. This is subject to an exception for monies actually advanced or paid, or the actual price or value of goods or services sold or supplied to the company at the time of or subsequent to the creation of, and in consideration for, the charge and interest at the appropriate rate. The 12-month period is extended to two years if the chargee is a connected person.
Irish courts have a limited jurisdiction to consolidate assets where satisfied that it is just and equitable to do so.
An Irish court may order that two or more "related companies", which are being wound up, are treated as one company and wound up accordingly (a pooling order). In deciding whether to so order, it must consider:
- any intermingling of businesses;
- involvement of one company in the management of the other;
- conduct towards each other's creditors; and
- responsibility of one company for the circumstances giving rise to the winding-up of the other.
An Irish court may also order the related company to contribute to the whole or part of the provable debts in the winding-up (a contribution order). The court must consider, as regards the related company, amongst other things, (i) its involvement in the management of, and conduct towards creditors of, the company being wound up; and (ii) the likely effect of a contribution order on its own creditors.
There is no reported judicial authority in Ireland addressing the circumstances in which a court would exercise these discretions. The use of an orphan SPE and compliance with standard separateness covenants reduces the likelihood of an issuer and an originator being considered related companies.
Disclaimer of Onerous Contracts
A liquidator may, with leave of the court, at any time within 12 months of the commencement of the liquidation, disclaim any property of a company being wound up which consists of unprofitable contracts or any property that is unsellable or not readily saleable.
Examinership is a protection procedure under the Companies Act to facilitate the survival of Irish companies in financial difficulty. Where an Irish company is, or is likely to be, unable to pay its debts, an examiner may be appointed if the court is satisfied that there is a reasonable prospect of the survival of the company and all or part of its undertaking as a going concern. Petitions may be presented by the company, its directors, contingent creditors, prospective creditors or members holding at least one tenth of the voting share capital. Non-petition provisions in transaction documents are intended to prevent the presentation of such petitions in respect of an issuer. However, an argument could be made that such provisions should not be given effect to on the basis that they oust the jurisdiction of, or restrict the right of access to, the courts. This point has not been judicially considered to date.
An examiner is appointed for a period of 70 days, which can be extended by a further 30 days where the court is satisfied that it is required to enable the examiner to complete their work. A court may order a further 50-day extension where exceptional circumstances exist in respect of the relevant company, pursuant to temporary measures (currently due to expire on 9 June 2021 but subject to prolongation) introduced by the Companies (Miscellaneous Provisions (Covid-19)) Act 2020.
During the period of protection, the examiner formulates proposals for a compromise/scheme of arrangement to assist the survival of the company or the whole or any part of its undertaking as a going concern. A scheme of arrangement may be approved by the court when at least one class of creditor has accepted it and the court is satisfied that the proposals are fair and equitable to members or creditors who do not support the proposals and whose interests would be impaired by their implementation.
There has been no instance to date of an examiner being appointed to an entity with the typical characteristics of a securitisation SPE.
Where an insolvent originator is a credit institution, Irish and EU rules on resolution and recovery of credit institutions and the Central Bank Acts 1942 to 2018 are also relevant.
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.