Prior to the COVID-19 pandemic, lending activity continued to operate at a high level across all industries. Re-financing remained a common theme reflecting the ever-increasing competitive environment in Ireland and across Europe. Prior to the pandemic, there had been a notable increase in project finance activity and a continued increase in real estate finance.
Given Ireland’s close economic and political ties to the United Kingdom, Ireland’s lending market has become linked with political developments in the UK. In particular, the uncertainty surrounding Brexit has had an effect on the Irish lending market. However, the effect of COVID-19 on any deal between the UK and the European Union also remains to be seen.
One positive consequence of Brexit for the Irish loan market is that there has been a noticeable increase in Irish law being the governing law for international finance transactions.
The COVID-19 pandemic has, as expected, had a significant impact on the loan market in Ireland. Initially, the pandemic caused immediate cashflow and liquidity issues for borrowers. Certain borrowers were quick to act to utilise headroom under their existing facilities, exercise accordion and extension options together with seeking uplifts to existing credit lines.
The Covid-19 pandemic had a significant impact on SMEs and retails customers. As a result, the Banking and Payments Federation of Ireland (BPFI) announced in April 2020 that some borrowers could avail of a six-month payment break to mortgage-holders, personal borrowers and small and medium enterprises.
The BFPI also published its Economic Recovery Plan which called on the Irish government to introduce a state-guaranteed business support scheme to aid recovery and improve SME access to the loan market. The Plan included measures such as extended terms, initial interest-free periods, state guarantees, the waiver of affordability assessments and the alignment of interest rates with the state guarantee.
Changes as a Result of COVID-19
On 1 August 2020, the Companies (Miscellaneous Provisions) (COVID-19) Bill 2020 was signed into law. The Bill makes temporary amendments to the Companies Act 2014 and the Industrial and Provident Societies Acts 1893 – 2018 to address issues arising as a result of COVID-19. Under Section 6 of the Bill, companies in Ireland will be able to postpone their Annual General Meetings (AGMs) until 31 December 2020 and hold their AGMs and general meetings by electronic means.
It also makes provision in respect of business solvency by increasing the period of examinership to 150 days and increasing the threshold at which a company is deemed unable to pay its debts to EUR50,000. The Bill also allows for documents which are required to be executed under seal to be executed in counterpart. The amendments will apply for an interim period, initially up to 31 December 2020, with a possibility for extension by way of Government order.
Irish entities in various industry sectors may be involved in high-yield bond transactions; often as borrowers and guarantors, and in certain circumstances as high-yield bond issuers.
Irish incorporated special purpose vehicles (SPVs), often referred to as "Section 110 companies", are normally used as high-yield bond issuers in certain European high-yield transactions, often to avoid covenant breaches or local law restrictions on guarantees of securities. Section 110 companies are named as such because Section 110 of the Taxes Consolidation Act 1997 allows for special tax treatment for "qualifying companies".
Favourable tax laws allow these structures to be, in most cases, tax neutral (with no annual minimum profit or "spread" required at the SPV level) and a "quoted eurobond" exemption. This, together with numerous double taxation treaties, allows interest on securities to be paid gross. A minimal share capital requirement makes incorporating an Irish SPV an easy and attractive process.
European High-Yield Bonds
European high-yield bonds are normally marketed as private placements, primarily to attract US investor interest as well as participation from European investors. These transactions are usually led through London or the USA, and New York law or English law are typically the governing laws of such transactions. We are unaware of any high-yield bonds which have been governed by Irish law to date.
Whereas lenders in loan financings would tend to be traditional banks and other financial institutions, investors in high-yield bonds would typically be institutional investors (including investment banks, insurance companies, pension funds, hedge funds, investment managers and mutual funds) looking for higher rates of return through more aggressive lending practices.
There has been a continued increase in the prominence of alternative credit providers in the Irish market since the financial crisis. The alternative credit providers group include a diverse collection of direct lenders, debt funds and debt arms of hedge funds and buyout houses. This allows borrowers to be more selective when choosing lenders and results in greater liquidity as well as more competitive pricing and terms.
In recent years there has been a continued growth in the asset-based lending market. This has been particularly noticeable in the commercial and residential property development industries, especially in Dublin. Asset-based lending has benefited both lenders and borrowers through reduced credit risk and competitive pricing.
Irish-incorporated Real Estate Investment Trusts (REITs) can be listed on the main market of a recognised stock exchange of any EU member state, which has had the effect of attracting fresh capital into the Irish property market. In recent years there has been a trend of advancing unsecured debt to REITs which improves their balance sheet strength. To accommodate this, lenders have been making use of covenant packages which limit the amount of secured debt an REIT can issue.
After the economic crash in 2008 there was a noticeable increase in the use in invoice discounting as a financing tool. The Irish Asset and Invoice Finance Association anticipate that Irish businesses will repeat this trend as the economy emerges from the COVID-19 lockdown.
Last year the Court of Appeal held in Bank of Ireland v Eteams (International) Limited that invoice discounting facilities, once correctly documented, will be treated as a sale and purchase of debs rather than a financing arrangement secured over the borrower’s book debts. This decision follows the line of English judicial authorities and will make the continued use of these types of facilities attractive for providers in the Irish market.
The ongoing COVID-19 pandemic is likely to have a significant effect on the loan market for years to come, including credit restrictions from lenders and liquidity issues for borrowers. The Central Bank of Ireland and the European Central Bank will need to work closely together to ensure that all lenders are able to continue to operate in the Irish loan market and ensure that the flow of credit is not overly restricted.
The Central Bank of Ireland is responsible for prudential regulation and supervision of credit and financial institutions. Wholesale lending to companies generally does not require authorisation, provided the lender does not take deposits, carries on investment services or provides services to consumers. Traditional banks, those which create securities and fall within the definition of a banking business, are required to hold a banking licence.
A bank authorised in another EEA member state (the home state) can passport its services through establishing a branch in Ireland, or by providing its services in Ireland (the host state) on a cross-border basis.
At a high level, there are no restrictions on the granting of loans in Ireland by foreign lenders, however, as the loans become more specific, there are limitations and requirements to observe when lending to consumers and mortgage lending.
There are no specific restrictions under Irish law, but there may be restrictions under the specific guarantee limitations.
There are no restrictions, controls or other concerns on and regarding foreign currency exchange, save that a person (legal or natural) shall not operate as a Bureau de Change Business in the absence of an authorisation from the Central Bank of Ireland under Part V of the Central Bank Act 1997 (as amended from time to time).
Generally, the borrower is required to use the proceeds from loans or debt securities for the “purpose” as set out in the relevant credit agreement. If a borrower uses the proceeds of financing for any purpose other than that set out in the credit agreement, this would result in an event of default (however so defined), allowing the lenders to accelerate any outstanding loans and terminate unused commitments (and if necessary, to enforce any available collateral).
The agent concept is well recognised and established in Ireland. In a syndicated loan arrangement, the borrower usually grants a mandate to a “lead bank”, which then arranges for a syndicate of banks to be set up to provide the necessary finance to the borrower. The liability of the agent is usually limited by the underlying documentation appointing the agent.
The concept of a trust (and trusts created under the law of another jurisdiction) is also recognised in Ireland. A security trustee can enforce its rights in the courts in Ireland, usually in accordance with the terms of the relevant security document. However, the rights of the security trustee may also be subject to legislative or other public policy considerations.
Secured debt is traded in Ireland, usually by means of assignment, transfer or novation. An assignment of security should be notified to the security provider (or in accordance with the terms of the underlying security document). A transfer or novation can be effected with the security provider as a party to the transfer or novation.
In the case of a transfer or novation, appropriate registrations should be carried out in the Irish Companies Registration Office and/or Land Registry and/or Registry of Deeds (as applicable). Typically, Loan Market Association standard documentation is relied on, which contains standard language in relation to novation and transfer.
This will depend on what is commercially agreed between the lender(s), borrower(s) or sponsor(s), but there is no restriction under Irish law to agree terms relating to the buy-back of debt.
Certain funds provisions in credit agreements originate from the requirements of the Irish Takeover Rules which govern the takeover of any public limited company incorporated in Ireland. The Irish Takeover Rules require that a bidder must announce a bid only after ensuring that It can fulfil in full any cash consideration (if any is offered) and after taking all reasonable measures to secure the implementation of any other type of consideration. A financial advisor also must stand behind any bid and confirm that the relevant bidder has certain funds – ie, that the funding will be available on the completion of the acquisition of the securities to pay the full amount due. This position must be confirmed in the Rule 2.5 announcement and the offer document.
Certain fund provisions are specifically negotiated for the relevant public acquisition finance transaction and tend not to be standard provisions contained in other acquisition finance transactions. Whether short or long form documentation is to be used will normally depend on the credit requirements of the relevant lenders. Although the main provisions of finance documents are set out in the offer document, such details are not required to be publicly filed or registered in Ireland.
A company making a payment of yearly interest which has an Irish source is subject to withholding tax at a rate of 20%. There are, however, a number of exemptions under Irish law with respect of withholding tax, which would need to be assessed on a case-by-case basis.
Stamp duty for mortgage deeds executed on or after 7 December 2006 is now abolished.
With the introduction of the Companies Act 2014 the registration of a Form C1 (Registration of a Mortgage or charge created by Irish company) must be completed online. The registration cost (this includes the registration of Forms C1A and C1B) is EUR40.
In the case of registered external companies, the cost of registering Form e-F8 and Form e-F8A (Registration of particulars of a charge on property in the State created by a company incorporated outside the State - there is no cost to register Form e-F8B) is EUR40.
The registration of a Form C6 (Declaration of satisfaction of a charge) or Form C7 (Declaration of Partial satisfaction of a charge) with the Irish Companies Registration Office costs EUR15 and there is no e-filing option available for these forms.
Registration at the Circuit Court usually amounts to no more than EUR1 for each registration. The registration cost at the High Court is stamp duty of EUR15.
In relation to intellectual property, as trademark attorneys are used to make the registrations, their costs differ quite substantially depending on whether local as well as international filings are to be made.
The cost of registering the security in the Registry of Deeds is EUR50 for each deed registered.
The cost of registering security in the Land Registry is now EUR175, following the introduction of the Land Registry Fees Order 2012, which came into effect on 1 December 2012.
There is no set fee for the services of a notary in Ireland. A proper professional fee is usually paid dependent on the time spent, the skill of the notary in question and the level of responsibility.
Protection against excessive interest rates in Ireland is afforded to borrowers and consumers by the Consumer Credit Act 1995, as amended by Section 35 of the Central Bank and Financial Services Authority of Ireland Act 2003.
Lenders should be aware of the treatment of default interest under Irish law. The judgments handed down by the Court of Appeal in July 2018 (Sheehan v Breccia/Flynn and Benray v Breccia) address 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. It would, therefore, be pragmatic for lenders to include a tailored, negotiated term in the credit agreement relating to default interest (rather than relying on the default interest provisions contained in the standard terms and conditions) in order to give the lender the best chance of such provisions not being considered a penalty.
Real estate includes real property as opposed to personal property. It includes:
Common forms of security
The following forms of security can be taken over real estate:
It is generally agreed that registration is the “operative perfection mechanism in respect of security interests in land”. The specific formalities in relation to real estate in Ireland depend on whether the land is registered or unregistered. There are no specific time limits in respect of registration in the Registry of Deeds or Land Registry. The 2009 Act introduced compulsory first registration in respect of sales of interests in unregistered land, applicable to all counties as of 1 June 2011.
Registration requirements with the Companies Registration Office also exist in respect of Irish corporate bodies. If a company has created a mortgage or charge over real estate, a relevant filing must be lodged with the Companies Registration Office within 21 days of the creation of the security. Section 412 (3) of the Companies Act 2014 provides that the priority of a charge will be determined by the date and time of receipt by the registrar of a fully filed charge submission, not the date of the creation of the charge, ergo there is now significant importance placed on timely filings. Further failure to register the charge, by delivering details to the Companies Registration Office within 21 days of the creation of the charge, or notice to create the charge, will result in making the charge void against a liquidator of the company and any creditors.
If a company has failed to comply with Section 409 of the Companies Act 2014, an application can be made under Section 417 of the Companies Act 2014 to the High Court for an order requesting an extension of the time afforded to effect registration of the charge. If the registration requires amending, based on an omission or misstatement, an order of rectification can be applied for under these provisions too.
When the Companies Registration Office is satisfied that the statutory requirements have been met, a certificate of charge is issued. The certificate is conclusive evidence that the requirements of the Companies Act 2014 have been complied with.
Tangible Movable Property
Tangible movable property in Ireland could include trading stock (inventory), agricultural stock, goods, plant, machinery and vessels such as aircraft or ships.
Common forms of security
The following forms of security can be taken over tangible movable property: a fixed charge and a floating charge.
A fixed charge attaches to a specific asset or class of assets on creation. With a floating charge, the security “floats” over the asset and remains dormant until some further step is taken by or on behalf of the chargee. This enables the borrower to deal with the asset over which the charge is created in the ordinary course of business, until the floating charge crystallises into a fixed charge.
Crystallisation of a floating charge into a fixed charge may occur on the happening of a specified event or on insolvency of the borrower. These could be such as when a receiver is appointed, or a winding up commences, or if the chargee intervenes when entitled to do so. An automatic crystallisation clause is one stipulating that a floating charge will crystallise on some specific event occurring.
Note that floating charges have certain weaknesses, including:
In relation to general registration requirements, see above. Specific formalities apply in relation to different categories of assets.
A fixed and or/floating mortgage can be created over agricultural stock provided the chattels in question comply with the terms of the Agricultural Credit Act 1978 (as amended) and are the absolute property of the mortgagor. Specific rules apply in relation to registration. If capable of being registered, and in order to be effective, the security interest must be registered in accordance with the terms of the Agricultural Credit Act 1978. Essentially, the security must be registered within one month of creation with each Circuit Court in each district where the mortgagor’s land on which the chattels are situated, is located.
A mortgage or fixed charge can be created over aircraft. The registration requirements in respect of aircraft are twofold:
Movable plant and machinery
Security over a movable plant and machinery would typically be done by way of a fixed or floating charge. Registration should be made at the Companies Registration Office and notification by affixing the security interest to plant or machinery.
Security over a ship must be done by way of statutory ship mortgage. Any security created over a vessel must be registered with the appropriate Registrar for Shipping. The Registrar for shipping registers statutory ship mortgages on a priority basis. Notice of the security interest should also be affixed to the vessel.
Financial instruments are defined in Directive 2002/47/EC on financial collateral arrangements (Financial Collateral Directive), as amended by Directive 2009/44/EC and Directive 2014/59/EU, which has now been transposed into Irish law as including:
Common forms of security
Common forms of security are:
Note that there are certain advantages (and disadvantages) of creating a legal mortgage as opposed to an equitable mortgage in the creation of security under Irish law.
In general, note that any ancillary documentation should be sought in connection with any security over shares. This may include stock transfer forms and the original share certificates. It is market practice to register the creation of security over shares (in a foreign company only) at the Irish Companies Registration Office. An affidavit and stop notice can also be served on the company whose shares are being charged to put them on notice that the shares have been charged.
Claims and Receivables
The most common types of claims and receivables under Irish law over which security is granted include bank accounts and rent.
Common forms of security
It is generally not common to take security over receivables in Ireland except by way of floating charge. However, security can also be created by way of a:
The parties must ensure that the contract creating the trade receivable does not contain a prohibition on assignment. A security assignment over receivables is registrable as a fixed charge over book debts and must be registered with the Irish Companies Registration Office within 21 days. Note that a Section 1001 filing should be made with the Irish Revenue Commissioners within this 21-day period, in accordance with the terms of Section 1001(3) of the Taxes Consolidation Act 1997.
Common forms of security
The most common forms of security over cash deposits are:
Where a fixed charge or assignment has been created by a company, a section 1001 notice in relation to book debts must also be filed with the Irish Revenue Commissioners, under Section 1001(3) of the Taxes Consolidation Act 1997. The Irish Revenue Commissioners must be notified of the creation of the charge over book debts within the same 21-day period, and acknowledgement received from the Irish Revenue Commissioners that they have received the notification and updated their records accordingly.
For a security assignment, to create a legal as opposed to an equitable security interest, a notice of the assignment of the bank account must be served on the account holding bank informing it that the account has been assigned. There is no timeframe within which this notice must be served and the bank need not acknowledge the notice for it to be valid.
Fixed charges on bank accounts can be re-characterised as floating charges if the requisite prohibition on dealing with the account and the monies in the account is not adequately provided for in the security document notice to the account bank.
Under the Companies Act 2014, a charge created over an interest in cash or money credited to an account of a financial institution or any other deposits does not require registration with the Irish Companies Registration Office.
The most common types of intellectual property over which security is granted in Ireland include:
Common forms of security
The most common forms of security granted over intellectual property are:
For example, in relation to patents, a mortgage and/or charge may be taken.
Registration is required at the Irish Companies Registration Office within 21 days of creation. Registration can also be required with the following entities, where relevant:
Certain local laws may take precedence over Irish law when it comes to fulfilling registration requirements. In addition, note that both patents and trademarks can be registered, however copyright arises automatically and is not registerable.
A floating charge over all present and future assets is a commonly accepted by lenders as a form of security in Ireland.
It is possible for an Irish incorporated entity to provide such guarantees, provided that the provision of such guarantee does not breach any constitutionally enshrined terms or limits on guarantees Section 239 of the Companies Act 2014 (Prohibition of loans, etc, to directors and connected persons) or Section 82 of the Companies Act 2014 (Financial assistance).
In respect of any constitutionally enshrined terms or limits on guarantees, a shareholder’s special resolution must be executed amending the constitutional prohibition/limit and filed in the Companies Registration Office with a Form G1 (Amending the Constitution). In respect of Sections 239 and 82 of the Companies Act 2014, the relevant obligor will need to conduct a “Summary Approval Procedure” (SAP). SAPs are discussed in 5.4 Restrictions on Target.
Under Irish law, it is not 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 that company, or, where the company is a subsidiary, in its holding company (Section 82 of the Companies Act 2014). The statutory prohibition is broadly drafted, with the main rationale being the preservation of a company’s capital and shareholder/creditor protection.
Financial assistance may only be given in limited circumstances, such as where it falls within one of the legislative exceptions or where a SAP has been followed under Section 202 of the Companies Act 2014.
A SAP is a means by which companies can engage in certain restricted activities by ensuring that the persons those restrictions protect, consent. There are seven “restricted activities” for which the SAP can be used to validate otherwise prohibited transactions, including financial assistance. The directors are required to set out the circumstances in which the transaction or arrangement is entered into and the benefit that will accrue to the company. The directors are required to swear a 12 month look forward declaration of solvency. Failure to deliver the directors’ declaration to the Companies Registration Office within 21 days invalidates the activity in question.
The Companies Act 2014 amended the previous regime in relation to financial assistance in that the prohibition against it has been narrowed, such that the giving of financial assistance is not prohibited if the acquisition of shares is not the principal purpose of the financial assistance. The Companies Act 2014 also provides for the giving of assistance for the purpose of acquiring the shares where it is only an incidental part of some larger purpose of the company, and the assistance is given in good faith and in the interests of the company.
The various restrictions (and related costs, if any) in relation to the granting of security or guarantees has been set out above.
In the case of fixed security, the chargee executes a deed of release. In the case of floating security, the security giver can deal with the secured assets in the ordinary course of business until such time as the floating security crystallises into a fixed charge.
A Form C6 (full release) or Form C7 (partial release) needs to be registered with the Irish Companies Registration Office. This can be completed by the chargor and on receipt of this, the Companies Registration Office practice is to notify the person(s) entitled to the charge that a memorandum of satisfaction has been received for registration. The person(s) entitled to the charge then has 21 days to lodge an objection to the registration of the memorandum of satisfaction. If no objection is received, the satisfaction is registered and the security released. Alternatively, Form C6 or Form C7 can be completed by the chargee and no notification is necessary, and the satisfaction is simply registered.
If security was granted over real estate located in Ireland, it will also be necessary for the charge to execute a Land Registry discharge document, in addition to the deed of release, in the form of a Form 57A. This discharge document is then registered with the Property Registration Authority to release the security over underlying real estate.
Contractual subordination is possible and common in Ireland. It occurs where the senior lender and the subordinated lender enter into an agreement as a result of which the subordinated lender agrees that the senior debt will be paid out in full before the subordinated lender receives the payment of the subordinated debt, creating a contractual subordination.
Structural subordination is also possible depending on the particular terms of a transaction. Structural subordination arises where one lender (the senior lender) lends to a company in a group of companies which is lower in the group structure than another lender (the subordinated lender).
Inter-creditor arrangements are common in Ireland. Typical parties include a senior lender, a junior lender, inter-group lender and a borrower. Typical terms in an inter-creditor agreement include provisions as to priorities, standstill, representations and warranties, covenants and other standard clauses.
The circumstances in which a lender can enforce its loan, guarantee or security interest under Irish law are largely dependent on the terms of the underlying loan and as set out in the security documentation. Typical events of default that are often contained in loan agreements in Ireland might include:
The normal methods of enforcement are for the security holder to appoint a receiver, pursuant to the terms of the charge deed, or for the charge-holder to become a mortgagee in possession of the charged asset. Generally speaking, court order is not necessary to appoint a receiver, although in the case of real property, it may be necessary to obtain a court order for possession if the security holder intends to go into direct possession. Once possession is obtained it is not generally necessary to get a court order for sale.
Appointing an Examiner
Enforcement may be prevented by the appointment of an examiner to the company (that has created the security). The examiner is appointed by the court where a creditor, shareholder or the company petitions the court and the court is satisfied that there is a reasonable prospect of the company’s survival as a result of this appointment.
The examiner is typically appointed for 70 days (but this may be extended to 100 days in exceptional cases), during which time the examiner will endeavour to put a scheme of arrangement, subject to approval by the interested parties and the court, in place where the company’s creditors write off part of the amounts owing to them and the company continues to trade. Under the Companies Act 2014, the proposed examiner must be qualified for the purposes of Section 519 of the Companies Act 2014.
Choice of Foreign Law
The Rome I Regulation and Rome II Regulation have force of law in Ireland and the purpose of both regulations is not to harmonise the actual law of EU states that applies to contractual and non-contractual obligations respectively, but to harmonise the rules that determine what law applies to contractual and non-contractual disputes, with the aim of ensuring that the courts in the European Union are uniform in their application of laws in international disputes, thereby reducing the risk of forum shopping. The choice of foreign law as the governing law of the contract, will therefore be upheld by the courts of Ireland, provided that the relevant contractual or non-contractual obligation is within the scope of the relevant regulation.
Submission to a Foreign Jurisdiction
Pursuant to the provisions of the Brussels Regulation Recast (Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast)) the submission by an Irish natural person, or a company incorporated in Ireland to the jurisdiction of the courts of another EU member state, will be upheld in the Irish courts.
Waivers of immunity are effective under Irish law.
Provided that neither Article 45 (Refusal of recognition) or Article 46 (Refusal of enforcement) of the Brussels Regulation Recast is applicable, and subject to general compliance with the Regulation, any judgment given by a foreign court or an arbitral award against a company would be recognised and enforced in Ireland, without a retrial of the merits of the case.
There are no other matters under Irish law which might impact a foreign lender’s ability to enforce its rights under a loan or security agreement.
As mentioned above, there are two main company rescue procedures: examinership and company voluntary arrangements (CVAs).
Examinership is the main rescue procedure for companies nearing insolvency. The emphasis is on introducing a scheme of arrangement that assists the survival of the company as a going concern. To aid this process, the company is granted court protection so that, in effect, the rights of the creditors and other third parties against the company are frozen for a period of time (which is a maximum of 100 days, plus the time required by the court to make the decision). It is commenced by a petition to the court by any of the directors, creditors or shareholders.
The Companies (Miscellaneous Provisions) Act 2013 was signed into law on 24 December 2013 and has introduced what has become colloquially referred to as “examinership-lite”. Section 2 of this act gives jurisdiction to the Circuit Court for examinership petitions for small private companies that meet certain criteria. Small private companies can apply directly to the Circuit Court to have an examiner appointed, rather than applying to the High Court. This measure is intended to make examinership more accessible and cost effective for small private companies. This procedure has been incorporated into Part 10 of the Companies Act 2014.
A CVA is a court-sanctioned procedure to enable a company in financial difficulty to reach a compromise or arrangement with its creditors and avoid liquidation. It is rarely used in practice as a secured creditor is free to enforce its security while the CVA is pending.
Security may be set aside in certain circumstances at the beginning of insolvency procedures. There will also be a stay of execution concerning the appointment of an examiner.
The priority in which claims are paid is generally as follows:
Regarding Section 16(2) of the Social Welfare (Consolidation) Act 1993 mentioned above, any sum deducted by an employer from the remuneration of an employee in respect of an employment contribution due by the employer and unpaid by it does not form part of the assets of a limited company in a winding-up. Further, a sum equal to that deducted is paid into the Social Insurance Fund ahead of all preferential debts (super preferential claim).
Within each ranking, all claims in one category receive full payment before any remaining proceeds are distributed to creditors in the following category. When proceeds are insufficient to meet claims of one category in full, payments thereon are paid pro-rata.
Note that it is possible for the secured creditors to agree among themselves, where desired, the order of application of the proceeds of the enforcement of their security so far as their secured claims are concerned.
There is no concept of equitable subordination in Ireland. It is almost exclusively a US doctrine, although it has been adopted in other jurisdictions in the EU in special situations, including, but not limited to, Austria and Germany.
The following are some potential risk areas from the Lender’s perspective, should a borrower, security provider or guarantor become insolvent.
See 5.4 Restrictions on Target.
As part of their fiduciary duties the directors of an Irish company have an obligation to act in what they consider to be the best interests of the company they direct. The transaction must be for the company’s commercial benefit and these requirements should be recorded in the board minutes of the company.
Directors must ask whether they can justify their company providing security for another company’s obligations (in terms of corporate benefit). The risk of giving third-party security must be balanced against the actual or potential rewards. A parent company might justify giving security for a subsidiary’s borrowings (downstream security) because it will, directly or indirectly, hope to receive dividends from the subsidiary or will benefit from any enhanced commercial value in their role as shareholder.
Alternatively, a subsidiary might justify supporting its parent (upstream security) because of the support it receives from its parent in, for example, its marketing terms.
However, there are authorities to suggest that:
Additionally, the granting of security, and the liability incurred in respect of which the security was given, must be within the objective of the company as set out in its memorandum of association, otherwise it will be ultra vires and therefore void. However, this is no longer a requirement for limited companies under the Companies Act 2014, which has abolished the ultra vires doctrine in respect of such companies.
Interests of employees and directors duties
It is now also a requirement for the directors of an Irish company to consider the interests of its employees (Section 224, Companies Act 2014). Under Section 1112 of the Companies Act 2014, there is an obligation on the directors of private limited companies to ensure that the person acting as company secretary has the necessary skills and resources to discharge his or her statutory duties.
Under the Companies Act 2014 the duties of a director have been codified to reflect common law principles. The principal fiduciary duties have been listed in Section 228 of the Companies Act 2014. Under Section 233 a director is now required to make a statement acknowledging their duties under the law and Section 225 requires a director to make a compliance statement when the company’s balance sheet total for the year exceeds EUR12.5 million and the amount of its turnover for the year exceeds EUR25 million.
Loans to Directors
Under Section 239 a company is prohibited from providing security in favour of a person who makes a loan (or a quasi-loan) to, or enters into a credit transaction with, a director of that company or its holding company, or a person connected to that director (as defined in Section 220). There are a number of exceptions, including where the transaction occurs with a member of the same group. These transactions can sometimes be summarily approved, but caution must be exercised as the Summary Approval Procedure is limited and is not intended to be deployed as a "catch-all" mechanism.
The outcome of the Breccia case was discussed above.
Other laws to consider include the following.
Section 610 of the Companies Act 2014
Section 610 of the Companies Act 2014, which relates to fraudulent or reckless trading. Fraudulent trading essentially means the carrying on of the business of a company with intent to defraud creditors or for any fraudulent purpose.
If, in the course of a winding up, it appears that any person was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose (fraudulent trading), that person may be exposed to personal liability for all or any part of the debts or other liabilities of the company. Fraudulent trading can attract both civil and criminal liability.
Civil liability can be imposed on any person for “reckless trading” where it appears, in the course of winding up or examinership proceedings, that while an officer of a company, they were knowingly a party to the carrying on of any business of the company in a reckless manner or were engaged in fraudulent trading. Such a person may also be held personally responsible for all or part of the debts and liabilities of the company.
Section 238 of the Companies Act 2014
Section 238 of the Companies Act 2014. Subject to certain exceptions, it prohibits a company from acquiring assets from, or disposing of assets to, a director of the company, or of its holding company, or to a person connected with such a director, unless the company’s shareholders and, in some cases, the shareholders of its holding company approve the acquisition or disposal. The consequences of a breach of Section 238 are that:
Project finance as a financing technique has been used to finance large capital-intensive energy and infrastructure projects in Ireland since the early 1970s. Project finance is a loan arrangement whereby finance is raised on a non, or limited, recourse basis by a special purpose vehicle, with the repayment of the financing dependent on the cash flows generated from the project post-completion. It is underpinned by a robust legal framework in which sponsors, lenders and government parties rely on both the appropriate level of regulation as well as certainty regarding contract law. Ireland has recently seen a large amount of interest from investors on both the sponsor and equity side.
Such financing is now being offered by non-bank lenders, thus making the availability of credit to fund such projects more accessible. Project finance in Ireland is not subject to any specific legal framework, but will primarily depend on the sector within which the project falls (different regulations for healthcare, education, highway construction, etc).
The public-private partnership (PPP) is the most widely used project finance infrastructure model in Ireland. Essentially, this involves a public service or asset being funded and operated by the private sector under a long-term concession granted by the relevant public authority.
The government or public authority may provide certain advantages to the project company by way of a guarantee, a grant or use of a state asset for free or below market value. It should be noted that, in certain circumstances, such arrangement may be prohibited by the State Aid Rules.
The relevant government approvals, licences and statutory controls required for a project will depend on the specific nature of each project. The tax regime governing project finance transactions is generally the same as for other commercial loan transactions. Certain tax exemptions do apply in respect of certain sectors, but again this is based on the specificity of the transaction.
The transaction documents do not need to be registered or filed with any governmental body, save to the extent that such documents create security. In that instance, the relevant security filings will need to be made (as outlined above). The governing law of the transaction documents will, in the vast majority of cases, be the laws of Ireland, however, depending on who the lending pool are, the transaction documents may be governed by English law.
With respect to natural resources, the Natural Resources Section (NRS) of the Department of Communications, Climate Action & Environment is the relevant authority in Ireland. There is specific primary legislation in Ireland regarding mining, including, but not limited to, the Planning and Development Act 2000, the Minerals Development Act 1940 and the Minerals Development Act 1979. As regards oil and gas, the primary legislation is the Petroleum and Other Minerals Development Act 1960, the National Oil Reserves Act 2007 and the Petroleum (Exploration and Extraction) Safety Act 2015.
A project finance deal will normally involve a number of lenders that provide funds to the project. Any potential issues which may arise will be dependent on the type of project that is being financed, so any risk should be assessed and allocated between the parties involved.
The project company will be required to adhere to both Irish and EU laws and regulations (including, but not limited to, competition law) which are specific to the sector in which the project is centred. There are no particular restrictions on foreign investment in Ireland, however, restrictions may apply to foreign investors in relation to certain regulated sectors, but this would need to be assessed on a case by case basis.
The typical source of financing for PPPs in Ireland would be bank financing and bond issuances.
As mentioned previously, the NRS is the relevant authority in Ireland which deals with natural resources and any policies relating to the acquisition and export of natural resources. The objective of the NRS is to sustainably exploit and manage Ireland inland fisheries, geological resources and oil and gas reserves. Any potential issues or considerations would need to be assessed on the basis of which natural resource is being extracted and comply with the primary legislation outlined in 8.4 The Responsible Government Body.
The Health and Safety Authority is the main body in Ireland responsible for health and safety laws. The primary legislation would be the Safety, Health and Welfare Act, 2005 (as amended from time to time), Chemicals Acts, 2008 and 2010, Safety Health and Welfare (Offshore Installations) Act 1987, Safety in Industry Act, 1980, Factories Act, 1955, and the Dangerous Substances Act, 1979 and 1972. The Health and Safety Authority also ensure that various regulations and orders are adhered to and have issued various codes of practice (for example, in relation to chemical agents, working on roads, safety in roof work).
As regards the environment, the national statutory body in Ireland is the Environmental Protection Agency (EPA). The EPA is an independent public body established under the Environmental Protection Agency Act, 1992. The other main instruments from which the EPA derives its mandate are the Waste Management Act, 1996, the Protection of the Environment Act, 2003, and the Radiological Protection (Miscellaneous Provisions) Act, 2014.
The beginning of 2020 seemed to be picking up right where 2019 left off - with financial markets remaining relatively buoyant despite the ongoing Brexit uncertainty. No one could have foreseen the arrival of COVID-19 and the paralysing effects it has had on global markets and, by extension, the domestic Irish market and life in general.
Impact on the Irish banking sector
Even prior to the introduction of strict lockdown measures in Ireland in the middle of March, many business sectors (for example, hotel, hospitality and retail) were already starting to see a negative impact in their revenue as consumer sentiment started to dip. Businesses that had access to undrawn commitments and revolving credit lines fared better in the short term than those who did not. The initial shock led to an influx of queries from lenders and borrowers worried about breaches of payment obligations and financial covenants in their facility agreements.
Payment deferrals and waivers
Given the unprecedented nature of COVID-19, initial advice to both lenders and borrowers in the Irish market was to be proactive, exercise tolerance, open the lines of communication with their counterparts and provide information as early as possible. As businesses hastily conducted financial reviews and attempted to analyse their projected cash flows, it became apparent that many were going to have to negotiate waivers for existing or forecasted payment breaches and/or amendments to the levels of financial covenants as well as having to consider potential COVID-19 specific carve outs for breaches of other restrictive covenants.
With most remedial measures only being temporary in nature as lenders and borrowers wait to see how the COVID-19 pandemic unfolds (most are operating from one interest payment date to the next), lawyers are likely to see this type of work continue until the year end and beyond into 2021, particularly as certain lockdown restrictions are extended or reinstated across the country.
As well as considering the various payment deferrals and waiver requirements, in the early stages of the pandemic, there was a lot of discussion amongst lawyers around the material adverse change clause (the "MAC Clause") which is typically contained in facility agreements. The consensus among lawyers was that such clauses, though seldom relied upon or litigated, are only as effective as they are properly drafted and the majority, if not all such clauses, would not have been drafted with COVID-19 in mind and therefore of limited value to lenders and borrowers alike. It is anticipated that MAC Clauses will be the subject of further negotiation and it has already been seen that COVID-19-related qualifiers are being introduced into certain representations and undertakings in facility agreements.
As the pandemic has deepened, there have been a number of casualties in the market. Certain businesses who, were most likely already struggling somewhat pre-COVID-19, could not adapt or refinance once COVID-19 struck and have had no option but to seek the protection of the Irish courts by going down the examinership route, as has been the case for CityJet, New Look and Maxim Media, while others have ceased to operate altogether including Debenhams, Mothercare and Inglot. A further 40 plus companies are expected to enter liquidation by the end of the third financial quarter and the expectation is that this is just the tip of the iceberg with the numbers continuing to increase by the end of 2020 and into 2021.
Irish Stakeholders' Response to COVID-19
As the pandemic unfolded, the government announced a stimulus package encompassing "COVID Loans" for business across the spectrum. These loans and the various schemes and initiatives that have been implemented are to incentivise the finance providers to play their role in supporting the availability of additional liquidity to Irish businesses to stimulate a jobs-led recovery and build economic confidence.
COVID-19 Credit Guarantee Scheme
One of the biggest schemes to date is the Irish Government's EUR2 billion COVID-19 Credit Guarantee Scheme, which provides an 80% state-backed guarantee to participating finance providers lending to eligible SMEs, small Mid-Caps and primary producers until the end of 2020 (currently), for terms between three months to six years on loans between EUR10,000 and EUR1 million. In addition, as well as the funds being used to fund working capital and liquidity requirements, in some circumstances, the funds can helpfully be used to refinance existing debt. It is important to note that offering this scheme to customers is at the participating finance provider's sole discretion and businesses who have experienced adverse impacts due to COVID-19 but cannot evidence a realistic chance of future success are unlikely to be able to avail of funds.
It's too early to tell if the scheme will prove popular but under the existing credit guarantee scheme launched in 2018, 200 loans with a value of more than EUR37.6 million have been sanctioned but only 128 of these loans have been drawn down to a value of over EUR24.6 million and no claims have been submitted against the guarantee to the end of 2019.
Pandemic Stabilisation and Recovery Fund
Other state bodies including the Irish Strategic Investment Fund (ISIF), the Strategic Banking Corporation of Ireland, Enterprise Ireland and Microfinance Ireland have all announced their own supports for struggling businesses with loans available from EUR10,000 to €EUR1.5 million plus. In the case of ISIF, it has made available a EUR2 billion Pandemic Stabilisation and Recovery Fund to support medium and large enterprises in Ireland affected by COVID-19. Eligible enterprises must demonstrate that their business was commercially viable prior to COVID-19 and that they can return to viability and contribute to the Irish economy. It is clear that the Irish government bodies are actively working together during these uncertain times to ensure that their respective policy initiatives are complementary such that no sector of the market has not been provided for.
Countercyclical Capital Buffer
In April, the Central Bank of Ireland reduced the Countercyclical Capital Buffer, a time varying capital requirement which applies to banks and investment firms, from 1% to 0% in order to reduce the potential for regulatory capital requirements acting as an impediment to the supply of credit in the Irish economy. This is another measure introduced by the Government to support the Irish economy through the economic shocks arising from COVID-19 and to enable the banking system to be more resilient and less pro-cyclical given lessons learnt from the recession in 2008. The Central Bank does not expect any subsequent increase to be made before the first quarter of 2021.
Companies (Miscellaneous Provisions) (COVID-19) Act 2020 (the "COVID Act")
As well as new governmental schemes and policies being introduced, Irish company law has recently been amended as a direct result of COVID-19. The COVID Act became law on 21 August 2020 and introduced some welcomed legislative initiatives to a number of net areas of law that have created challenges for Irish companies over the past few months. Among the changes made, it has increased the protection period in an examinership up to 150 days (up from a maximum of 100 days) in exceptional circumstances and has increased the threshold at which a company is deemed unable to pay its debts to EUR50,000 (up from EUR10,000, or EUR20,000 where two or more creditors are acting together).
The COVID Act applies for an interim period only, currently expiring on 31 December 2020. Though temporary in nature, the changes brought about as a result of the COVID Act are another example of measures being introduced to give additional breathing space to struggling Irish businesses while complementing the existing supports provided by the government stimulus packages.
Practical Considerations Arising as a Result of COVID-19
With the number of Ireland's workforce working remotely as a result of COVID-19, businesses have been trying to stay connected and ensure business continuity. An important factor arising in light of this is the ability to sign documents using electronic signatures.
While electronic signatures have been legally recognised in Ireland since the Electronic Commerce Act 2000 (which implemented the Electronic Signatures Directive 1999/93/EC) was enacted, its adoption has been minimal. This is due in part to practitioner's familiarity with "wet-ink" signatures and a general unease around the process of e-signing. Lenders, borrowers and practitioners who adapted to working remotely now faced additional hurdles in order to close out existing and new transactions.
The pandemic has forced lawyers, with the benefit of The Law Society of Ireland's guidance note on "E-Signatures, Electronic Contracts and Certain other Electronic Transactions", issued in March 2020, and their clients to engage with the use of e-signatures and has accelerated their general adoption in the Irish market in line with other jurisdictions, particularly the USA.
Execution of deeds in counterpart
Given the statutory requirements for the execution of deeds which, in Ireland, requires the affixing of a physical seal for an Irish incorporated company and the counter-signing by either two directors or one director and the company secretary, difficulties arose when company directors were forced to work from home and no longer had access to each other nor indeed to the company seal. Deeds can, however, also be executed by way of a power of attorney (noting that such attorney's signature must be witnessed by a third party) providing a flexible alternative in the current circumstances. Nevertheless, the recent introduction of the COVID Act has provided a welcome workaround for the execution of deeds.
Now, companies who are either unable or unwilling to grant a power of attorney, may seal and execute a deed in counterpart and it is considered one instrument for the purpose of the Companies Act, 2014. Though the measures under the COVID Act are only temporary, it has sparked a discussion on the electronic execution of deeds. While the EU's eIDAS Regulation provides for the recognition of electronic seals and contemplates the technology to implement them, that technology is not yet in use in Ireland. This may well change as more businesses are exposed to the use of e-signing as a matter of necessity during COVID-19.
CRO's digital transformation project
A knock-on consequence from the use of e-signatures was whether it would affect the perfection of security. The Irish Companies Registration Office (CRO) has made great strides in the last five years in developing an online system to facilitate the registration of certain filings via its CORE (Companies Online Registration Environment) portal. However, transactions that required certain manual filings to be physically delivered were left in doubt when the CRO had to send their staff home in March 2020 and closed postal applications.
To the CRO's credit, a temporary solution was quickly put in place and COVID-19 just highlights the need for a more comprehensive e-filing regime. The CRO is currently undergoing a Digital Transformation Project which aims to have 95% of forms available to file online and see the CORE portal updated. The launch was due to be completed in September 2020 but has been postponed until December 2020, yet with remote working becoming the norm, the roll out will be of significant benefit to practitioners, lenders and borrowers.
Not since the global recession in 2008 have directors' duties come under such detailed scrutiny. With the anticipated increase in insolvent liquidations arising from COVID-19, directors are understandably worried about finding themselves subject to restriction and disqualification orders for breach of their duties.
The Office of the Director of Corporate Enforcement (ODCE) moved to clarify directors’ duties in light of COVID-19 by issuing a helpful publication in June 2020 which should provide comfort to directors. It reiterates that the directors of an insolvent company should continue to act honestly and responsibly, in good faith, in the best interests of the company, and at all times exercise reasonable judgement given the circumstances. The guidance shows that the ODCE is cognisant of the external factors that can impact a company.
As for the COVID-19 pandemic itself, it has opened director's eyes to their ongoing duties which one should remember are owed to the company both in good times and in bad.
Register of Beneficial Ownership
Since the introduction of the Central Register of Beneficial Ownership of Companies and Industrial and Provident Societies (the “Central Register”), there was concern that compliance with the legislation would be low, with reports in November 2019 stating that only 21% of Irish based businesses had submitted information to the Central Register. More recent figures show that the situation is improving with 80% of companies and 59.4% of industrial and provident societies registered as at February 2020.
A further step in the roll out of the EU's beneficial ownership regime sees ICAVs and unit trusts both required to report beneficial ownership information to the Central Bank by 25 December 2020. The practical consequence of this is that lenders are requesting delivery of a copy of the register of beneficial owners of a borrower as a condition precedent to closing.
The Central Register is part of the EU's action plan for a comprehensive policy on preventing money laundering and terrorism financing and one of the elements of the Fifth Anti-Money Laundering Directive (MLD5). In May 2020, the European Commission sent a letter of formal notice to Ireland for having only partially transposed MLD5 by the deadline of 10 January 2020. With the deadline for transposing the Sixth Anti-Money Laundering Directive fast approaching on 3 December 2020, Ireland is in danger of once again falling behind.
Ireland has managed to position itself as one of the major players in the creation and management of investment funds globally, though in recent years, its competitiveness as a jurisdiction of choice has waned somewhat against other jurisdictions. As of June 2020, assets in Irish domiciled funds reached EUR3.03 trillion with approximately 40% of the world’s alternative investment funds being administered in Ireland.
Investment Limited Partnerships (ILPs) are the most popular and widely used collective investment vehicle globally though only a handful of ILPs have been established in Ireland since the enactment of the Investment Limited Partnerships Act 1994 (the "ILP Act"). The Investment Limited Partnership (Amendment) Bill 2019 (the "Bill") proposes changes that would align ILPs in Ireland more closely with equivalent structures in other international funds domiciles (eg, the Cayman Islands and Luxembourg) and are expected to make ILPs more appealing to venture capital and private equity funds in particular, where partnership structures are the default legal form.
Once the ILP Act has been reformed, it is expected that it will make Ireland a jurisdiction of choice for the domiciling and servicing of real assets, private equity and infrastructure funds. On 3 September 2020, the Business Committee of Dáil Éireann (Ireland's Lower House of Parliament) agreed to a request from the Minister for Finance to waive the requirement for pre-legislative scrutiny of the Bill indicating continued support of the Bill, notwithstanding the recent change in government and economic climate.
With all that has been going on in the last few months, one would be forgiven for forgetting that the end of the Brexit transition period is fast approaching. The EU Commission has said that a trade deal will need to be finalised by 26 November 2020 if there is any chance of it being ratified before the year is out. Undoubtedly, how Brexit plays out in the coming months will have a big impact on the lending market in Ireland but may also provide opportunities for those lenders well positioned to capitalise on the fallout from Brexit.
COVID-19 represents the first real challenge for alternate lenders since they moved into Ireland following the 2008 financial crash chasing returns. One advantage the alternate lenders have over the domestic pillar banks is that they tend to be "closed ended", that is, their funders can't withdraw their investment and walk away at the first sign of trouble. This represents a certain confidence in the market and commitment to Ireland in the longer term. Alternate lenders being unregulated are more concerned with their return on investment and as a result are better able to deal with impaired loans and more willing to restructure non-performing loans.
The first financial quarter of 2020 saw a big drop in European alternate lending, primarily as a result of the warehouse lenders, who part fund alternate lenders and are more risk adverse than their clients, putting a hold on funding of new deals in light of COVID-19. Alternate lenders have a small market share in Ireland and only time will tell if they can capitalise on COVID-19 to increase this or perhaps whether they withdraw from the market altogether.
Notwithstanding the impact of COVID-19, 2020 saw the EU continue to push towards a harmonised framework for sustainable finance. The Taxonomy Regulation, adopted in June 2020, sets out an EU-wide classification system and provides a common method for investors to identify environmentally sustainable economic activities and encourage private investment in those activities.
The move towards sustainable finance in Ireland is particularly important in light of Project Ireland 2040 which sets out the Government's long-term strategy for developing Ireland’s infrastructure over the next 20 years, including an investment package of EUR116 billion in the years to 2027 with climate change objectives to fundamentally shape public capital investment choices across a range of sectoral areas.
Currently the taxonomy is limited to environmental objectives, but the development of a social and governance-focused taxonomy is likely to be accelerated in light of COVID-19.
The banking sector in Ireland has previously proven to be resilient in times of uncertainty and flux and there will no doubt be plenty of both in the future. As 2020 comes to a close, 2021 begins and the new normal has been solidly established, lawyers and their clients alike would do well to stay alert and flexible as changes are inevitable and those who are unable or unwilling to adapt may get left behind or worse.