Download Lending to Companies: Key Issues for Lenders

Lending to Companies:
Key Issues for Lenders
companies act 2014
This briefing is designed to identify for lenders the principal issues and questions
arising for them when lending to companies as a result of the introduction of the
Companies Act 2014.
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1. Companies Act 2014 - what is it and what does it do?
2. When does the Act take effect?
3. What should lenders be doing pre-Commencement?
4. What about impending deals?
5. What about existing deals?
6. What will change for private limited companies versus public limited companies?
7. What are the new types of private company limited by shares?
8. What happens during the Transition Period for Existing Private Companies?
9. What is new for PLCs?
10. What is new for private unlimited companies and guarantee companies?
11. What is the new Summary Approval Procedure?
12. What else is new for financial assistance?
13. What is the new majority written resolution procedure?
14. What is the new definition of a “charge”?
15. What are the new rules applicable to charges in terms of registration and priority?
16. How will these new rules impact on secured lending?
17. What are the new e-filing requirements for the registration of charges?
18. Does the Act impact security registration for foreign companies?
Lending to
Companies Key Issues for
Lenders
(continued)
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1. Companies Act 2014 - what is it and what does it do?
The Companies Act 2014 (Act) consolidates
substantially all of the Companies Acts 1963
to 2013 into a single piece of legislation.
It introduces significant reforms and
modernises Irish company law.
Although the Act makes few changes
in the law applicable to the making of
loans, the provision of credit, the taking
of security or to the general principles
underlying such law, it does make a number
of changes which are relevant to lenders
when contracting with Irish companies and
relevant external companies.
The relevant key changes for lenders
introduced by the Act include:
• Provision for new types of private
companies
• Changes relating to the constitution of
private companies, their governance,
organisation and procedures
• Changes to the ultra vires rule (easing
restrictions on corporate capacity)
• A new Summary Approval Procedure
which may be used by most companies
to validate otherwise restricted
activities, including the giving of
financial assistance and loans to
directors and connected persons
• Change to the definition of a charge
which means certain security assets
will no longer require to be registered
at the Companies Registration Office
and, consequently, third parties may
not be put on notice of certain security
interests granted in favour of a lender
• Priority of charges is to be governed
by the date/time of registration of the
prescribed particulars of the charge
rather than the date of creation –
registration will no longer be simply
a perfection issue but will determine
priority
• To establish certainty on the date and
time of submission of the prescribed
particulars of the charge it is expected
that a mandatory system of e-filing
of the prescribed particulars will
be introduced by the Companies
Registration Office
The introduction of the Act will
impact on loan documentation as new
representations, warranties and covenants
will be required to address the changes in
law and procedure.
2. When does the Act take effect?
Most of the Act will be effective from 1 June 2015 (“Commencement”).
3. What should lenders be doing pre-Commencement?
Lenders should consider the
implications of the Act for any lending
arrangements to be put in place prior
to Commencement and whether
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additional representations and warranties
should be included in loan and security
documentation to address issues arising on
Commencement.
Lending to
Companies Key Issues for
Lenders
(continued)
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4.What about impending deals?
Where there is uncertainty regarding the
timing for completion of impending deals,
lenders should seek to “future proof ”
their documentation by preparing a suite
of documents compatible with both the
pre-Act legal position and the position
under the Act. Lenders should consider
representations, warranties and covenants
to be included in their documentation in
terms of a borrower’s re-registration and
otherwise.
5.What about existing deals?
The Act will not change, invalidate or
endanger existing deals for private or
public companies. All companies will
continue to be the same legal entity
that entered into prior loan and credit
transactions with their lenders and their
obligations thereunder will continue in
full force and effect.
However, the Act brings changes
for existing Irish private companies
limited by shares (“Existing Private
Companies”) and there will be
administrative and legal implications
arising from such changes - see further
question 6 below. The good news is that,
although Existing Private Companies
must re-register as a new type of
company, such re-registration will not, in
and of itself, invalidate or prejudice any
prior contractual commitments or any
security entered into or created by them.
6.What will change for private limited companies versus public limited companies?
All Existing Private Companies will
change to a new type of company within
a transition period of 18 months from
Commencement (“Transition Period”).
The Act provides for two new types of
private company limited by shares to
which an Existing Private Company may
select to be re-registered.
No new type of public limited company
(“PLC”) is created under the Act.
In general, there is little change in
relation to the nature or constitution of
PLCs - but see question 9 below.
7.What are the new types of private company limited by shares?
The two new types of private company
limited by shares are:
•• A
designated activity company
(“DAC”), the closest form under the
Act to an Existing Private Company
primarily because its activities remain
restricted by its objects and it will
retain a memorandum and articles of
association.
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•• A private company limited by shares
(“LTD”), a new simplified form of the
Existing Private Company and the
“default” company type under the Act.
An LTD will have a single constitutional
document, effectively amalgamating the
memorandum and articles of association
and will not be permitted to have an
objects clause. It will have the same
unqualified legal capacity to do anything
that a natural person may lawfully do.
Lending to
Companies Key Issues for
Lenders
(continued)
8.What happens during the Transition Period for Existing Private Companies?
An Existing Private Company must decide
within the Transition Period whether to reregister as an LTD or a DAC.
(c) it may take no action so that, at the
end of the Transition Period, it will be
deemed to be an LTD by default.
At any time from Commencement:
We recommend that during the Transition
Period lenders engage with their Existing
Private Company borrowers and request
information from them as to their reregistration selection and the timing
of such re-registration. In some cases,
lenders may have the right to approve the
type of company or the right to request
advance notice of proposed new forms of
constitution.
(a) until the end of the Transition Period,
it may “opt in” to the new regime and
re-register as an LTD; or
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(b) for a period of 15 months, it may “opt
out” by ordinary resolution (or where
more than 25% of shareholders holding
voting rights require it) and re-register
as a DAC (or to another company type);
or
9. What is new for PLCs?
PLCs will retain their objects clause,
however, third parties dealing with the
PLC will not be prejudiced by the ultra
vires rule and so will not need to enquire
as to whether an action is permitted by the
company’s objects.
PLCs may now have one shareholder
(previously they had to have a minimum
of seven), however, a PLC with more that
one shareholder cannot dispense with the
requirement of holding an AGM.
A minimum of two directors are required
in all PLCs and the previous default
position regarding retirement of directors
by rotation has now been “hardwired”
into the Act, and can only be excluded if
there is a provision to the contrary in the
constitution.
10. What is new for private unlimited companies and guarantee companies?
Private unlimited companies are not
required to re-register as another form
of company under the Act. However the
Act does introduce a number of changes
including:
-
the removal of the restriction on
companies previously re-registered
from limited to unlimited (or vice versa)
subsequently reverting to their previous
status;
-
the application of new rules regarding
the legal capacity of an unlimited
company, effectively removing ultra vires
concerns; and
-
permission for unlimited companies to
be single member companies (unlimited
companies were previously required to
have at least two shareholders).
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The Act introduces a number of changes
for companies limited by guarantee not
having a share capital (“CLGs”) including:
-
the name of a CLG must end with the
words “company limited by guarantee”
or the Irish equivalent “cuideachta faoi
theorainn ráthaíochta” although an
exemption from using such a suffix
may be available;
-
a CLG will now benefit from an
audit exemption vis-à-vis its
financial accounts (subject to certain
modifications); and
-
the validity of acts by a CLG will not be
compromised by virtue of its objects
clause so protecting third parties.
Lending to
Companies Key Issues for
Lenders
(continued)
11. What is the new Summary Approval Procedure?
The Summary Approval Procedure is
a new streamlined validation procedure
available to most companies to authorise
a number of restricted activities and
involves a declaration of the directors, a
special resolution of the shareholders and,
in respect of certain activities only, an
auditor’s report.
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The Summary Approval Procedure should
make it easier to validate otherwise
restricted activities such as the provision of
financial assistance and loans to directors/
connected persons. Helpfully, under the
Summary Approval Procedure, the making
of loans to directors and connected persons
can now be validated without a report of an
independent accountant.
12. What else is new for financial assistance?
Under section 60 of the Companies Act
1963, a private company is, subject to
exceptions, prohibited from giving any
financial assistance, directly or indirectly,
“for the purpose of or in connection with” a
purchase or subscription made or to be
made by any person of or for any shares in
the company or in its holding company,
if any. Under the Act, the words “or in
connection with” in the phrase quoted above
have been deleted so that the test in the
prohibition is intended to become wholly
purposive.
Helpfully, the previous exception
for refinancing (which was felt to be
deficient) has been expanded to disapply
the prohibition to the refinancing of
financial assistance previously given in
accordance with the Summary Approval
Procedure or the previous section 60
“whitewash” procedure. This should
remove the requirement to “whitewash”
any refinancing of indebtedness which
constituted financial assistance.
13. What is the new majority written resolution procedure?
For all companies other than PLCs, the Act
introduces a welcome change enabling the
passing of written resolutions by a requisite
majority of shareholders and removing the
requirement for unanimity.
It provides for the passing of ordinary or
special resolutions by written resolution
signed by the requisite majority of
shareholders of the company (more
than 50% of voting rights in respect
of an ordinary resolution and at least
75% of voting rights in respect of a
special resolution). The directors or the
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other person proposing the resolution
must circulate the proposed text of the
resolution and an explanation of its main
purpose to all members of the company
concerned entitled to attend and vote on
such resolutions.
An ordinary resolution is deemed to have
been passed at a meeting held 7 days after
the date on which it was signed by the last
shareholder to sign it and this period is
21 days in respect of a special resolution.
Companies may continue to use the
previous system of unanimous written
resolution which will continue to take
immediate effect.
Lending to
Companies Key Issues for
Lenders
(continued)
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14. What is the new definition of a “charge”?
The definition of a “charge” has changed
and is now defined as being, in relation
to a company, any mortgage or charge
in an agreement (written or oral) that is
created over an interest in any property of
the company but excluding a mortgage or
a charge (written or oral) created over an
interest in:
(a) cash;
(b) money credited to an account of a
financial institution, or any other
deposits;
(c) shares, bonds or debt instruments; or
(d) claims and rights (such as dividends
or interest) in respect of any thing
referred to in (b) to (c) above.
Lenders should be aware when dealing
with borrowers that given the specified
exclusions to the definition of a charge:
(a) it could now be the case that a company
could have created security over
certain assets without any registration
appearing on its file at the Companies
Registration Office (“CRO”). This
could impact on a lender’s diligence
as searches alone may no longer be
sufficient; and
(b) certain security interests created in
favour of a lender will no longer require
to be registered at the CRO, meaning
that third parties may not be put on
notice of certain security interests
granted in favour of a lender.
15. What are the new rules applicable to charges in terms of registration and priority?
The Act still requires particulars of
certain types of charges to be registered
at the CRO within 21 days of the date of
creation of the charge. The consequences
of non-registration continue to be that the
charge will be void as against a liquidator
or creditor of the company and the
monies secured by the charge will become
immediately repayable.
The Act does, however, introduce a number
of material variations to the existing
regime for the registration of, and priority
attaching to, charges:
(a) New Registration Procedure
The Act introduces a new one-stage/
two-stage registration procedure.
The one-stage procedure is similar to
the existing practice (other than with
regard to priority) whereby a filing
must be made not later than 21 days
after the creation of a charge. The
filing is effected by way of a Form C1.
While currently one party may sign a
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form C1 and submit it with a certified
copy of a deed, the Act does not permit
parties to submit deeds to the CRO
and so it will not be possible for this
practice to continue under the Act.
The CRO forms indicate that all forms
must be signed by both the borrower
and the lender.
The two-stage procedure is new and
provides for the filing of a preliminary
notice with the CRO in a prescribed
form (Form C1a) stating the company’s
intention to create a charge and
containing the prescribed particulars
of the charge and then, following the
creation of the charge, filing a second
notice (Form C1b) (no later than 21
days after the date of the receipt by
the Registrar of the initial notice)
stating that the charge referred to
in the preliminary notice has been
created. If the first notice is signed by
the lender, the second notice must be
signed by the creator of the charge and
vice versa.
Lending to
Companies Key Issues for
Lenders
(continued)
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15. What are the new rules applicable to charges in terms of registration and priority?
(Continued)
(b) Priority
submitted as opposed to the date of
creation of the charge.
Under the Act, the priority of a charge,
unless governed by other enactments,
will be determined by the date/time of
receipt by the CRO of the prescribed
particulars of the charge using either
the ‘one-stage’ or ‘two-stage’ procedure.
With the one-stage procedure, the
required particulars are lodged at some
stage not later than 21 days after the
creation of the charge but unlike the
current position, priority will now
run from the date the particulars are
With the two-stage procedure, the
required particulars are lodged in
advance of the creation of the charge
(when the Form C1a is submitted).
Provided the second step in the twostage procedure is adequately followed
(the lodgement of the Form C1b),
priority will run from the date that the
C1a was submitted, being a point in
time before the creation of the charge.
16. How will these new rules impact on secured lending?
(a) New Registration Procedure
(b) Priority
Regardless of which registration
procedure is adopted, a lender will
need to ensure that it receives, as a
condition precedent to funding, the
authority of the security provider for
the lender’s solicitors to complete the
required security registration forms on
its behalf.
The change to the priority of charges
introduced by the Act is likely to
impact on the manner in which
registrations are effected in practice.
The net effect will be that registration
of particulars of a charge will no longer
be just a perfection issue, but will
determine priority and will require
to be completed as soon as possible
following the creation of the charge.
17. What are the new e-filing requirements for the registration of charges?
On the basis of the new priority regime
for charges, the CRO is introducing an
e-filing facility, incorporating electronic
(ROS) signatures, to establish certainty
on the date and time of submission of
the prescribed particulars of a charge for
the purposes of priority. The submission
of the prescribed particulars by e-filing
with electronic signature(s) is aimed at
facilitating the automatic establishment of
the date and time of submission for priority
purposes.
Under the two-stage procedure, the date of
priority will be that of the e-filed Form C1a
(assuming the submission of a Form C1b
confirming creation of the charge within
21 days of such date). Under the one-stage
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procedure, an e-filed Form C1, filed within
21 days of creation of the relevant charge,
will receive priority from the time and date
of the e-filing.
It is expected that the Minister for Jobs,
Enterprise and Innovation will make an
order mandating the registration of charges
by way of e-filing with a ROS signature in
accordance with section 897 of the Act.
While the CRO are endeavouring to assist
with the move to mandatory e-filing in
terms of guidance and notifications, it is
expected that there will be a learning curve
for users of the online system particularly
given the requirement for verification by
both parties by way of ROS signature.
Lending to
Companies Key Issues for
Lenders
(continued)
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18. Does the Act impact security registration for foreign companies?
Yes. The ‘Slavenburg’ file, maintained by
the CRO (named after an old English case
(NV Slavenburg’s Bank v Intercontinental
Natural Resources Ltd) and which related
to companies with an established place of
business in the State, is to be closed and
cancelled.
From Commencement, the security
registration regime will also apply to
“relevant external companies” defined
as (i) bodies corporate, (ii) with limited
liability, (iii) incorporated in a country
other than Ireland and (iv) which have
an established branch in the State. This
means that failure to register a charge
created by a relevant external company,
in accordance with the Act, will render
the charge void as against a liquidator or
creditor of that company.
The practical issue for lenders is that the
obligation to make such registrations
arise by virtue of the foreign company
being a “relevant external company”. No
registration requirements are required
to be satisfied in Ireland for a foreign
company to become a relevant external
company for the purposes of the Act.
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However, relevant external companies are,
within a period of establishing a branch,
then required to satisfy certain registration
requirements with the CRO. The Act
provides that unless those registration
requirements have been completed, it will
not be possible to register particulars of
a charge created by a relevant external
company under the Act.
The net effect will be that if a lender is
taking security from a foreign company it
will need to be satisfied that either:
(a) the foreign company is not a relevant
external company for the purposes
of the Act. While it is expected that
representations in finance documents
and related due diligence will be
required, lenders should be aware that,
to the extent these representations
are untrue, the failure to register the
charge could, nonetheless result in the
charge being declared void; or
(b) the foreign company is a relevant
external company and that it has
completed all of its branch registration
requirements under the Act.
For further information please contact
Fergus Gillen
Philip Murphy
Paul Heffernan
Partner, Head of Banking &
Financial Services
Partner, Banking &
Financial Services
Partner, Corporate
ddi
+353-1-611 9146
ddi
+353-1-611 9139
email
fergus.gillen@
mccannfitzgerald.ie
email
philip.murphy@
mccannfitzgerald.ie
Niall Powderly
John Cronin
Lisa Faughnan
Partner, Banking &
Financial Services
Partner, Banking &
Financial Services
Solicitor, Banking &
Financial Services
ddi
ddi
+353-1-607 1388
+353-1-607 1284
ddi
+353-1-607 1325
email
niall.powderly@
mccannfitzgerald.ie
email
john.cronin@
mccannfitzgerald.ie
email
lisa.faughnan@
mccannfitzgerald.ie
ddi
+353-1-607 1326
email
paul.heffernan@
mccannfitzgerald.ie
Alternatively, your usual contact in McCann FitzGerald will be happy to help you further.
This document is for general guidance only and should not be regarded as a substitute
for professional advice. Such advice should always be taken before acting on any of the
matters discussed.
2015 © McCann FitzGerald. All rights reserved.
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