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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. Quick Links 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) Back to Quick Links 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 1 | mccann fitzgerald ¼ may 2015 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) Back to Quick Links 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. 2 | mccann fitzgerald ¼ may 2015 •• 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 Back to Quick Links (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). 3 | mccann fitzgerald ¼ may 2015 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. Back to Quick Links 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 4 | mccann fitzgerald ¼ may 2015 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) Back to Quick Links 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 5 | mccann fitzgerald ¼ february 2015 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) Back to Quick Links 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 6 | mccann fitzgerald ¼ may 2015 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) Back to Quick Links 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. 7 | mccann fitzgerald ¼ may 2015 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. 8 | mccann fitzgerald ¼ may 2015 Principal Office Riverside One Sir John Rogerson’s Quay Dublin 2 Tel: +353-1-829 0000 Fax: +353-1-829 0010 London Tower 42 Level 38C 25 Old Broad Street London EC2N 1HQ Tel: +44-20-7621 1000 Fax: +44-20-7621 9000 Brussels 40 Square de Meeûs 1000 Brussels Tel: +32-2-740 0370 Fax: +32-2-740 0371 Email [email protected] www.mccannfitzgerald.ie © McCann FitzGerald, May 2015