In the recent case of Independent Trustee Company Limited –v- Registrar of Companies [2015] IEHC 12, High Court, 16th January 2015, Judge Hunt discusses and clarifies a number of interesting issues for lenders and institutional borrowers:

  1. whether the application of a receivership to a designated property, amongst a portfolio of properties and assets, warrants and justifies a change of status by the Registrar on the company file – see “The value of status”; and
  2.  what constitutes an interest in property, where the company acts as a trustee and whether the registration regime set out in the Companies Acts[1] applies to entities holding property on trust – see “What is meant by an interest in property ?”

The Value of Status

In the case, the plaintiff, ITC, sought (amongst other reliefs) an injunction to prevent the defendant from altering the status of the plaintiff on the register of companies from “normal” following the appointment of a receiver to a property secured in favour of a lender[2].

Since the introduction by the Registrar of Companies of an electronic register in the early 1990s, the Registrar creates an entry for each company which is entitled “status”. A  company status is recorded as “normal”, “strike off listed”, “liquidation”, “receivership”, “ceased following a cross border merger” or “dissolved”.  The application of these descriptions is a long standing practice but it is not a requirement of the Companies Acts.  In Ireland, the Registrar does not issue certificates of good standing. However nowadays a request for a letter of status is a reasonably common request particularly in cross border transactions and serves a useful purpose to demonstrate to governmental and regulatory authorities in other jurisdictions the existence and status of a company.

In this case, the plaintiff company carried on the business as a pension provider and acted as a trustee to approximately 2,750 unit trust funds and had created and registered pursuant to s. 99 (1) Companies Act 1963[3]over 1,000 charges, relating to assets and properties held by it as legal owner and trustee for various pension funds.

Pursuant to s. 107 (1) Companies Act 1963 where a person appoints a receiver under any powers contained in any instrument, then within 7 days after the date of the appointment, he must publish a notice of appointment of a receiver in the Companies Registration Office Gazette and in at least one daily newspaper[4], circulating in the district where the registered office of the company is situated, and deliver to the Registrar of companies, a notice in the prescribed form.

In this case, the plaintiff stated that the effect of such publicity of a receiver appointed resulted in a “storm of activity”, involving the company’s bankers, regulator, other lenders and the company staff. In general, the impact of a change to status to “in receivership” could have, without further explanation, been read as indicative of an adverse financial condition and may trigger default provisions in other financing facilities and result in a breach of regulatory provisions.

Judge Hunt commented that the Registrar is obliged to ensure that the label applied to a company should be reasonably fair and accurate. Whilst it is reasonable to require the Registrar to ensure that the manner in which the information is displayed pertaining to receiverships differentiates between the various possibilities in so far as practicable, but that  it is hardly in the spirit of the Acts that there should be a class of receivership which is invisible to concerned persons.

He commented that whilst a receivership does not necessarily connote insolvency on the part of the company and may be limited in scope, this has to be balanced against the extent of the receivership of all assets or an entire business which may be so wide as to raise the issue of solvency. Judge Hunt referred to the “signpost”, introduced by the Registrar in the form of an explanatory note which appears on the company record, which alerts the person inspecting the Register to the existence of the various possibilities regarding ownership. This coupled with an invitation to inspect the individual form E8 at the Companies Registration Office will reveal additional information about the extent of such appointment.

This, he commented, was sufficient to address the practicable issue and notice requirement to interested third parties and he was not prepared to judicially legislate any additional criteria or conditions. Relief sought was denied.

While the status assigned to a company is available from the Companies Registration Office and a useful starting point for due diligence enquiries, it is important not to yield to popular misconceptions, to follow the signposts and seek further and additional information when carrying out a review or risk assessment of corporate books and records of a company. For companies with a large portfolio of charges and security, the onus remains with the company to handle the publicity and public relations necessary to minimise adverse and inaccurate reporting of receiver appointment, particularly where alternative consensual arrangements have been exhausted.  

What is meant by an interest in property?

Judge Hunt analysed the statutory definition of “property” in circumstances where the plaintiff held and received property in trust. In the present case the plaintiff interposed its corporate person into the trust scheme and in so doing the plaintiff acquired a proprietary interest in the property. Judge Hunt regarded this as falling within any ordinary definition or concept of the term “property”. The plaintiff had acquired an interest in land, which was in the context of secured financing susceptible to the application of the provisions of s. 99(1) of the 1963 Act[5]relating to perfection of charges.

The lender advanced monies on the condition that it was subject to security and a charge upon the legal interest in the property and not any other interest therein and the plaintiff agreed to enter into a deed of charge. The plaintiff’s counsel characterised the charge as a requirement of the lender, rather than a strict requirement of the Acts, in circumstances where the legal ownership of the property was held in trust for others.

The debate as to the true nature of the interest of a beneficiary of a trust is one of long standing and Judge Hunt outlined some of the debate and theories in his judgment. One view is that there cannot be 2 owners of the same thing and what the beneficiary really owns is the obligation of the trustee (a right in personam), coupled with the right to follow the trust assets into the hands of others (a right in rem). The wider and more generally accepted view is that the legal estate is a mere “shadow” following the equitable estate, which is the substance of the property, and the beneficiary may enforce a form of ownership against all except a bona fide purchaser for value without notice. On either view, if the beneficial interest was to be charged with repayment of the purchase loan, that interest could be defeated or impaired by the trustee dealing with a bona fide purchaser for value without notice, in a way that the legal interest could not.

Legal ownership of the trust property enabled the plaintiff to secure considerable finance required in order to construct the trust in favour of the beneficiaries and thereafter enabled the plaintiff to derive income from management of the trust asset. He concluded that the plaintiff’s power to deal with the property as legal owner was considerable and substantial and subject in the ordinary way only to the constraints imposed by the trust.

Judge Hunt held that s.99 applies to all land, wherever situate, or any interest therein and does not provide for any exemption or distinction in respect of property in the legal ownership of a company and held on trust for another or others, and property where both the legal and beneficial ownership are both vested in the company. The terms of s.99 expressly apply to all interests in property, whether legal or equitable, and are unequivocal in providing that all charges in respect of such property must be registered in order to be valid as against the liquidator or creditors.

In applying rules of statutory interpretation, Judge Hunt commented that the possible division of title to property into legal and equitable interests was presumably well known to the drafters of the 1963 Act. The drafters had back in 1963 and more recently when reforming the 1963 Act and introducing the Companies Act 2014, the opportunity to dis-apply the provisions to one or other of such categories.

The application of the literal meaning of the words in the Acts resulted in a comprehensive and harmonious administration of (i) the Companies Register generally and (ii) the procedures for the registration of charges and the appointment of receivers in particular. To adopt the interpretations suggested by the plaintiff would, in fact, constitute an unwarranted interference with the plain and unambiguously expressed intention of the Legislature, and would amount to a form of judicial legislation which is beyond the competence of the court.

Section 408 (1) Companies Act 2014 (which replaces s.99 1963 Act) came into effect on 1 June 2015 and in the context of notification and perfection of a charge, refers to an interest in any property of a company and as such, “property” includes any assets or undertakings of the company without reference to the nature of such interest, i.e. legal or equitable.

Conclusion

The decision of Judge Hunt reaffirms the role of the judiciary as interpreters of legislative provisions, but does not extend to permitting expansive interpretations so as to form an alternative non-elected legislative body. With the introduction of the Companies Act 2014, the legislature had the opportunity to review and revise a great many provisions of the foundational legislation from 1963 and sought to introduce a number of valuable and worthwhile reforms. Time will tell whether the 2014 Act is robust and will withstand challenge and judicial interpretation.