The Companies Act 2014 (the "Act") was recently passed by the Irish parliament and is expected to be brought into force on 1 June 2015 (the "Commencement Date"). The Act is largely a consolidation and modernisation exercise.
However, there are a number of significant areas which modify existing companies legislation and which borrowers and lenders will need to consider, in respect of existing and future financings, both in the run-up to the Commencement Date and afterwards. In particular these relate to:
- Registration and priority of charges.
- Changes to the financial assistance and connected party lending regimes.
- New private company types.
- Amendments to existing constitutional documents.
Registration and priority of charges – a key change
Under the current companies legislation, priority of security is governed by the date of the charge, provided that any necessary CRO filing has been done within 21 days of creation of the charge.
The Act now provides that it is the date (and time) of registration of the charge at the CRO which regulates priority. (The exception to this general rule is where priority is governed by another statutory regime, e.g. where the charged assets comprise real estate, ships or aircraft.) Under the Act a two-stage filing process will be available so that priority can be achieved from the date of filing of a notice of intention to charge the assets in question, provided the actual charge is executed and filed within 21 days of that notice of intention.
Lenders should consider from a practical perspective whether such filings will be a condition precedent to closing, as opposed to the current practice of filing after closing, but within the prescribed 21 day period. Lenders may well take the view that the two-stage process is preferable because it ensures earlier priority of their security interest. Borrowers and lenders will also need to ensure that the terms of the security documents - especially the assets to be charged - are agreed as far in advance as possible, in order to allow any filings of intention to be made under the two-stage process. This is because successfully completing the two-stage process enables the secured lender to obtain priority from the date of notice of intention, rather than from the date of the charge.
Changes to the financial assistance prohibition
Section 60 of the Companies Act 1963 provides that a company may not give financial assistance where the assistance is given "for the purpose of" or "in connection with" the acquisition of or subscription for shares in the company or its holding company. The Act has removed the "in connection with" test so the financial assistance prohibition will only apply where assistance is given "for the purpose of" the relevant acquisition or subscription. Under the Act, the financial assistance can still be "whitewashed" by a private company as under the current companies legislation. This will be done by following the summary approval procedure set out in the Act, the requirements of which are broadly similar to those contained in the existing legislation.
While the Act intends to limit the scope of the financial assistance prohibition, there may be marginal cases where it will be unclear what constitutes the "purpose". Lenders should still require the summary approval procedure to be followed in doubtful cases.
The Act does not change the law insofar as a breach of the financial assistance rules may affect lenders. It is only where a lender has actual notice of the facts constituting the breach that its security will be in jeopardy.
New private company types – inertia is not an option
A key issue for borrowers is the introduction of new company types. An existing private limited liability company ("Existing LTD") will be required, during a transition period of 18 months from the Commencement Date, to re-register as one of the new types of private company set out in the Act. Borrowers and guarantors which are Existing LTDs will need to consider whether to re-register as a limited liability company under the Act ("LTD") or as a designated activity company ("DAC").
An important point for lenders to note is that an LTD will not have an objects clause and will have no limitation on its powers under its constitution. A DAC is still required to have an objects clause, but a third party is no longer bound to enquire whether a DAC is acting within its objects. The Act does not remove existing protection which allows a company outsider to proceed on the basis that all internal consents have been obtained to authorise the transaction. We would expect, however, that lenders will still require a review of a DAC's constitution to be carried out by legal counsel to highlight any issues relating to capacity, especially where lenders require a capacity opinion to be issued in connection with a particular transaction.
Lenders will need to consider, in respect of a corporate borrower or guarantor, whether they should require or suggest such borrower or guarantor to re-register as a DAC rather than an LTD, for example because such borrower or guarantor has issued, or intends to issue debt securities, which is not permitted for an LTD. Borrowers will also need to decide if they are comfortable with re-registration as an LTD or whether, given the nature of a particular transaction, they require re-registration as a DAC.
Amendments to existing constitutional documents
Upon re-registration (whether as an LTD or a DAC), an Existing LTD is required to submit an amended constitution to the Companies Registration Office ("CRO").
Many typical loan agreements contain consent requirements on any changes to the constitutions of corporate borrowers or guarantors. Borrowers and guarantors will need to consider whether the terms of their existing finance documents permit such changes. Lenders will need to consider how they will handle consent requests, given that the Act provides for a statutory duty on the directors of companies to make the changes under the Act within the transition period.
Borrowers and lenders may also wish to consider whether they wish to build in provisions to loan agreements entered into prior to the Commencement Date to deal with the required changes upfront.
Other noteworthy provisions
Restructuring and Insolvency processes
While not radically changing the current legislation, the Act provides certain changes of interest to lenders where a borrower is in certain distressed situations. In particular, the Act has streamlined procedures in schemes of arrangement, winding-up and examinerships, giving both borrowers and lenders greater flexibility.
Determination of subsidiary status
The definition of subsidiary has been amended so that the tests previously used only for accounting consolidation purposes now apply for all purposes. Thus, a company may be a subsidiary of another company on a 'dominant influence' analysis. Borrowers and lenders need to be aware, therefore, that where definitions of subsidiaries in loan agreements are made by reference to the Irish companies legislation, the scope of subsidiaries may automatically alter.
Loans to directors
The Act now provides that loans and other types of credit may be provided by companies to their directors, provided that the summary approval procedure is followed but notably no independent report is required. Accordingly, in appropriate cases, connected party transactions may be whitewashed.
The Act streamlines and modernises much of existing companies legislation. However, there are some changes in all areas that borrowers and lenders should familiarise themselves with.
As market practice evolves in light of these changes, borrowers and lenders will need to ensure they are aware of the changes and issues which arise from the implementation of the Act and seek local guidance on change and risk management.