Guarantees and collateral for acquisition financings in Ireland

Guarantees and collateral

Are there restrictions on the provision of related company guarantees? Are there any limitations on the ability of foreign-registered related companies to provide guarantees?

There are no specific costs or taxes associated with the provision of related company guarantees (or of guarantees generally).

Regarding restrictions generally, the following should be noted.

Financial assistance

See question 15 regarding the prohibition on the provision of financial assistance (including by way of guarantee) for the purpose of an acquisition, and the related summary approval (validation) procedure.

Transactions with directors

Under section 239 of the Companies Act, there is a restriction on a company’s ability to guarantee the liabilities of, among others, a person connected with one of its directors. The definition of ‘connected person’ is very broad, and includes another company controlled by that director. As such, the prohibition in section 239 should always be considered when a related party guarantee is being provided. A validation procedure, known as a ‘summary approval procedure’, is available.

Corporate benefit

The directors of a company must also be satisfied as to the commercial benefit in providing a guarantee, notwithstanding that the impact of the doctrine of ultra vires has been considerably reduced by the Companies Act. There is, however, Irish case law to support the view that there is benefit in a group company providing a guarantee of the obligations of other companies in its group.

Are there specific restrictions on the target’s provision of guarantees or collateral or financial assistance in an acquisition of its shares? What steps may be taken to permit such actions?

Subject to certain exceptions, under section 82 of the Companies Act, it is not lawful for a company to give direct or indirect financial assistance (whether by way of a guarantee, security, loan or otherwise) for the purpose of an acquisition of shares in that company, or in its holding company.

A summary approval procedure (a form of ‘whitewash’ procedure) can be carried out to validate the provision of financial assistance, but this can only be availed of by certain types of company. A private company that is a subsidiary of a public limited company cannot avail itself of the summary approval procedure, and neither can a public limited company. The procedure involves the making of a directors’ declaration (including as to solvency on a 12-month look-forward basis), and the approval by the company’s shareholders of the financial assistance by way of special resolution, in each case before the financial assistance is provided.

What kinds of security are available? Are floating and fixed charges permitted? Can a blanket lien be granted on all assets of a company? What are the typical exceptions to an all-assets grant?

An Irish corporate obligor will typically grant an all-assets debenture. Where the Irish obligor owns assets outside of Ireland, local law security is generally also taken. Where security is being taken from an Irish individual, that is granted on an asset-specific basis. Both fixed and floating security can be taken from an Irish corporate obligor, but an individual cannot grant floating security. The types of security interest granted (most usually under an all-assets debenture) are set out below.

When taking security over real estate, this can only be done by way of charge by deed, and it is not possible to create a legal charge over future-acquired real estate in Ireland. Future-acquired real estate should be the subject of a separate charge by deed when it is acquired.

When taking security over shares, the most common approach is to take an equitable charge, under which the chargor remains the registered shareholder but must deliver its original share certificates, together with signed but undated share transfer forms (with the name of the transferee left blank for use on enforcement), to the chargee or security trustee. It is also possible (but quite rare) for a legal mortgage to be taken under which title to the shares is transferred to the chargee or security trustee (and reassigned to the chargor once the secured liabilities have been repaid).

When taking security over bank accounts, consideration should be given as to whether fixed security (precluding the chargor from dealing with the account) should be taken, or whether floating security is to be taken (whereby the chargor is permitted to deal with the account). See question 34 regarding how fixed and floating security-holders rank on insolvency. Where the bank account is held with the chargee or security trustee, security is generally taken by way of charge. In other cases, it is usually taken by way of assignment.

Security over contract rights is taken by way of security assignment. Where the chargor does not relinquish control over the proceeds of receivables, the security will be fixed rather than floating in nature. Notice of the assignment should be given to the relevant debtors (to ensure that a legal, rather than an equitable, assignment is created).

Security over most forms of intellectual property is granted by way of charge. There are specific security regimes for taking security over agricultural stock (under the Agricultural Credit Act 1978) and over ships (under the Mercantile Marine Act 1955).

Are there specific bodies of law governing the perfection of certain types of collateral? What kinds of notification or other steps must be taken to perfect a security interest against collateral?

Companies Registration Office and CBI

If security is created by an Irish company, a Form C1 (or a Form C1a and Form C1b) must be filed with the Irish Companies Registration Office (CRO) within 21 days (priority runs from the time of filing). There is a similar filing requirement with the CBI where the chargor is an Irish Collective Asset-management Vehicle. Where the chargor is a foreign company with a branch in Ireland, and the charged assets are located in Ireland, a CRO filing is also required (Form F8, or Form F8a and F8b). There are exemptions: security over cash, accounts with financial institutions, shares, bonds, other debt instruments, units in collective investment undertakings, money market instruments and (in the case of each of the foregoing other than cash) claims and rights in respect thereof, are exempt from the CRO and CBI filing requirements.

Property Registration Authority

Security over Irish real estate must be registered with the Irish Property Registration Authority (PRA) (the Land Registry section in the case of registered land, and the Registry of Deeds in the case of unregistered land).

Revenue Commissioners

Where the security includes a fixed charge over book debts, a notice under section 1001 of the Taxes Consolidation Act 1997 (TCA 1997) should be served on the Irish Revenue Commissioners (Revenue) within 21 days to avoid the chargee or security trustee being held liable for any arrears of VAT (value added tax), PAYE (pay as you earn), LPT (local property tax) and PRSI (pay-related social insurance) that the chargor may have at that date.

High Court

Where security is taken over shares in an Irish company, an affidavit is sometimes lodged with the Irish High Court, and a related ‘stop notice’ served on the secretary of the company whose shares have been charged, asking to be notified if the chargor purports to deal with the charged shares. Separately, where a fixed charge has been created by an individual or group of individuals over assets such as ships, aircraft, machinery and stock-in-trade, the bill of sale and the accompanying attestation affidavit must also be registered in the High Court Central Office as a personal chattel in accordance with the Bills of Sale Acts 1879 and 1883 within seven days.

Constitutional documents

Where security is taken over shares, it would be usual for the chargee or security trustee to request changes to the constitutional documents of the company whose shares are being charged to remove the directors’ right to veto a transfer of shares.

Notices of assignment

Notice of the security assignment should be given to the relevant debtors (to ensure that a legal, rather than an equitable, assignment is created) and those debtors should be instructed to pay all amounts to a designated account controlled by the chargee or security trustee.

Intellectual property registries

Where security is taken over intellectual property, the security must be registered against each trademark and patent in the registry in which it is registered, which may include the Irish Patents Office (IPO) and the European Union Intellectual Property Office (EUIPO). Security can also be registered over designs in both the IPO and the EUIPO.

Registrar for Shipping

Where security is taken over a ship, the statutory ship mortgage must be registered with the Registrar for Shipping. Failure to do so will not invalidate the mortgage, but an unregistered ship mortgage will rank behind any subsequent registered ship mortgages. There is no time frame stipulated for such registration; however, as the Registrar of Shipping registers statutory ship mortgages on a priority basis (ie, priority is determined by date of registration), registration should be attended to promptly.

Aircraft

Ireland has ratified the Cape Town Convention. If the chargor is an authorised user of the International (Cape Town) Registry (located in Dublin) the Cape Town Security Agreement can be registered. Priority is determined by date of registration.

Circuit Court

Where security is granted over agricultural machinery or agricultural stock by a company or by an individual, the specific chattel mortgage and the floating chattel mortgage, if capable of being registered, must be registered within one month of creation with the Circuit Court in each district where the chargor’s land, on which the chattels are situated, is located in accordance with the requirements of the Agricultural Credit Act 1978 (ability to register depends on whether or not the mortgagee is a ‘recognised lender’ under that Act). Until registration is made, the security is not effective.

Once a security interest is perfected, are there renewal procedures to keep the lien valid and recorded?

Once a charge is granted and any registration requirements are complied with, there are no ongoing requirements that need to be complied with to ensure that the charge remains valid and registered.

As mentioned in question 20, it is usual for the security package to be granted to a security trustee for the benefit of all of the lenders. Where the identity of the chargee or security trustee changes, filings will be need to update the relevant registries (including the CRO and the PRA) in which the security was registered. Where the security is held by a security trustee, changes to the underlying lender syndicate do not trigger a registration requirement.

Are there ‘works council’ or other similar consents required to approve the provision of guarantees or security by a company?

No. The provision of a guarantee or security by an Irish obligor should be approved by the obligor’s board of directors. A shareholders’ resolution is not usually required, unless the summary approval procedure is being availed of where the provision of the guarantee or security could otherwise breach the prohibition on financial assistance, or the prohibition on giving guarantees or security in respect of the liabilities of a person connected with a director of the obligor (those prohibitions are under section 82 and section 239, respectively, of the Companies Act).

Can security be granted to an agent for the benefit of all lenders or must collateral be granted to lenders individually and then amendments executed upon any assignment?

Security is generally granted to a security trustee for the benefit of all of the lenders. This means that, on a transfer or assignment where the identity of the security trustee is not changing, the security does not need to be amended. Where the security has been registered, and the identity of the security trustee changes, there is a requirement to make a filing with the relevant registries to reflect the identity of the new security trustee.

What protection is typically afforded to creditors before collateral can be released? Are there ways to structure around such protection?

In practice, a deed of release is provided by the chargee or security trustee confirming that collateral can be released. This would usually happen on repayment in full of the secured liabilities, or on a permitted disposal of a charged asset. A potential purchaser of such an asset would usually require sight of the executed deed of release before it will complete the purchase.

Where a deed of release is provided in respect of security that has been registered, a filing will also be needed to reflect the fact that the security has been released. In respect of security registered in the CRO, there is an additional layer of protection for the chargee or security trustee - the form to be filed on a release may be signed by either the chargor or the chargee or security trustee, but where it is signed by the chargor only, the CRO will write to the address listed for the chargee or security trustee where the security was registered to check that the chargee or security trustee has no objection to the charge being released, and will give the chargee or security trustee 21 days to respond.

Describe the fraudulent transfer laws in your jurisdiction.

The Companies Act contains a number of rules addressing issues such as unfair preference and fraudulent transfers.

Improper transfers

Under section 608 of the Companies Act, the Irish High Court may order any person who appears to have ‘use, control or possession’ of the property (or the proceeds of sale of that property) of a company that is being wound-up, where the property was disposed of (including by way of security) and the effect of that disposal was to ‘perpetrate a fraud’ on the company, its creditors, or its shareholders, to deliver that property to a liquidator, creditor or contributory of the company, or to pay a sum to the liquidator in respect of that property.

Void dispositions

Under section 602 of the Companies Act, where a company is being wound up, a disposal of the company’s property after the winding-up process has started without the liquidator’s consent will be void unless the High Court orders otherwise.

Unfair preference

Under section 604 of the Companies Act, any one of a variety of steps (including the making of a payment, or the granting of security) made by a company that is unable to pay its debts as they fall due in favour of one of its creditors, with a view to giving that creditor a preference over the company’s other creditors, will be deemed to be an unfair preference and invalid if a winding-up of the company begins within six months (where the creditor is a ‘connected person’, that six-month period is extended to two years).

Disclaimer of unprofitable contracts

Under section 615 of the Companies Act, a company’s liquidator could attempt to disclaim a contract that it views as onerous and unprofitable. However, this is very unlikely to impact an acquisition finance arrangement, as the mere fact that the company’s asset position would be better off if it did not have to repay the debt would not be sufficient justification for a disclaimer - there would need to be unduly onerous or burdensome obligations associated with the contract.

Invalid floating charges

Under section 597 of the Companies Act, a floating charge created by a company will be invalid if it is created within the 12 months prior to the beginning of the winding-up of the company, unless it is demonstrated that the company was solvent immediately after it granted the charge. The 12-month period is extended to two years if the floating charge is created in favour of a ‘connected person’. This provision underlies the importance of obtaining representations as to solvency from obligors in an acquisition financing.

Case law

There is also case law (Re Frederick Inns Ltd [1991] ILRM 582 (High Court) 1 ILRM 387 (Supreme Court)) to the effect that where the directors of an insolvent company are aware of its insolvency, they hold the company’s assets in trust for the benefit of the company’s creditors. As such, it is possible that the actions of those directors (such as taking steps to dispose of the company’s assets) could be held not to have been lawfully and effectively done if carried out in disregard of the rights and interests of the company’s general creditors.