Lending to a Company in Ireland: Issues with Loans, Guarantees and Security

A Practice Note providing an overview of certain key considerations involved in structuring a loan to a company incorporated or located in Ireland (which may also involve a guarantor or security provider incorporated or located in, or assets located in, Ireland), where the lender is incorporated in another jurisdiction. In particular, this Note looks at key legal issues involved in making such loans, as well as taking and enforcing security and guarantees.

Lawyers advising a lender who proposes to make a loan to a borrower incorporated or doing business in another jurisdiction need to be aware of a variety of issues that can affect the structure of the loan transaction. In addition, if a transaction also involves a guarantor or security provider incorporated or doing business in another jurisdiction, or the assets over which security is being taken are located in another jurisdiction, then there will be other issues to consider. Lawyers should identify these issues in the early stages of structuring a transaction, as they can have an impact on key elements of the transaction structure.

In particular, it is important to identify key legal issues involved in the loan transaction, as well as in taking and enforcing security and guarantees, as they can have a major impact on key elements of the transaction structure, such as:

• Who the borrower, guarantor, and security providers will be.
• The lender’s ability to enforce security interests and guarantees.

This Note looks at the following issues which may affect the structure of a loan transaction:

• Issues involved in taking a guarantee or security.
• Issues involved in enforcing a loan, guarantee, or security interest.

This Note is part of a suite of resources that explain regulatory issues that should be considered when undertaking a cross-border loan finance transaction in a specified jurisdiction where the lender is incorporated in a different jurisdiction. For more information on other regulatory issues, see Cross-Border Lending: Regulatory Issues Toolkit. For information on how to structure a cross-border lending transaction, see Cross-Border Lending: Structuring the Transaction Toolkit. For information on other cross-border legal and documentation issues, see Cross-Border Lending: Legal and Documentation Issues Toolkit. For information on considerations relating to signing and closing a cross-border corporate loan transaction, see Cross-Border Lending: Signing and Closing a Corporate Loan Transaction Toolkit.

Unless otherwise stated, a reference in this Note to:

• “Irish law” is used to refer to the laws of Ireland.
• “Irish company” denotes a company incorporated in Ireland.
• “Ireland” means the island of Ireland excluding Northern Ireland.

Issues in Taking a Guarantee or Security

In the context of share acquisitions, laws relating to corporate benefit, financial assistance, loans to directors and connected persons, and potential environmental liability, may need to be considered by a lender who is proposing to lend to a company in Ireland.

Corporate Benefit

Where the lender requires a guarantee or security not only from the borrower but also from its parent, a subsidiary, or other companies in the group, it may not be clear what benefit the borrowing company receives in return.

While not explicitly stated in the Companies Act 2014 (Companies Act), it is generally accepted that the guarantee or security could be declared invalid in an insolvency proceeding of that company if either of the following is true, and the lender had actual or imputed knowledge of the irregularity:

• The directors of the company providing the guarantee or security did not believe the transaction was in the company’s best interests.
• No reasonable board of directors could have considered that it was in the company’s best interests.

Loans to Directors and Connected Persons

Section 239 of the Companies Act prohibits an Irish company from entering into certain transactions with directors of that company, or persons connected with a director of that company. This includes a prohibition on the making of a loan or a quasiloan, a credit transaction, the provision of a guarantee or security to a director of the company (or of its holding company), or to a person connected with a director.

However, the Companies Act contains a number of exemptions from the restriction in section 239. The most frequently used exemption in Irish transactions is the intra-group exemption, contained in section 243 of the Companies Act, which lifts restrictions on transactions with directors where the company carrying out the restricted activity, and the company benefiting from that action, are both within the same group of companies. In most lending transactions, the obligors will be in the same group of companies and, therefore, any cross-guarantees or security which are being provided will benefit from this exemption.

In addition, Section 240 of the Companies Act sets out a “de minimis” threshold. If the value of the transaction is below that threshold, in a transaction that would otherwise fall foul of section 239, the transaction will not be invalidated. The threshold in question is a transaction value of less than 10% of the company’s relevant assets.

Another frequently relied on exemption is the use of the Summary Approval Procedure (SAP) under Section 242. Effectively, any transaction that is prohibited under section 239 is capable of being whitewashed by carrying out an SAP which involves a declaration of solvency by all or a majority of the directors of the company plus approval by the shareholders. It is worth noting that this process is not specific to transactions under section 239 but can also be used to whitewash or “bless” various transactions that are otherwise restricted under the Companies Act.

Finally, two other exemptions exist under the Companies Act:

• Section 244 of the Companies Act provides for an exemption where the director incurred properly vouched expenses.
• Section 245 permits a transaction that would otherwise be prohibited, if the transaction is entered into in the ordinary course of business and at arm’s length.

Financial Assistance Relating to Share Acquisitions

The financial assistance regime under Irish law should be considered by a lender in the context of an acquisition finance.

Under section 82 of the Companies Act, it is unlawful for a company to give any financial assistance, directly or indirectly (such as providing security, a guarantee, or other financial support), for the purchase of shares in that company or in that company’s holding company.

While there is no definition of “financial assistance” in the Companies Act or extensive judicial clarification of its scope, it is accepted that financial assistance is not limited to the granting of loans, guarantees, or security.

Importantly, any financial assistance will be permitted where the company’s principal purpose in giving the assistance is not for the purpose of the acquisition, or where it is incidental to some larger purpose, and the assistance is given in good faith.

As with section 239, the giving of financial assistance will be permitted if approved in advance by an SAP.

A number of other exemptions to the general restriction on providing financial assistance are contained in the subsections of section 82, including exemptions for the following:

• The payment of dividends.
• The discharge or payment of lawfully incurred debts.
• Share redemptions.
• The lending of money in the ordinary course of business of the company.
• Employee share schemes.
• Loans to non-director employees to acquire shares of the company.
• Re-financings.
• Representations and warranties in share purchase acquisitions.
• Fees and expenses of advisers.
• Expenses in share listings.
• Takeovers.
• Payment of commissions and fees on allotment of shares by public limited companies.
• Employee share ownership schemes and trusts.

Environmental Law Liability

A lender’s potential exposure to environmental law liability is unclear due to a lack of relevant case law in Ireland.

However, the “polluter pays” principle is operative in Ireland under S.I. No. 547/2008 European Communities (Environmental Liability) Regulations 2008 (the EU Regulations). Certain provisions of the EU Regulations impose liability on an owner or occupier of land who causes or permits the environmental damage. The liability of the lender might arise under environmental laws only on the occurrence of an event of default by virtue of the lender controlling or participating in the activity or decision-making that caused the breach of law, and therefore falling within the definition of a polluter.

Under the EU Regulations, if a lender is found by the Environmental Protection Agency to have caused damage to protected species, natural habitats, waters, or lands by exercising an occupational activity, the lender could incur criminal liability of up to EUR500,000 or up to a term not exceeding 3 years imprisonment, or both, depending on the severity of the offence.

Lenders can take proactive steps aiming to decrease the risk of such liability occurring. For example, lenders can:

• Conduct an environmental appraisal or other due diligence as part of the risk assessment process before making the loan.
• Perform routine environmental audits.
• Require the borrower to indemnify the lender in the case any environmental law liability arises.

For more information on issues in taking guarantees and security, see Practice Note, Lending to a Company in Ireland: Corporate Authority and Legal Issues: Laws of General Application Relating to Lending, Granting of Security, and Guarantees.

Issues in Enforcing a Loan, Guarantee, or Security Interest

There are no restrictions on foreign lenders, by comparison with domestic lenders, in relation to their ability to commence proceedings against an Irish company or to enforce guarantees or security rights in Ireland, nor are there exchange controls restricting payments to a foreign lender. Further, foreign lenders are bound by the same statutory limitation periods within which a claim must be brought.

However, in certain circumstances, a foreign lender may be required to hold, or have passported, an appropriate regulatory authorisation, which can be obtained from the Central Bank of Ireland, or where applicable, the Single Supervisory Mechanism. Some lenders based in the European Economic Area may be regulated in their home EEA Member State and may be authorised to provide services in Ireland under passporting arrangements.

There are two types of passporting, passporting in and passporting out:

• Passporting in is where a financial firm uses an authorisation obtained in another EEA Member State (or in some cases, from a country that is outside the EEA) to sell its products or services to consumers in Ireland.
• Passporting out is where a financial firm, authorised by the Central Bank of Ireland, sells its products or services to consumers in another EEA country.

While the concept of administration does not exist in Ireland, if the court is satisfied that an insolvent company (or part of its business) has a “reasonable prospect” of survival, the court can provide protection to the company through examinership. This is a process aimed at rescuing insolvent companies, during which the company is the subject of court protection.

While the insolvent company is in examinership, no petition for winding up may be commenced, nor can a receiver be appointed over the company. As such, no action can be brought by any creditor, Irish or foreign, to enforce its security during this period.