Lending to a Company in Ireland: Insolvency Issues

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 Nore looks at key insolvency issues and related matters that can affect the lender’s rights and structure of the transaction.

Lawyers advising a lender who is proposing 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 the transaction, as they can have an impact on key elements of the transaction structure.

In particular, it is important to identify and deal with a variety of insolvency-related issues that can affect the structure of the loan transaction.

In determining key elements of the transaction structure, foreign lenders and their counsel should consider the lender’s rights in any insolvency of the borrower, guarantor or security provider, and related limitations on those rights.

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-BorderLending: 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.

Lenders’ Rights in Insolvency

The principal insolvency and reorganisation procedures and mechanisms available in Ireland are liquidation, receivership, examinership, and schemes of arrangement.

Liquidation

Liquidation is the process by which the assets of a company are realised by a liquidator and distributed to the company’s creditors in accordance with an order of priorities. As a general rule, secured creditors are entitled to realise their security outside of the liquidation (see Receivership). An insolvent company may be wound up in a voluntary process (called a creditors’ voluntary liquidation) or in a compulsory process following the making of a winding-up order by the High Court (known as a compulsory liquidation).

Where a company’s liquidation has commenced (either by the passing of a members’ resolution or by the making of a winding-up order), creditors may not take any court action or proceedings against the company except with the leave of the court (section 678, Companies Act).

Under the EU Recast Insolvency Regulation, a judgment of an Irish court opening insolvency proceedings shall be recognised in all EU Member States and will, with no further formalities, “produce the same effects” in any other Member State as under the law of the State of the opening of proceedings, except where otherwise provided in the Regulation (Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast), Articles 19 and 20).

Receivership

Receivership is a process in which a secured creditor enforces security that it holds over assets of a company. The effect of appointing a receiver is that the powers of the company and its directors, in respect of the charged assets affected, are largely suspended and can be exercised only with the consent of the receiver. The receiver’s function is to take possession of the secured assets, realise the secured assets, and apply the proceeds of sale to discharge of the secured debt.

The appointment of a receiver does not carry with it a moratorium on any action or proceedings being taken by creditors, although in practice a company that is in receivership may also be in liquidation, in which case the moratorium referred to above will apply (see Liquidation).

Examinership

Examinership is a court-supervised rescue process in which an insolvent company is placed under the protection of the Irish High Court (and, in certain limited circumstances, the Circuit Court), so that a court-appointed examiner can investigate the company’s affairs and report to the Court on the prospects of the company’s survival. If the company and all or any part of its business is capable of being rescued, the Court may sanction proposals for a scheme of arrangement formulated by the examiner which usually involves partial payments being made to the company’s creditors and the survival of the business of the company as a going concern.

Following presentation of a petition for the appointment of an examiner to a company, the examiner for a company is usually appointed for a period of 70 days from the date of presentation, which period may be extended by a further 30 days by the court. Creditors are prevented from taking the type of action that they would normally be entitled to take, such as enforcing security, presenting a winding-up petition, or (without leave of the court) issuing proceedings against the company (section 520, Companies Act).

Scheme of Arrangement

A scheme of arrangement is a statutory procedure provided under Irish law in which a company puts forward compromise proposals to its members or classes of members or creditors or classes of creditors. The creditors or members then meet and vote on the scheme. If the statutory voting majorities are obtained, the company will then seek the sanction (or approval) of the High Court to make the scheme binding on all parties.

A moratorium is not automatically available in the context of a scheme of arrangement, but the Court has the power to stay all proceedings or restrain further proceedings against the company for any time period as the court sees fit, on terms that the court deems just (section 451, Companies Act).

Transactions that May be Void or Voidable

In certain instances, transactions may be void or voidable where one or more parties to a transaction subsequently enters liquidation. The following are the primary examples of these void or voidable transactions:

• Improper transfer. Where a company entered a transaction that has the effect of perpetrating a fraud on the company, its members, or creditors, the court has the power (in a liquidation) to order a person who has the use or control of the assets concerned, or the proceeds of sale, to deliver the assets or pay a sum of money from the asset proceeds to the liquidator of the company. It is not necessary to prove that the company was insolvent at the time of the transaction although payments made in the ordinary course of business may be exempt. (section 608, Companies Act).
• Unfair preferences. A payment or transfer of property by an insolvent company to a creditor, which occurs within six months (or such longer period as the court considers just and equitable under the circumstances of the act concerned) prior to the commencement of the winding up of the company and at a time when the company was insolvent, will be deemed an unfair preference and will be invalid, if the payment or transfer was made with a view to giving the creditor a preference (or better treatment) over the other creditors of the company. Where the transaction is in favour of a “connected person” (as defined in the Companies Act), the relevant period is extended to two years (or such longer period as the court considers just and equitable under the circumstances of the act concerned) prior to the commencement of the liquidation, and an intention to prefer is presumed, unless the contrary is shown by the beneficiary. However, a transaction will not be considered an unfair preference, even if it is detrimental to the general body of creditors, unless there are other reasons to deem the transaction invalid, where the transaction was:
  
  • reasonable;
  • immediately necessary for the implementation of a scheme of arrangement under Part 10 of the Companies Act; and
  • carried out in accordance with a scheme of arrangement confirmed by a court.

  (Section 604, Companies Act).

• Invalid floating charge. A floating charge on the assets of a company that is created within 12 months prior to the commencement of the liquidation or winding up of the company will be invalid (except to the extent of monies actually advanced or paid or the actual price or value of goods or services sold or supplied to the company, at the time of or after the creation of, and in consideration for, the charge), unless the company was solvent immediately after the creation of the charge. Where the floating charge is created in favour of a “connected person”, the relevant period (within which a floating charge can be held to be invalid) is extended to two years. (Section 597, Companies Act).
• Guarantees. A guarantee may potentially be set aside by a court, on various grounds, including undue influence, duress, and non est factum. The doctrine of non est factum applies where a guarantor enters a transaction in the belief that the essential effect of the transaction was radically different from what it was in fact.

Payment Priority

Where a company has entered liquidation, the amount of each lender’s recovery depends, in part, on where the lender ranks in the order of priority, which applies when distributions are made.

In any liquidation, the obligation of a liquidator is to get in and realise property and assets of the company and ensure their realisation in such a manner that discharges the company’s liabilities to its creditors. A key principle in the distribution of property of a company under Irish law is enshrined in section 618 of the Companies Act, which provides that all debts rank equally and where assets are insufficient to meet the debts, they abate in equal proportion.

While exceptions exist, both statutory and otherwise, the general order of priority of payments in a liquidation is as follows:

• Super-preferential claims.
• Remuneration, costs and expenses of an examiner (where one was appointed).
• Fixed charge holders (ranking in order of creation).
• Expenses certified by an examiner under section 529 of the Companies Act.
• Costs, fees and expenses of the winding up.
• Preferential debts.
• Uncrystallised floating charges (ranking in order of creation).
• Unsecured debts (ranking pari passu with each other).
• Deferred debts of members (ranking pari passu with each other).

All claims in one category must be paid in full before any remaining proceeds are distributed to the creditors in the following category. When there is an insufficient amount to meet the claims on a category in full, they are pro-rated.

Regulatory Issues Affecting Foreign Lenders

Making a Loan

For a summary of the regulatory requirements that a foreign lender needs to comply with before it may make a commercial loan to a borrower in Ireland, such as licensing, filing, or registration requirements, see Practice Note, Lending to a Company in Ireland: Regulatory Issues: Restrictions on Making Loans.

Taking a Guarantee or Security Interest

For a summary of the regulatory requirements that a foreign lender needs to comply with before it can take a guarantee or a security interest from an entity in Ireland, or a security interest over assets located in Ireland, see Practice Note, Lending to a Company in Ireland: Regulatory Issues: Restrictions on Taking Security or a Guarantee.

Enforcing Rights Under a Loan Agreement

For a summary of the regulatory requirements that a foreign lender needs to comply with before it can enforce its rights under a loan agreement against a borrower in Ireland, see Practice Note, Lending to a Company in Ireland: Regulatory Issues: Restrictions on Enforcing Rights under a Loan Agreement.

Enforcing Security Interests

For a summary of the regulatory requirements that a foreign lender needs to comply with before it can enforce security interests in Ireland, see Practice Note, Lending to a Company in Ireland: Regulatory Issues: Restrictions on Enforcing Security.