1. STRUCTURALLY EMBEDDED LAWS OF GENERAL APPLICATION
1.1 Insolvency Laws
Ireland is a leading domicile within Europe for securitisation
activity and the leading European jurisdiction by value for
securitisation special purpose entities (SPEs). While the
legislative regime incorporates a number of supportive taxation
measures, no equivalent measures exist in the area of insolvency
law. Issuers and originators in Ireland are subject to the general
insolvency law and utilise well-established structures to insulate
the underlying assets from the balance sheet (and insolvency
estate) of the originator. See 1.3 Transfer of Financial
Assets.
While we have seen an increase in synthetic securitisations, an Irish securitisation of receivables is typically structured as a "true sale" via an assignment from the originator directly, or through an intermediary vehicle, to the issuer. True sale transactions are subject to two principal risks in an originator insolvency: recharacterisation of the sale as a secured loan and clawback on originator insolvency. Both true sale and synthetic securitisations may be impacted by rules on consolidation of assets, avoidance of certain contracts and examination of companies.
Recharacterisation as Secured Loan
True sale
A transfer of assets purporting to be a true sale may
in certain circumstances be recharacterised by an Irish court as a
secured loan. In determining the legal nature of a transaction, a
court considers its substance as a whole, including economic
features and the parties' intention; and irrespective of any
labels.
Recharacterisation was considered by the High Court in Bank of Ireland v ETeams International Limited [2017] IEHC 393 (subsequently upheld by the Court of Appeal in Bank of Ireland v ETeams (International Ltd) [2019] IECA 145), which endorsed the principles set out in the English cases of Re: George Inglefield [1933] Ch.1, Welsh Development Agency v Export Finance Co. Limited [1992] BCLC 270 and Orion Finance Limited v Crown Financial Management Limited [1996] BCLC 78.
Re: George Inglefield prescribed three indicia distinguishing a sale from a security transaction.
- Return of the asset – a security provider is entitled, until the security has been enforced, to recover its secured asset by repaying the sum secured; whereas a seller is not entitled to recover sold assets by returning the purchase price.
- Sale at a loss – if a secured party realises secured assets for an amount less than the sum secured, the security provider is liable for the shortfall; whereas a purchaser bears any loss suffered upon a resale.
- Sale at a profit – if a secured party realises secured assets for an amount greater than the sum secured, it must account to the security provider; whereas a purchaser is not required to account to the seller for any profit made upon a resale.
None of the above indicia of a security transaction is necessarily inconsistent with a sale; a transaction may be a sale notwithstanding that it bears all three features. The following are generally considered as being consistent with a sale:
- a seller acting as servicer for, or retaining some credit risk on, sold assets;
- a seller repurchase obligation on breach of asset warranties; and
- extraction of profits for the seller via the waterfall after transaction expenses have been met.
A sale transaction will be upheld unless it is (i) in substance, a security arrangement (for example, the transaction documents do not indicate a sale); or (ii) a sham (for example, the transaction documents do not reflect the parties' intentions).
Consequences of recharacterisation
Subject to the list of "excluded assets"
set out in Section 408(1) of the Irish Companies Act 2014 (as
amended) (the Companies Act), the particulars of security created
by an Irish company must be registered with the Registrar of
Companies within 21 days of creation. In practice, this is done at
closing to secure priority under the Companies Act which confers
priority by time of registration. Failure to register within this
timeframe renders the security void as against any liquidator or
creditor of the company. It is not the typical practice in Ireland
to make precautionary security filings. Consequently, a true sale
which is recharacterised as a secured loan would constitute an
unregistered security interest of the originator and render the
issuer its unsecured creditor as regards the assets.
The issuer would rank pari passu with other unsecured creditors and behind the claims of secured and preferential creditors, the costs and fees of the insolvency process and certain insolvency officials and certain amounts deducted from employees' remuneration.
Claw-back
Several provisions of Irish company law entitle a liquidator to
seek to set aside pre-insolvency asset transfers.
Unfair preference
Any transaction in favour of a creditor of a company which is
unable to pay its debts as they become due which occurs during the
six months prior to the commencement of the company's
winding-up, and with a view to giving that creditor a preference
over other creditors, constitutes an unfair preference and is
invalid. Case law indicates that the company must have a dominant
intent to prefer one creditor over its other creditors. No question
of unfair preference can arise where the originator is able to pay
its debts as they become due at the transaction date. An originator
therefore certifies its solvency at closing.
The six-month period is extended to two years for transactions in favour of "connected persons" (including directors, shadow directors, de facto directors and "related companies" (as defined in Section 2(1) of the Companies Act)).
Fraudulent disposition
Any conveyance (including an assignment, charge or mortgage) made
with intent to defraud a creditor or other person is voidable by
any person thereby prejudiced. However, this does not apply to any
estate or interest in property conveyed for valuable consideration
to any person in good faith not having, at the time of conveyance,
notice of the fraudulent intention; or affect any other law
relating to bankruptcy or corporate insolvency.
Invalidity of floating charge
A floating charge on the property of a company created during the
12 months before the commencement of its winding-up is invalid
unless it is proved that the company, immediately after the
creation of the charge, was solvent. This is subject to an
exception for 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 subsequent to the creation of, and in consideration
for, the charge and interest at the appropriate rate. The 12-month
period is extended to two years if the chargee is a connected
person.
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Published on WalkersGlobal.com with permission from Chambers and Partners (February 2022)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.