Lending to Companies: Key Issues for Lenders

Lending to Companies: Key Issues for Lenders

companies act 2014

This briefing is designed to identify for lenders the principal issues and questions arising for them when lending to companies as a result of the introduction of the Companies Act 2014.

Quick Links 1. Companies Act 2014 - what is it and what does it do? 2. When does the Act take effect? 3. What should lenders be doing pre-Commencement? 4. What about impending deals? 5. What about existing deals? 6. What will change for private limited companies versus public limited companies? 7. What are the new types of private company limited by shares? 8. What happens during the Transition Period for Existing Private Companies? 9. What is new for PLCs? 10. What is new for private unlimited companies and guarantee companies? 11. What is the new Summary Approval Procedure? 12. What else is new for financial assistance? 13. What is the new majority written resolution procedure? 14. What is the new definition of a "charge"? 15. What are the new rules applicable to charges in terms of registration and priority? 16. How will these new rules impact on secured lending? 17. What are the new e-filing requirements for the registration of charges? 18. Does the Act impact security registration for foreign companies?

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1. Companies Act 2014 - what is it and what does it do?

The Companies Act 2014 (Act) consolidates ? Change to the definition of a charge

substantially all of the Companies Acts 1963

which means certain security assets

to 2013 into a single piece of legislation.

will no longer require to be registered

It introduces significant reforms and modernises Irish company law.

at the Companies Registration Office and, consequently, third parties may not be put on notice of certain security

Although the Act makes few changes

interests granted in favour of a lender

in the law applicable to the making of

? Priority of charges is to be governed

loans, the provision of credit, the taking

by the date/time of registration of the

of security or to the general principles

prescribed particulars of the charge

underlying such law, it does make a number

rather than the date of creation ?

of changes which are relevant to lenders

registration will no longer be simply

when contracting with Irish companies and

a perfection issue but will determine

relevant external companies.

priority

The relevant key changes for lenders introduced by the Act include:

? Provision for new types of private companies

? Changes relating to the constitution of private companies, their governance, organisation and procedures

? Changes to the ultra vires rule (easing restrictions on corporate capacity)

? A new Summary Approval Procedure which may be used by most companies to validate otherwise restricted activities, including the giving of financial assistance and loans to directors and connected persons

? To establish certainty on the date and time of submission of the prescribed particulars of the charge it is expected that a mandatory system of e-filing of the prescribed particulars will be introduced by the Companies Registration Office

The introduction of the Act will impact on loan documentation as new representations, warranties and covenants will be required to address the changes in law and procedure.

2. When does the Act take effect? Most of the Act will be effective from 1 June 2015 ("Commencement").

3. What should lenders be doing pre-Commencement?

Lenders should consider the implications of the Act for any lending arrangements to be put in place prior to Commencement and whether

additional representations and warranties should be included in loan and security documentation to address issues arising on Commencement.

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4. What about impending deals?

Where there is uncertainty regarding the timing for completion of impending deals, lenders should seek to "future proof " their documentation by preparing a suite of documents compatible with both the pre-Act legal position and the position

under the Act. Lenders should consider representations, warranties and covenants to be included in their documentation in terms of a borrower's re-registration and otherwise.

5. What about existing deals?

The Act will not change, invalidate or endanger existing deals for private or public companies. All companies will continue to be the same legal entity that entered into prior loan and credit transactions with their lenders and their obligations thereunder will continue in full force and effect.

However, the Act brings changes for existing Irish private companies limited by shares ("Existing Private

Companies") and there will be administrative and legal implications arising from such changes - see further question 6 below. The good news is that, although Existing Private Companies must re-register as a new type of company, such re-registration will not, in and of itself, invalidate or prejudice any prior contractual commitments or any security entered into or created by them.

6. What will change for private limited companies versus public limited companies?

All Existing Private Companies will change to a new type of company within a transition period of 18 months from Commencement ("Transition Period").

The Act provides for two new types of private company limited by shares to which an Existing Private Company may select to be re-registered.

No new type of public limited company ("PLC") is created under the Act.

In general, there is little change in relation to the nature or constitution of PLCs - but see question 9 below.

7. What are the new types of private company limited by shares?

The two new types of private company limited by shares are:

?? A designated activity company ("DAC"), the closest form under the Act to an Existing Private Company primarily because its activities remain restricted by its objects and it will retain a memorandum and articles of association.

?? A private company limited by shares ("LTD"), a new simplified form of the Existing Private Company and the "default" company type under the Act. An LTD will have a single constitutional document, effectively amalgamating the memorandum and articles of association and will not be permitted to have an objects clause. It will have the same unqualified legal capacity to do anything that a natural person may lawfully do.

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8. What happens during the Transition Period for Existing Private Companies?

An Existing Private Company must decide within the Transition Period whether to reregister as an LTD or a DAC.

(c) it may take no action so that, at the end of the Transition Period, it will be deemed to be an LTD by default.

At any time from Commencement:

(a) until the end of the Transition Period, it may "opt in" to the new regime and re-register as an LTD; or

(b) for a period of 15 months, it may "opt out" by ordinary resolution (or where more than 25% of shareholders holding voting rights require it) and re-register as a DAC (or to another company type); or

We recommend that during the Transition Period lenders engage with their Existing Private Company borrowers and request information from them as to their reregistration selection and the timing of such re-registration. In some cases, lenders may have the right to approve the type of company or the right to request advance notice of proposed new forms of constitution.

9. What is new for PLCs?

PLCs will retain their objects clause, however, third parties dealing with the PLC will not be prejudiced by the ultra vires rule and so will not need to enquire as to whether an action is permitted by the company's objects.

PLCs may now have one shareholder (previously they had to have a minimum of seven), however, a PLC with more that

one shareholder cannot dispense with the requirement of holding an AGM.

A minimum of two directors are required in all PLCs and the previous default position regarding retirement of directors by rotation has now been "hardwired" into the Act, and can only be excluded if there is a provision to the contrary in the constitution.

10. What is new for private unlimited companies and guarantee companies?

Private unlimited companies are not required to re-register as another form of company under the Act. However the Act does introduce a number of changes including:

- the removal of the restriction on companies previously re-registered from limited to unlimited (or vice versa) subsequently reverting to their previous status;

- the application of new rules regarding the legal capacity of an unlimited company, effectively removing ultra vires concerns; and

- permission for unlimited companies to be single member companies (unlimited companies were previously required to have at least two shareholders).

The Act introduces a number of changes for companies limited by guarantee not having a share capital ("CLGs") including:

- the name of a CLG must end with the words "company limited by guarantee" or the Irish equivalent "cuideachta faoi theorainn r?tha?ochta" although an exemption from using such a suffix may be available;

- a CLG will now benefit from an audit exemption vis-?-vis its financial accounts (subject to certain modifications); and

- the validity of acts by a CLG will not be compromised by virtue of its objects clause so protecting third parties.

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11. What is the new Summary Approval Procedure?

The Summary Approval Procedure is a new streamlined validation procedure available to most companies to authorise a number of restricted activities and involves a declaration of the directors, a special resolution of the shareholders and, in respect of certain activities only, an auditor's report.

The Summary Approval Procedure should make it easier to validate otherwise restricted activities such as the provision of financial assistance and loans to directors/ connected persons. Helpfully, under the Summary Approval Procedure, the making of loans to directors and connected persons can now be validated without a report of an independent accountant.

12. What else is new for financial assistance?

Under section 60 of the Companies Act 1963, a private company is, subject to exceptions, prohibited from giving any financial assistance, directly or indirectly, "for the purpose of or in connection with" a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company, if any. Under the Act, the words "or in connection with" in the phrase quoted above have been deleted so that the test in the prohibition is intended to become wholly purposive.

Helpfully, the previous exception for refinancing (which was felt to be deficient) has been expanded to disapply the prohibition to the refinancing of financial assistance previously given in accordance with the Summary Approval Procedure or the previous section 60 "whitewash" procedure. This should remove the requirement to "whitewash" any refinancing of indebtedness which constituted financial assistance.

13. What is the new majority written resolution procedure?

For all companies other than PLCs, the Act introduces a welcome change enabling the passing of written resolutions by a requisite majority of shareholders and removing the requirement for unanimity.

It provides for the passing of ordinary or special resolutions by written resolution signed by the requisite majority of shareholders of the company (more than 50% of voting rights in respect of an ordinary resolution and at least 75% of voting rights in respect of a special resolution). The directors or the

other person proposing the resolution must circulate the proposed text of the resolution and an explanation of its main purpose to all members of the company concerned entitled to attend and vote on such resolutions.

An ordinary resolution is deemed to have been passed at a meeting held 7 days after the date on which it was signed by the last shareholder to sign it and this period is 21 days in respect of a special resolution. Companies may continue to use the previous system of unanimous written resolution which will continue to take immediate effect.

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