Bank finance and regulation Multi-jurisdictional survey Ireland Enforcement of security interests in banking transactions Mr William Johnston and Arthur Cox Arthur Cox [email protected]

Part I – types of security 1.

What are the most common types of security in banking transactions in your jurisdiction (eg, standard security package)? Please provide a brief characteristic of each type of security. The principal forms of security are mortgages, security assignments, pledges, chattel mortgages and charges. Essentially a mortgage is the transfer of the mortgagor’s title to the asset in favour of the mortgagee (usually the lender) with a provision that once the debt secured by the mortgage has been discharged the title is transferred back to the mortgagor. This form of security applies to titles which are not registered in the Land Registry but where the entitlement can be seen from the Registry of Deeds, which registers every transfer of title to unregistered land. These titles essentially apply to land in Dublin and Cork. With effect from 1 December 2009 this type of security cannot be created. The foregoing is a legal mortgage. There is also a concept known as an equitable mortgage. This concept can be broken down into two categories usually an agreement to give a mortgage and a mortgage by deposit of title deeds. A security assignment is the same as a mortgage namely the transfer of title by the assignor to an assignee, the lender, to secure the assignor’s obligations to the lender and once these obligations are discharged the assignor is entitled to the return of the assets (to the extent not used to discharge the assignor’s indebtedness). A security assignment would arise typically with regard to development agreements and other contracts, monies in a bank account (where the account is held with another bank) and life assurance policies. A pledge of an asset is the transfer of the asset by the pledgor to a pledgee, usually the lender. Transfer takes effect by the physical transfer of the asset or a certificate evidencing title to the asset. Typically a memorandum will be drawn up by the bank official, similar to a mortgage by deposit of title deeds, and the asset or certificate transferred to the lender. This form of security has become less common – in recent times it was used principally in the meat and grain trades, where the asset would be moved from, in the case of meat, a slaughter house to a warehouse in the docks, control at all times being kept with the financier. There are three principal categories of chattel mortgages which may be given by companies or individuals. The first, which may be given by any person (ie, an individual as well as a company), are chattel mortgages under the Agricultural Credit Act 1978 (as amended). This applies only when the lender is a ‘recognised lender’ 1

under the Act. This is a special form of mortgage which can be fixed or floating over what is known as agricultural stock. However, the Act is widely drafted so that it covers not only cattle and other animals but buildings and machinery used in connection with such animals. There is nothing special about this form of security other than there are certain statutory provisions which apply to it and it must be registered within 28 days in the Circuit Court offices of the County or Counties where the assets are located. The second category of chattel mortgage is where a company creates a mortgage over specific items of machinery and equipment which are specified in the mortgage or a schedule to it. This has the same effect as a mortgage, a security assignment or a fixed charge. The third category is the creation of security by an individual over moveable assets such as machinery, equipment, vehicles and individual works of art. This security must be set out in a form known as a bill of sale required by the Bills of Sale (Ireland) Acts 1879 and 1883. Furthermore particulars of the security must be registered within a week of taking the security and re-registered every five years thereafter until discharged. Where title to land is registered in the Land Registry the best form of security is to take a specific charge over it. The Registration of Title Act 1964 provides that the owner of the land may charge its land in favour of another, say the lender, to secure the owner’s obligation to the lender. The creation of a charge under the Act has the effect of the owner giving a mortgage of the land and the charge will be registered as a burden on the owner’s title folio. Unregistered land (Registry of Deeds) is now secured by way of charge (since 1 December 2009). A company may create a floating charge. This enables the company to use the charged asset in the ordinary course of business, in other words they may be sold, the monies realised by the collection of the proceeds can be spent in the course of the company’s business. Thus the company is free to deal with such of its assets as are covered by a floating charge in the ordinary course of business and without having to seek permission from the chargee. The floating charge may crystallise by being converted into a fixed charge in respect of whatever assets were, as at the time of crystallisation, covered by the floating charge, at which time the charge fixes on specific assets to the extent that the company can no longer deal with those assets in the ordinary course of business. 2.

In relation to the following types of assets, please provide the types of security that can be created or granted in your jurisdiction and give details of any registrations required: When a company gives any form of security (other than a pledge) over any asset (other than fixed charges, shares and debts which are not book debts) particulars of that security are required to be registered in the Companies Registration Office within 21 days of the creation of the security. Failure to do so will render the security void against any creditor or liquidator of the company. Late registration can be effected through an application made to the High Court. (a)

Real estate Title to real estate is registered either in the Registry of Deeds, whereby each transfer document is registered showing title, or in the Land Registry where the owner is registered on a folio showing his or her title.

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In the case of the Registry of Deeds up until 1 December 2009 a mortgage would be created whereby the owner would transfer title to a bank on condition that the owner would be entitled to the return of that title once the amount secured by the mortgage was discharged. Since the enactment of the Land and Conveyancing Law Reform Act 2009 on 1 December 2009 security is given by way of charge which effectively gives the same result. In the case of titles registered in Land Registry, a specific charge is created and this charge is registered as burden on the onerous folio in the Land Registry. The Registry of Deeds deals with priority so that if security is not registered in the Registry of Deeds the bank will still have the security but will rank subsequent in priority to any further person which registers security from that owner. In the case of the Land Registry, the charge is not fully effective until it is registered as a burden on the folio and in the absence of any agreement between banks the first in time to be registered obtains priority. (b)

Changing assets (inventory, stock etc) In the case of inventory or stock the company will typically give security by creating a floating charge over such assets. This will enable the company to deal with the assets in the ordinary course of its business as though the charge did not exist but upon an event of default or other stipulated event the charge will crystallise and fix onto whatever inventory or stock the company has at the time of such crystallisation.

(c)

Movables In certain situations a pledge may be given over moveable assets. Typically this arises in the case of grain or meat where the asset is being transported from a factory to a warehouse. In such cases a memorandum of pledge is drawn up and the asset or a certificate of title in relation to the asset is delivered to the secured creditor. Movables may also be charged by a company through ideally designating them in a charge document and making them subject to a fixed charge in favour of the secured creditor if it is anticipated the movables will not be moved during the course of the bank facility. If they are likely to be moved then it may be more appropriate to grant a floating charge over such assets. In the case of an individual the movables may be secured either by granting a pledge in respect of them or by the individual executing a bill of sale which requires registration in the High Court central office within seven days of the creation of the bill of sale and requires re-registration every five years thereafter until the bank facility is discharged.

(d)

Shares Shares may be the subject of security by granting a charge over the shares. Typically the share certificates in respect of the charged shares are handed to the secured creditor together with a share transfer form executed by the chargor with a power of attorney granted to the secured creditor to complete the transfer in the event of enforcement. It is also important to ensure that the articles of association of the company whose shares are being charged are amended to enable a share transfer to be registered and the transferee entered in the share register without the directors of the company having power to veto such transfer. 3

(e)

Rights under contracts (receivables) Receivables can be assigned by the assignor to the secured creditor and notice given to the debtors to pay the receivables directly to the secured creditor. More typically the receivables will be subject to a charge. The charge can be said to be fixed if under the charging document the chargor is required to pay the receivables into a designated account with the secured creditor and not withdraw the proceeds without the specific consent of the secured creditor. If the receivables are charged but there are no restrictions on the application on the proceeds, the receivables will be subject to a floating charge. More common is invoice discounting whereby a bank purchases debts from their customer. The customer collects the proceeds as undisclosed agent for the bank.

(f)

Bank accounts Where the account is held with a bank which is not the secured creditor the preferable form of security is for the account owner to grant an assignment of the benefit of the account to the secured creditor and notice of that assignment given to the account bank. Where the bank account is with the secured creditor the account should be charged in favour of the secured creditor. This would be a fixed charge if there is a restriction on the chargor withdrawing the monies but if there is no such restriction then it would be subject to a floating charge.

(g)

Financial instruments (eg, securities) Typically securities would be subject to a charge in the same form as a charge over shares, with the certificate of title and executed transfer form delivered to the secured creditor.

(h)

Intellectual property Intellectual property would be subject to a fixed charge in favour of the secured creditor and particulars registered in the appropriate trademarks or patents office.

(i)

Plant and machinery This is subject to a charge or chattel mortgage whereby the assets are charged by way of a fixed charge or mortgage in favour of the secured creditor and particulars of the assets are set out in a schedule to the security. If the security is in respect of agricultural stock, particulars of the security must be registered within 28 days of the creation of the security.

3.

Can a trustee or security agent be used in your jurisdiction, or must security be granted in favour of all lenders? Is the parallel debt clause concept recognised in your jurisdiction? A security trustee or security agent may be used to take security on behalf of a number of banks and is commonly used where a syndicate or club of banks make

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facilities available to a company or group of companies. The parallel debt clause provision is not typical. 4.

Please explain the latest amendments to the law governing secured transactions in your jurisdiction. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of secured transactions? Please also explain recent practical developments regarding secured transactions in your jurisdiction. The Land and Conveyancing Law Reform Act 2009 amended (with effect from 1 December 2009) provisions concerning principally the enforcement of mortgages and charges. With regard to security for commercial loans the amendments made to the Conveyancing Law of Property Act 1881 are not significant but more protective provisions have been given in the case of consumer loans. The National Asset Management Agency Act 2009 entitles the National Asset Management Agency (‘NAMA’), a state backed entity to purchase loans and security from banks. This Act was designed to re-capitalise banks for their overuse of development loans which became impaired following the liquidity crisis on foot of the collapse of Lehman Bros. NAMA has been given additional powers to appoint a statutory receiver over such assets. The most common form of enforcing assets was by receiver pursuant to the terms of the security document. NAMA’s powers are more extensive.

Part II – enforcement of security 1.

Please explain briefly general rules of enforcement of security indicated in answer to the Question 1 in Part I above (excluding rules in a bankruptcy or insolvency proceeding – see Question 3 below). In your answer please explain whether specific security may be enforced only through judicial proceedings or whether extra-judicial methods are also available. Furthermore, please provide an estimate of costs (if they create a significant obstacle in enforcement, including applicable taxes and any other duties/costs) and timing for enforcing such security. Please also explain degree of difficulty (eg, burdensome formalities, whether enforcement requires actions of a state body) in enforcing security. Also please explain whether taking security by an entity from another jurisdiction influences the possibility of establishing security and its enforcement. Enforcement of security typically arises by contract under the security document under which the secured creditor is given the right to appoint a receiver to take control of the asset sell it, at the best price reasonably obtainable, and remit the proceeds to the secured creditor. In certain circumstances for example where an asset is subject to a floating charge, the receiver must in the first instance pay out of the proceeds (of a floating charge) to statutory preferential creditors which principally taxes due to be paid by the chargor, local authority rates and arrears of payment and other entitlements due to employees of the chargor. In most instances enforcement through the appointment of a receiver and the sale of property can be carried out without judicial proceedings. This does not apply with regard to family homes where judicial proceedings are necessary. The secured creditor may enforce security directly without the appointment of a receiver but this is rare due to the potential liability attaching to the secured creditor as a result of such enforcement.

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Enforcement by way of appointment of a receiver can take effect on the same day that a demand for payment is made, assuming the monies to be lawfully due and payable. A liquidator should be appointed to a company where the company is no longer able to pay its debts as they fall due. A receiver may still nonetheless be appointed by a secured creditor in respect of assets the subject of security held by the secured creditor. If the assets are not specifically identifiable this may give rise to difficulty where there is both a receiver and a liquidator claiming jurisdiction over such asset. In the event that an examiner is appointed a receiver cannot be appointed. Furthermore, an examiner may be appointed and displace a receiver if the examiner is appointed within three days of the appointment of a receiver. An examiner can be appointed by the court on the petition usually of the directors or shareholders of the company, which company at the time of the petition is unable or likely to be unable to pay its debts but where the court is satisfied, by the petition, that there is a reasonable prospect that the company or part of its undertaking may be saved as a going concern. There is a stay of enforcement of any security or other debt against the company for 70 to 100 days during which time an examiner appointed to the company will formulate proposals for the survival of the company or a portion of it usually with additional investment provided such proposals are approved by the court. Under such proposal a secured creditor may be required to write down part of the debt owned to it. In the event of the liquidation of a company, the proceeds of the charged assets are, in general terms, distributed following the discharge of the costs of enforcement, first to the holder of a mortgage, security assignment, pledge, chattel mortgage or fixed charge over that asset, any remaining funds are distributed to the preferential creditors namely the Revenue Commissioners for PAYE, VAT and other taxes, the local authorities for rates as well as employees for arrears of pay, holiday and unfair dismissal entitlements. Thereafter any proceeds are distributed to the holder of a floating charge over the assets, then to unsecured creditors, then to subordinated debt holders and finally the shareholders. An exception to the foregoing is that where a person has a specific charge over book debts of a company and the company is in arrears on its PAYE or VAT payments to the Revenue Commissioners, the Revenue can take the first monies received by the chargee (even in respect of assets other than book debts) in priority to everything (Taxes Consolidation Act, 1997 s1001). There is mitigation of this if notice of the security was given to the Revenue within 21 days of its creation. 2.

Please explain briefly specific features (if any) of enforcement of security established over the following types of assets: See 1 above

3.

How does a commencement of bankruptcy or insolvency proceedings influence the rights of the security holder to enforce its rights? In bankruptcy or insolvency proceedings, what are the suspect periods, is claw-back possible, and what other types of rights (tax debts, employees, etc) have preference over security granted? Please explain briefly specific features (if any) of enforcement of security established over the following types of assets in a bankruptcy or insolvency proceedings: See 1 above

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4.

Are there any specific features or problems of enforcement proceedings if the security is granted to a trustee or security agent or the parallel debt structure is used? No – usually there is an inter-creditor agreement under which the secured creditors agree amongst themselves as to when to enforce a security.

5.

Please explain the latest amendments to the law governing secured transaction in your jurisdiction in relation to a bankruptcy or insolvency proceedings. Are there any amendments which will be introduced in the near future (within one to two years) which might have an impact on the legal framework of the enforcement of secured transactions in the light of insolvency law? Please also explain recent practical developments regarding secured transactions in your jurisdiction in relation to insolvency law. The most recent amendment is the power of NAMA to appoint a statutory receiver. Such statutory receiver cannot be displaced by an examiner and furthermore if a company petitions for the appointment of an examiner and all or part of its assets are charged in favour of a bank which has transferred its security to NAMA, NAMA is entitled to be heard at the court.

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