Corporate Finance

Loan Finance

The majority of small businesses fund themselves from bank lending and retained funds.  Loan finance can extend from short term finance, typically provided by a bank, to longer term finance provided by investors.

A loan or investment, whether from family, friends or outsiders, should be formalised in a legal agreement. The legal agreement should provide for the nature and timing of repayments, interest and any profits or shares in the business that is agreed.

If the loan agreement is in the nature of a longer-term investment, the investor may wish to have a greater say in certain key business decisions such as the taking on of additional liability.  The loan agreement should also deal with various scenarios which can arise.

Interest bearing loans have tax implications for the borrower and lender.  Interest paid on loans from non-bank entities may be subject to withholding tax. The lender must account for the interest received as taxable income. It will receive credit for interest withheld and paid to Revenue.


Tax Aspects of Finance

There are a number of methods of borrowing money in order to finance business operations in a tax efficient way. Leasing or renting an asset can be efficient, as the rent is usually tax deductible.

The write-off of the purchase price of assets against tax is allowed only where the asset qualifies for capital allowances.  The write-off is over a period, rather than up front in the year of purchase, when the actual expenditure may have been incurred.

Where borrowing is undertaken to acquire a capital asset, interest but not the capital repayments may be deducted in the income tax computation.  The deduction will be generally allowed for repairs and maintenance.

Interest paid on loans taken out by a business are usually deductible expenses when computing tax. The loans must be used exclusively for a business purpose.  Interest on overdrafts and credit cards may be deductible if the funds are used for business purposes.


Compliance Issues I

Companies, as legal persons can borrow, enter contracts, hold property and grant security in much the same way as an individual can do. However, there are particular Companies Acts considerations which may invalidate or affect a security. Generally, lender’s put in place procedures in order to ensure that the requisite formalities are complied with.

Until the 2014 Act reforms, every company was required to have “objects” or purposes in its founding documents. This requirement and restriction was reduced over time but is still potentially relevant. Private limited companies (LTDs), by far the most common type, may not now have objects. Other types of companies (including DACs and PLCs) must have objects. The protections for third parties who deal with the company are now very comprehensive.

A loan agreement or mortgage entered by a company could be invalid, under the pre-2014 Act law, because it was outside the powers of the company. Guarantees for the benefit of other companies were particularly prone to invalidity. Because the bank’s agents usually saw the company rules, the protections that applied to third parties dealing with the company might not be available. Therefore, it was usually necessary to ensure that the purposes of the loan and mortgage were within the company’s powers.


Compliance Issues II

Under company law, loans, guarantees and mortgages which are given for the benefit of directors and certain persons connected with directors, are potentially invalid. There are limited circumstances in which it is possible to follow particular procedures, so as to validate the loan, guarantee or security. The legislation is complex, and the circumstances need to be carefully considered in each case.

There is a very broad prohibition under Irish companies law on companies assisting in the purchase of their own shares. There are also certain procedures by which such a transaction may be validated, provided certain conditions apply. The procedures for the validation of “director’s loans” and financial assistance for share purchase, are intricate and must be implemented carefully.

If the courts consider that an agreement has breached the above legislation, that it has substantially impeded winding up or materially contributed to its inability to pay debts, the court may declare that any person for whose benefit the arrangement was made, shall be personally liable.


Insolvency Set Aside

A pre-insolvency transaction may be set aside if the dominant intention was to prefer one creditor over another. The court may unwind the transaction and determine the respective obligations of the parties.

The standard period in which a preference given by an insolvent company may be set aside is six months. Where a preference is given to a connected person, the period is two years from the commencement of insolvency proceedings. In such circumstances, it is presumed until the contrary is shown, that the company intended to prefer the connected person over creditors.

A connected person includes directors, persons controlling the company and certain trustees and guarantors of the company’s debts. A preference may occur where there is a guarantee by a director in favour of a particular creditor. The director may be tempted to cause the company to prefer the creditor so that the creditor is paid off and the guarantee is released or reduced.

A floating charge given within twelve months of the commencement of winding up is invalid if the company was insolvent at that time or became insolvent as a result of the charge. “Solvency” is measured by the ability to pay debts as they fall due.


All Asset Charges

A company is not subject to the restrictions which apply to individuals granting mortgages over moveable items. A company can create a charge over any or all of its assets, including present and future goods and moveable goods.  This facilitates the creation of a fixed and “floating” charge over all of the company’s assets. A “debenture” is the name commonly given to a deed incorporating a fixed and floating charge given by a company.

A floating charge is a charge over the circulating assets of the company. The key feature is that it does not attach to particular assets, but leaves the company at liberty to deal with the assets in the normal course of business.   A floating charge is “crystallised” (i.e. attaches and becomes fixed) on being enforced. The entire business and undertaking of a company can be mortgaged, “lock stock and barrel” by an all asset fixed and floating charge.

Upon “crystallisation” such as on cessation of business, the appointment of a receiver or winding up, the charge becomes fixed to all the assets. This gives the debenture holder priority over the general unsecured creditors in respect of all the secured assets.The receiver can step in and commence to trade either for the purpose of making loan payments or for the purpose of effecting a sale of all or parts of the business assets.

Certain preferential creditors such as the Revenue and employees rights arising within a certain period before formal insolvency, rank ahead of the rights of the lender in relation to the proceeds of the sale of the floating charge assets.


Registration

Most (but not all) charges by a company must be registered in the Companies Registration Office within twenty-one days.  The failure to register means that the security will be invalid as against a liquidator or a creditor. The rules apply to a very wide range of mortgages and securities granted by companies.

Failure to register will cause serious prejudice to a mortgagee. When the security is most needed, on insolvency, the liquidator is in a position to treat the mortgage as void and accordingly take the assets for the benefit of the creditors generally.

Where registration does not take place within twenty-one days, it is possible to apply to the court for an extension of time.  It must be shown that there is no prejudice to other creditors. The court may grant an extension on such terms, as it sees fit. Once a company charge is registered, the registrar issues a certificate of registration.


Foreign Companies

Irish law recognises companies formed in other jurisdictions. Companies are regulated by the legislation of the country in which they are formed. The foreign jurisdiction’s rules determine the mechanics of how a company grants a mortgage or enters a legal transaction.

In some cases, where a company is formed in one country and has a place of business in another country, it is necessary to register documents in both countries’ companies registration offices. There are certain Irish company law restrictions and rules which apply to all companies within the jurisdiction, even those formed abroad.

A foreign company may have an obligation to register charges in the Companies register in the country where it is formed. It may also have to register in the Irish CRO if it has a branch or place of business in Ireland.

In the case of a foreign company entering a transaction in Ireland, foreign company law rules may apply to the taking of the security. Some Irish company law rules may also apply. It is desirable to obtain a so-called “foreign lawyer’s opinion”  from a lawyer in the foreign country in which the company is formed, about the validity of the security by the foreign company from the perspective of that country’s law.


References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016) Ch.19    Courtney

Keane on Company Law 5th Ed. (2016) Ch. 22 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore Browne on Companies

Palmer’s Company Law