Special considerations apply to taking corporate security, over and above those applicable to taking security from individuals. These considerations arise from the nature of companies, Companies Act compliance and from the ability of a company to grant security over all of its assets and its undertaking.
The lender will require to be satisfied that the corporate borrower exists and that the loan (and any associated purchase or related transactions) are within the scope of its corporate powers. They will also wish to be satisfied that the parties, who execute the facility agreement and security documents, have authority to bind the corporate borrower.
The exemption from the Bill of Sales Acts allows for the possibility of a fixed and floating charge/debenture over the entire assets and undertaking of the company. This facilitates the appointment of a receiver/manager, who may take control of the entire assets and business of the company. This is a very attractive security as it provides the possibility of enforcement by way of sale of the profitable elements of the corporate undertaking as a going concern.
Corporations are creatures of statute (or historically, the Royal Prerogative). A lender will require at a minimum, that a corporate borrower company has legal existence under domestic or foreign companies legislation.
Most companies are constituted in Ireland by registration under the Companies Acts. The Certificate of Incorporation proves that the company is in existence.
Companies Registration Office searches should vouch that the company exists and that it is not in imminent danger of being struck off, for failure to make returns and is not in the course of winding up due to Court ordered or voluntary liquidation.
Corporate Powers I
The Memorandum and Articles of Association generally permitted companies to borrow monies and grant security. Even if it is not expressly granted, the power was generally implied in the case of trading company. In the case of non-trading companies, the power will not necessarily be implied.
The Companies Act 2014 has removed the limitations on company powers for private limited companies. It has also confirmed a statutory power to borrow and charge assets.
Most companies were formerly subject to the “ultra vires” principle. Companies could undertake acts and transactions which were within the scope of their objects and powers as provided for in their Memorandum of Association. Acts outside the scope of their objects were “ultra vires” (outside the powers of) the company and are invalid. Restitutionary considerations might apply to prevent unjust enrichment.
The issue of a company’s powers was examined critically in the context of commercial lending. If the borrowing was found to be outside the company’s powers, the lending might be irrecoverable, other than on a restitutionary basis.
Corporate Powers II
As the lender’s advisors typically had actual sight of the Memorandum and Articles, they were unlikely to be in a position to take advantage of the general relieving provisions, applicable to “outsiders” without actual knowledge of limitations on the company’s powers.
The lender’s adviser was required to be satisfied that the company had the power to borrow, to grant the requisite security and to do everything required to be done under the loan agreement. A trading company has implied part to borrow for the purpose of its business.
It was desirable that there be an express power to borrow, preferably in unconditional terms, If, as is often the case, the power to borrow is expressly or impliedly limited to borrowing for the purposes of the company’s business, the lender must be satisfied that the purpose of the loan is within the scope of the business.
A separate and related issue is that of corporate benefit. In principle, a company could do anything lawfully possible, provided that it had sufficiently clear objects and powers to do so. There was a strong presumption that a transaction by a company may be entered, only if it was for the benefit of the company.
If the objects and powers were is not in satisfactory terms or if there is any doubt about the corporate benefit, the lender required the Memorandum of Association to be amended to provide for an object to guarantee the debts of group companies.
The issues commonly arose in the case of an inter-company guarantee. Although the guarantee might be for the benefit of the corporate group, it might not benefit the guarantor and may be injurious to its interests, considered alone.
In a group setting, it was often possible to demonstrate an indirect benefit to the company. The objects could be amended to expressly permit a guarantee and securities to support lending to another group member.
A company must act through agents. The general law of agency applies. The persons who contract and grant security on behalf of the company must have authority to do.
The “default” Table A Articles of Association, provided under the Companies Acts, grants the directors the power to borrow money to mortgage the company’s property and undertaking and the uncalled capital of the company as security.
The default Article 79, provides that the amount outstanding must not, without the previous approval of the company in general meeting, exceed the issued share capital. A lender was not bound by the restriction unless it had express notice of it. However, the lender was commonly deemed to have express notice of the restriction through its lawyers and other representatives.
Many companies disapply the second part of Article 79 and accordingly give the directors the unconditional power to borrow and grant security. Where this has not been done, it may be required as a condition of the financing transaction that it be done.
Directors have an obligation to the company to take due care in the exercise of their functions. They owe fiduciary duties to the company. They must act exercise their powers and duties in good faith for the benefit of the company as a whole (in effect the body of shareholders).
If they do not do so, then their acts may be unauthorised, even if it is within the powers of the company. The lender will wish to be satisfied that there is nothing in the circumstances that points to an absence of good faith or conflict of interest on the part of the directors.
The Companies Acts and Regulations made under the EU First Company Law Directive protect third parties dealing with companies from defects in the corporate powers and authority. However, the protections were generally unavailable to financial institutions which dealt with the company as the lender. The protections required that the third-party acted in good faith without notice of restrictions on the corporate powers, objects and capacity.
Lenders, through their employees and advisers, usually had actual notice of the Memorandum and Articles of Association and of the corporate structure. The fact that the lender’s lawyers saw the Memorandum and Articles was sufficient to put the lender on actual notice of its contents.
The common law “indoor management” rule and general principles of the law of agency protect a third party who deals with corporate agents (usually directors) who act within the scope of their apparent or ostensible authority. Once again, there is a risk that these protections may not be available to a lender to a company, where it has a very high degree of visibility in relation to the loan transaction.
Evidence Though Minutes
The lender will generally require written minutes of resolutions duly passed at properly constituted directors’ meetings approving the borrowing and mandating particular directors to execute the loan agreement and security documentation.
The minutes are signed by the chairman of the meeting. They are presumptive evidence of what occured at the meeting. The will typically provide;
- particulars of the time and place of the meeting;
- that a properly constituted meeting of directors took place;
- that named directors were present and that a named director was appointed chairman;
- that directors with interests in the matter disclosed the same;
- a broad outline of the discussion had;
- particulars of the documents to be executed;
- the corporate benefit to the company of the proposed transactions and borrowing;
- that the directors were satisfied that the transaction benefited the company;
- a resolution authorising execution of the transaction documentations, including the loan agreement and security documents, by named individuals;
- a resolution authorising execution of any ancillary documents or matters required by the loan agreement;
- confirmation that no winding up or other adverse matters were pending.
Generally, the minutes are drafted by the lender’s solicitor and amended and approved by the borrower’s solicitor. The meeting should be held with the assistance of the borrower’s solicitor if required. The chairman of the meeting should sign the minutes to confirm that they give a true account of the meeting.
Corporate Certificates I
Corporate lending practice usually requires that the borrower’s officers sign a corporate certificate. In broad terms, the certificate brings together the various elements of the lending transaction. The contents of certificates will vary from lender to lender.
Corporate certificates usually set out the following;
- the identity of directors and secretaries;
- sample signatures of key officers;
- the identity of shareholders;
- exhibit board resolutions approving the transaction;
- confirm that there are no charges pending registration in the CRO.
Corporate Certificates II
Corporate certificates may also include the following;
- that there are a sufficient number of resident directors;
- that no directors are subject to disqualification or restriction;
- that there is no contradictory shareholders’ agreement;
- that the company can pay its debts as they fall due;
- that specific corporate prohibition such as Section 31 of the Companies Act, 1990 and Section 60 of the Companies Act, 1963 do not apply or have been demonstrably complied with;
- that annual returns are up to date;
- that other corporate returns required to be filed in the CRO have been undertaken.
The inclusion of some of the above may not be acceptable or appropriate in some cases, and their inclusion may be a matter for negotiation. Officers who sign the certificate are likely to undertake a duty of care to the lender who relies on it.
Companies Act Issues I
Issues under Section 31 of the Companies Act, 1990 and Section 60 of the Companies Act, 1963 commonly arose in the context of corporate borrowing. Each potentially invalidated financing transactions and required careful consideration, where potentially applicable.
The scope of each was wide, and there could be an uncertainty of application in marginal cases. Both have been re-enacted in reformed terms in the 2014 Act so that broadly similar considerations continue to apply.
Section 60 of the Companies Act, 1963 provided that a company might not directly or indirectly provide financial assistance to purchase or assist in the purchase of its shares or those of its holding company. There existed a so-called “whitewash” procedure, by which, strictly subject to compliance with statutory procedures, a transaction which would otherwise breach the prohibition, may be validly undertaken. There are certain pre-conditions regarding solvency.
Companies Act Issues II
Section 31 of the Companies Act prohibits loans, guarantees, securities and credit transactions by companies for the benefit of their directors, shadow directors or persons connected with them. The provisions were wide in scope and could invalidate loan and security transactions where their application was not immediately apparent.
Certain classes of transactions could be approved, where possible using a “whitewash” procedure. The conditions were strict and required declarations of solvency backed by independent financial opinion. Several of the institutes of accountants recommended that their members should not furnish the required certificate, given the risk of legal liability that they carried.
There was an exemption from the general prohibition for inter-group guarantees and security. It was critical to the lender that the group structure was demonstrated to exist. An auditor’s certificate vouching for the corporate relationship was usually required. The corporate certificate usually confirmed and exhibited a chart of the group structure.
The solicitor for the lender usually required evidence that the exempting provisions applied. If the whitewash procedure was undertaken, the lender’s typically drafted or reviewed the compliance documents. He usually took charge of the filing of resolutions and declaration, as they may be critical to the validity of the lender’s security.
Completion and Registration I
On completion of a corporate lending transaction, the searches relevant to the class of secured assets concerned must be undertaken. An up to date CRO search, a Judgments Office Search and a High Court petitions and winding up search will usually be appropriate concerning a corporate borrower.
Where real property is involved, the deed of mortgage or charge must be registered in the appropriate registry. Other types of security may require to be perfected in accordance with the nature of the asset. Charges over intangibles will generally require a notice to the obligor and acknowledgement. The obligation to stamp security documents was repealed in December 2006.
Section 99 of the Companies Act provided that most charges granted by a company must be registered in the CRO within 21 days of execution. Failure to register the charge will mean that it is invalidated as against creditors and a liquidator. Accordingly, when it is most needed, the security will not be available. It is therefore vital that any registerable company charge is registered within the requisite period.
Completion and Registration II
Registration is effected by filing a form C1. It may be signed on behalf of the lender or company. In the former case, a certified copy of the security document must be filed. The form C1 should include all the charges comprised in the security documents. One or more continuation pages may be required, in the case of security documents with multiple charges.
The CRO (eventually) issue a Certificate of Registration, which is conclusive evidence of registration. The failure by a solicitor to register a charge, where required in the CRO in the requisite period is likely to constitute negligence by the solicitor responsible, where the lender suffers loss.
A late application for registration is only possible with the consent of the High Court. The consent will at most be granted, without prejudice to the rights of any later creditors. It may be impossible to undo the prejudice to the lender is some cases.
Special resolutions and some ordinary resolutions must be filed in CRO. Changes in the Memorandum or Articles of Association require that an updated copy be filed. The “whitewash” procedures require that certain key documents and declarations are filed in the CRO within strict timelines. The lender’s solicitor must ensure that all necessary filings have been undertaken.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Courtney
Keane on Company Law 5th Ed. (2016) 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
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
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