SME Loans

Applicability

The Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Lending to Small and Medium-Sized Enterprises) Regulations 2015 (the “SME Regulations”), which took effect on 1st July 2016, apply to a regulated financial services provider (in this context a bank or retail credit firm) when it provides credit to small/ micro and medium sized enterprises. The legislation replaces and expands the Code of Conduct for Business Lending to Small and Medium Enterprises

Small and medium sized business enterprises are defined in accordance with conventional EU measures, reflected in the Companies Act and other EU-derived legislation. A micro and small enterprise is an enterprise which employs fewer than 50 persons and which has an annual turnover or balance sheet total which does not exceed €10 million;

The Regulations make provisions in relation to a number of matters, including in particular provision in relation to facilities which are in arrears. This section deals only with the contract formation / loan origination aspects of the Regulations.


Lending to Micro and Small Enterprises

The following provisions apply to lending to Micro and Small Enterprises by regulated lenders. Separate provisions, set out in a later section of this section apply to medium sized enterprises.

A regulated lender must not offer credit to a borrower or approve the provision of credit to a borrower in advance of an application by a borrower for such credit.

A regulated lender must ensure that information provided to a borrower is clear and comprehensible and that information of material importance is specifically brought to the attention of the borrower. A regulated lender must not present information in a way which disguises, diminishes or obscures information of material importance.

A regulated lender must ensure that the required warning statements are presented in a prominent manner, in a box, in bold type, and of a font size that is at least equal to the predominant font size used throughout the document or advertisement.

Where a regulated lender has appointed a third party to engage with a borrower in relation to its credit facility agreements, prior to the third party engaging with the borrower, the regulated lender must, in a durable medium inform the borrower that it has appointed a third party to engage with the borrower in relation to its credit facility agreement, and explain the role of the third party and the extent of its authority to act on behalf of the regulated lender.


Applications for Credit by Micro and Small Enterprises

A regulated lender must publish on its website, and otherwise make available to micro/ small borrowers in any office of the regulated lender dealing with lending, the following information:

  • that the borrower is entitled to request a meeting with the regulated lender to discuss any proposed application for credit;
  • the timelines which apply to the assessment of an application for credit as set out in the regulated lender’s policies and procedures;
  • the information that may be required from a borrower in support of a borrower’s application for credit;
  • that the regulated lender may require submission of a business plan in support of an application for credit;
  • a description of the information that may be required in a business plan, including information on the structure and content of the business plan;
  • information about Government support schemes available from or through the regulated lender;
  • a statement confirming whether a refused application for credit will result in a negative impact on the borrower’s credit rating;
  • a description of the regulated lender’s policies on security.

Lending must be Suitable

A regulated lender must acknowledge receipt of an application for credit, in a durable medium, within 5 working days of receipt of the application. Prior to entering into a credit facility agreement, a regulated lender must gather and record sufficient information from the micro/ small borrower to assess whether that credit is suitable to that borrower.

The level of information gathered must be appropriate to the nature and complexity of the credit facility agreement being sought by the borrower, and must be to a level that allows the regulated lender to assess the borrower’s likely ability to repay the debt over the duration of the agreement.

The regulated lender may offer a credit facility agreement to a micro/ small borrower only where it has satisfied itself on reasonable grounds that the credit is suitable to that borrower, and the borrower will likely be able to repay the debt over the duration of the credit facility agreement.

The suitability and assessment requirements are modified for enterprises with a turnover of less than €3,000,000 which are afforded protection by the Consumer Protection Code.


Pre-Contract Information for Micro and Small Enterprises I

Where a micro/ small borrower engages with a regulated lender prior to submitting an application for credit, the regulated lender must provide the borrower with the below information and provide guidance to the borrower which may assist the borrower in making a successful credit application.

In good time before a micro/ small borrower is bound by a credit facility agreement, the regulated lender must provide the borrower with the following information in a durable medium:

  • the type of credit facility agreement;
  • the name and the geographical address of the regulated lender;
  • the total amount of credit;
  • the duration of the credit facility agreement;
  • terms and conditions applying to the credit facility agreement together with the relevant fees, charges and interest rates which will apply to the credit facility agreement including an explanation of the basis for calculation of the interest charge;
  • an outline of the steps to be completed to facilitate drawdown of the credit granted under the credit facility agreement;
  • the amount, number and frequency of payments to be made by the borrower;
  • if a regulated lender intends to impose a charge in respect of the provision of credit, and there is an option whereby the borrower can incorporate the charge into the amount advanced to the borrower, the option of paying the charge separately, and the overall cost to the borrower of paying the charge over the term of the credit facility agreement;
  • where applicable the charges for maintaining an account or accounts recording payment transactions and drawdowns (unless the opening of any such account is optional), any charges for using a means of payment for both payment transactions and drawdowns, any other charges deriving from the credit facility agreement, and the conditions under which those charges may be changed;

Pre-Contract Information for Micro and Small Enterprises II

The following information is also required

  • where the conclusion of an ancillary service contract (in particular, an insurance policy) is compulsory to obtain the credit or to obtain it on the terms and conditions marketed, a statement of the obligation to enter into such a contract;
  • the interest rate applicable in the case of late payments and the arrangements for its adjustment, and any charges payable for default or any unauthorised overdraft balance;
  • the following warning statement: Warning: If you do not meet the repayments on your credit facility agreement, your account will go into arrears. This may affect your credit rating, which may limit your ability to access credit in the future.”;
  • where applicable, the security sought;
  • a statement that there is a right of withdrawal from the credit facility agreement or that there is no such right, as the case may be, and the terms applying to that right of withdrawal;
  • a statement of the right of early repayment, and, where applicable, information concerning the regulated lender’s right to compensation and the way in which that compensation will be determined and for this purpose, the regulated lender must provide a worked example of an early redemption charge specific to the borrower’s case;
  • a statement of the borrower’s right to be supplied, on request and free of charge, with a copy of the credit facility agreement;
  • where applicable, a statement that the collection of payments under the credit facility agreement may be passed to another organisation or debt-collection agency, or that the regulated lender may sell the debt;
  • the length of time for which the credit offer is valid.

Security from Micro and Small Enterprises I

Where a regulated lender seeks security in support of an application by a micro/ small borrower for credit, the regulated lender must ensure that any security being sought is reasonable and proportionate having due regard to the nature, liquidity and value of the security offered, and the value of the credit offered. It must provide the borrower, in a durable medium, with a clear explanation of why the security is required, and the potential consequences for the borrower of providing such security.

Where a regulated lender seeks security by way of a guarantee in support of a micro/ small borrower’s application, the regulated lender must, in a durable medium, provide the intended guarantor with a clear explanation of why the guarantee is required, and the potential consequences for the guarantor of providing the guarantee.

A regulated lender must include in the explanation the following warning statement:

“Warning: As a guarantor of any credit, you will have to repay the debt amount(s), any interest and all associated charges if the borrower(s) do(es) not. Before you sign this guarantee, you should get independent legal advice.”

It must provide the following warning statement where the guarantee sought is a personal guarantee:

“Warning for personal guarantors: As a guarantor of this credit, your personal assets, including your home, may be at risk if the borrower does not keep up repayments on this credit facility agreement.”, and

It must provide the following warning statement where the guarantee sought is an all sums guarantee:

“Warning: This is an all sums guarantee. You are not only guaranteeing the credit in relation to this particular transaction, but also any other credit that may in the future be provided by the lender to the borrower, for as long as the guarantee remains in place.”.


Security from Micro and Small Enterprises II

Where an offer of credit to a micro/ small borrower is subject to a guarantee, the regulated lender making the offer must outline in the guarantee documentation the obligations of the guarantor and must, where relevant, include the above warning statements in the guarantee documentation.

Where security is held by a regulated lender and any credit facility agreement to which it relates has been repaid, the regulated lender must inform the borrower, in a durable medium, that the regulated lender holds security in relation to that credit facility agreement.

Where the security is not held in relation to other credit facility agreements, the regulated lender must also inform the borrower, in a durable medium, of a right to request the return of the security.

A regulated lender must where requested by a micro/ small borrower, as soon as practicable, return any security held by the regulated lender to the borrower when all credit for which the security is pledged has been repaid.

Where a guarantee is held by a regulated lender and any credit facility agreement to which it relates has been repaid, the regulated lender must inform the guarantor, in a durable medium, that the guarantee is extinguished or, in the case of an all sums guarantee, that the guarantee remains in place.

Where security on a credit facility has been realised, a regulated lender must immediately inform the micro/ small borrower and where applicable, the guarantor, in a durable medium, of the following:

  • the amount obtained for the security;
  • the balance of any residual debt or overpayment after the proceeds in respect of the realised security have been applied;
  • if there is any residual debt, information about how the deficit is to be repaid;
  • details about the interest rate to be applied;
  • if there is a surplus, information on how any surplus is to be paid to the borrower or guarantor;
  • costs for the realisation of the security where these costs are ultimately borne by the borrower.

Post-Origination Information for Micro and Small Enterprises

A regulated lender must, at least once a year, provide a micro/ small borrower with a statement in a durable medium which must, where applicable, include—

  • the period to which the statement relates;
  • the amounts and dates of payments made by the regulated lender to the borrower;
  • the balance from the previous statement and the date of that balance;
  • the current balance;
  • the dates and amounts of payments made by the borrower to the regulated lender;
  • the interest rates applied;
  • all interest charged, and
  • all charges that have been applied.

A regulated lender must inform the borrower of any change in fees or charges in a durable medium before the change comes into effect.

Where the terms of a credit facility agreement have changed, a regulated lender must, in a durable medium, promptly provide the guarantor with information identifying the specific changes.

A regulated lender must provide the borrower, on request and free of charge, with a copy of any credit facility agreement between the borrower and the regulated lender.


Annual Review

A regulated lender must, on an annual basis, offer a micro/ small borrower the option of a meeting which must, at a minimum, include a credit review. This is a review of credit facility agreements between a regulated lender and a borrower, security held in respect of such credit facility agreements, and alternative arrangements.

Where a micro/ small borrower accepts the offer of a meeting, the regulated lender must promptly arrange the meeting, meet with the borrower in a manner acceptable to the borrower. This can include communication over telephone, video-conferencing or other means of electronic communication. It must perform and complete the credit review. Where a borrower requests a regulated lender to perform a credit review, the regulated lender must perform and complete the review.

Where a credit review is being performed the regulated lender, having regard to the micro/ small borrower’s specific circumstances, must

  • advise the borrower, in a durable medium, of any information that may be required from the borrower,
  • perform and complete the credit review within a reasonable timeframe, inform the borrower, in a durable medium, of the timeframe for completion of the credit review, and
  • upon receipt of the required information, complete the credit review within the timeframes notified to the borrower.

The regulated lender must, in a durable medium record the results of the credit review, and inform the micro/ small borrower of the results.  A regulated lender must inform the borrower, in a durable medium, of the outcome of any credit review initiated by the regulated lender, except where there has been no engagement with the borrower, the results will not lead to a change in the credit facility agreements, and no actions are required by either party.


Lending to Medium-sized Enterprises

The SME Regulations make similar, but lest extensive provision in relation to lending by regulated lenders to medium sized enterprises A medium-sized enterprise is an enterprise which employs fewer than 250 persons and which has an annual turnover not exceeding €50 million orand an annual balance sheet total not exceeding €43 million, but which is not within the micro/small enterprise thresholds (50 persons and which has an annual turnover or balance sheet total which does not exceed €10 million)

The regulated lender must ensure that information provided to a borrower is clear and comprehensible and that information of material importance is specifically brought to the attention of the medium sized borrower. A regulated lender must not present information in a way which disguises, diminishes or obscures information of material importance.

A regulated lender must, on an annual basis, offer a medium sized borrower the option of a meeting which must, at a minimum, include a review of credit facility agreements between the regulated lender and the borrower, security held in respect of such credit facility agreements, and alternative arrangements.


Pre-contract information Medium Sized Borrower

In good time before a borrower is bound by a credit facility agreement, the regulated lender must provide the medium sized borrower with the following information in a durable medium:

  • the type of credit facility agreement;
  • the total amount of credit;
  • the duration of the credit facility agreement;
  • terms and conditions applying to the credit facility agreement together with the relevant fees, charges and interest rates which will apply to the credit facility agreement including an explanation of the basis for calculation of the interest charge;
  • an outline of the steps to be completed to facilitate drawdown of the credit granted under the credit facility agreement;
  • the amount, number and frequency of payments to be made by the borrower;
  • the interest rate applicable in the case of late payments and the arrangements for its adjustment, and any charges payable for default or any unauthorised overdraft balance;
  • where applicable, a statement that the collection of payments under the credit facility agreement may be passed to another organisation or debt-collection agency, or that the regulated lender may sell the debt.

Post-Origination Information for Medium-sized Enterprises

A regulated lender must, at least once a year, provide a medium sized borrower with a statement in a durable medium which must, where applicable, include all interest rates applied. It must inform the borrower of any change in fees or charges in a durable medium before the change comes into effect.

A regulated lender must, in a durable medium, inform the borrower of any change in the interest rate where the change in interest rate arises as a result of a change in the interest margin on a credit facility, and the details of that change.


Security from Medium-sized Enterprises

Security, in this context, means assets, undertakings, indemnities, guarantees or charges over assets offered by a regulated lender to secure a credit facility agreement;

Where a regulated lender seeks security in support of an application by a medium sized borrower for credit, the regulated lender must ensure that any security being sought is reasonable and proportionate having due regard to the nature, liquidity and value of the security offered, and  the value of the credit offered, and  provide the borrower, in a durable medium, with a clear explanation of why the security is required, and  the potential consequences for the borrower of providing such security.

Where a regulated lender seeks security by way of a guarantee in support of a medium sized borrower’s application, the regulated lender must, in a durable medium, provide the intended guarantor with a clear explanation of why the guarantee is required, and the potential consequences for the guarantor of providing the guarantee.

A regulated lender must include in the explanation the following warning statement:

“Warning: As a guarantor of any credit, you will have to repay the debt amount(s), any interest and all associated charges if the borrower(s) do(es) not. Before you sign this guarantee, you should get independent legal advice.”,


Security Requirements

The following warning statement is required where the guarantee sought is a personal guarantee:

“Warning for personal guarantors: As a guarantor of this credit, your personal assets, including your home, may be at risk if the borrower does not keep up repayments on this credit facility agreement.”.

The following warning statement is required where the guarantee sought is an all sums guarantee:

“Warning: This is an all sums guarantee. You are not only guaranteeing the credit in relation to this particular transaction, but also any other credit that may in the future be provided by the lender to the borrower, for as long as the guarantee remains in place.”.

Where an offer of credit to a medium sized borrower is subject to a guarantee, the regulated lender making the offer must outline in the guarantee documentation the obligations of the guarantor and must, where relevant, contain the above warning statements in the guarantee documentation.

A regulated lender must, where requested by a medium sized borrower, as soon as practicable, return any security held by the regulated lender to the borrower when all credit for which the security is pledged has been repaid.

Where a guarantee is held by a regulated lender and any credit facility agreement to which it relates has been repaid, the regulated lender must inform the guarantor, in a durable medium, that the guarantee is extinguished or, in the case of an all sums guarantee, that the guarantee remains in place.


Realisation of Security

Where security on a credit facility has been realised, a regulated lender must immediately inform the medium sized borrower and where applicable, the guarantor, in a durable medium, of the following:

  • the amount obtained for the security;
  • the balance of any residual debt or overpayment after the proceeds in respect of the realised security have been applied;
  • if there is any residual debt, information about how the deficit is to be repaid;
  • details about the interest rate to be applied;
  • if there is a surplus, information on how any surplus is to be paid to the borrower or guarantor;
  • costs for the realisation of the security where these costs are ultimately borne by the borrower.

References and Sources

Irish Texts

Breslin Banking law + Supplement     3rd Ed  2013

Mortgages Law & Practice     Maddox 2nd Ed            2017

NAMA Act 2009: A Reference Guide Raghallaigh, Kennedy, Whelan

Money Laundering & Anti-Terrorist Financing Act 2010

Financial & Emergency Provision Legislation Annotated      2011

Shelley & McGrath     National Asset Management Agency Act Annotated 2011

Dodd & Carroll            Law Relating to NAMA 2012  0

Ashe & Reid    Anti-Money Laundering: Risks, Governance & Compliance             2013

Johnston & Ors           Arthur Cox Banking Law Handbook               2007

Dr Mary Donnelly  The Law of Credit and Security, 2nd Ed, 2015

UK Texts

A Hudson The Law of Finance 2nd Ed (Sweet and Maxwell 2013)

Veil (Ed) European capital markets law (Hart Publishing 2013)

IG MacNeil An Introduction to the Law on Financial Investment 2nd Ed ( Hart Publishing 2012)

E Ferran Principles of Corporate Finance 2nd Ed ( OUP 2014)

Gullifer (ed) Goode and Gullifer on legal problems of credit and security (6th edn Sweet and Maxwell London 2017).

MA Clarke et al (eds) Commercial Law: Text, Cases and Materials (5th edn OUP Oxford 2017)

McKendrick (ed) Goode on commercial law (5th edn Penguin London 2017)

G McCormack Secured credit under English and American law (CUP Cambridge 2004)

L Gullifer and J Payne Corporate Finance (2nd edn Hart Oxford 2015)

D Sheehan The Principles of Personal Property Law (2nd edn Hart Oxford 2017)

Ross Cranston, Emilios Avgouleas, Kristin van Zwieten, Christopher Hare, and Theodor van Sante Principles of Banking Law 3rd Ed 2018

E.P. Ellinger, E. Lomnicka, and C. Hare Ellinger’s Modern Banking Law 5th Ed 2011

Andrew Haynes The Law Relating to International Banking  Bloomsbury Professional 2009

Charles Proctor Mann on the Legal Aspect of Money 7th Ed 2012

Charles Proctor The Law and Practice of International Banking 2nd Ed  2015

Sheelagh McCracken The Banker’s Remedy of Set-Off   2010 Bloomsbury Professional

Louise Gullifer, Jennifer Payne Banking & Financial Law 2018

Hubert Picarda QC The Law Relating to Receivers, Managers and Administrators 4th Ed  2006 5th Ed 2019

Lightman & Moss on the Law of Administrators and Receivers of Companies 6th Ed  Sweet & Maxwell 2017