Navigating risks in the English and Irish asset-based lending markets: a comparative analysis

What is asset-based lending, in a nutshell?

This is the third in our series of articles considering and comparing jurisdictions in the asset-based lending (ABL) space – our previous articles contrasting the position in this jurisdiction with each of Germany and the Netherlands can be found here and here. In this article, we look at Ireland and the way in which its legal system addresses and accommodates ABL, and how it overlaps with and differs from the English legal system. We focus on the local issues and key risks for an ABL lender in each of England and Ireland and the potential impact of such issues and risks on that ABL lender's willingness to lend. 

As discussed in our previous articles, and by way of recap, ABL is a form of lending in which a percentage of the realisable value of a portion of the borrower's assets will be used to determine the sums to be advanced by the lender. The percentage set will be determined by the sum the lender is willing to lend money against in order to ensure that value of the loan never exceeds the realisable value of those assets, with reserves being created against the loan sum to reflect third party claims to the assets (for example retention of title or liens) that may reduce their overall value, and in relation to English borrowers, certain preferential claims in English insolvency proceedings. The value, quality and, crucially, liquidity of the assets (which could include receivables, stock, land, machinery and equipment) are as such paramount, particularly given that enforcement is likely to involve the lender taking control of the assets and converting them into cash.  This type of financing suits companies who are rich in receivables and stock and is particularly useful where financing is required on a flexible basis for example for companies whose returns are seasonal or those that are making strategic investments and acquisitions.  Borrowing companies may benefit from fewer covenants and favourable pricing depending on the nature and quality of the underlying assets.

Lenders considering making funds available by way of asset-based loans will need to consider various factors including: (1) the types of security that may be taken in the jurisdiction and the ability to enforce the security in a default scenario in the manner the lender wishes; (2) the perfection requirements which if not satisfied may impact the validity and effectiveness of the security; (3) other creditors having priority over their security interests on insolvency or there being competing claims to the assets; (4) vulnerabilities of the security on insolvency; and (5) third party costs involved in taking security in that jurisdiction.  Lenders will also need to get under the skin of the complexities of lending in the specific jurisdictions such as: any legal restrictions on the granting of security and any applicable regulatory (for example licensing) requirements which may affect a lender's ability to lend in that jurisdiction, plus any hidden costs involved in the taking and perfecting of security.  Consideration of applicable regulatory requirements is beyond the scope of this article.  

What types of security can be taken under English and Irish law and what do they allow the lender to do on enforcement? 

Under English law, various options are available: 

• Plant and machinery: a fixed charge may be taken over plant and machinery, potentially in the form of a standalone mortgage over chattels or as part of a debenture. 
• Receivables: security is usually taken by the creation of a mortgage over the receivables, which is usually done by way of an assignment. This can be legal or equitable under English law. An assignment will be a legal assignment if it complies with the requirements of s.136 of the Law of Property Act 1925 (the LPA) (ie must be in writing, absolute, not purport to be by way of charge only and be notified in writing to the third party against whom the assignor could enforce the assigned rights). If any of these requirements fails, there is an equitable assignment which can still be perfected at any point.  Future receivables are typically secured by way of an equitable assignment. Notice of the security should be given to the relevant third party (the security provider's debtor). If notice is not given the assignment will be equitable only.  Alternatively, charges are also commonly taken over receivables. With a charge, there is no transfer of title involved. The right over the receivable remains with the chargor, but the chargee has a right, if the charge becomes enforceable to appropriate the asset. It may be helpful to take a charge instead of an assignment where for example, the underlying document prohibits assignment (although the lender’s counsel should interrogate the assignment restriction and make sure it doesn’t also extend to charges).  There are two types of charge, fixed and floating. If a fixed charge is taken over receivables it can impair a company's ability to trade as the chargor will (amongst other things) be prevented from disposing of the asset without the lender's consent. 
• Inventory: security is usually taken by way of mortgage in the form of an assignment or a floating charge – these types of non-possessory security allow the company to operate in the usual course. 
• Real Estate: security is generally taken by way of charge by way of legal mortgage, which will need to be registered at the Land Registry (where the land is registered) or at the Land Charges Department (where the land is unregistered). However, security interests over unregistered land protected by the deposit of title deeds do not need to be registered. 

By contrast, under Irish law, the following options are available:

• Plant and machinery: security is commonly created as a fixed charge over plant and machinery. 
• Receivables: security over receivables is typically established through a legal assignment, provided the contract that creates the receivable does not prohibit assignment. To be valid as a legal assignment, various requirements must be met — including written notice to the security provider's debtor in accordance with the requirements of section 28(6) of the Supreme Court of Judicature (Ireland) Act 1877. If notice is not given or any of the other requirements are not met, the assignment will be equitable only. If the security provider's debtor pays the security provider without knowing the receivable was assigned (due to lack of notice), that payment would be viewed as fully discharging the security provider's debtor’s obligation. As a result, the assignee would have to rely on the security provider to pass that payment along. 
• Inventory: security over inventory may be taken as a fixed or floating charge. It usually takes the form of a floating charge to allow the chargor enough flexibility to deal with inventory in the ordinary course of business. 
• Real Estate: the Land and Conveyancing Law Reform Act 2009 streamlined the law relating to taking security over land and since its enactment, security over land in Ireland is most commonly taken by way of fixed charge over land. Under a fixed charge arrangement, the chargor is prohibited from disposing of the land without obtaining prior consent from the chargee or satisfying the obligations owed to the chargee.

On enforcement: 

Under English law: a security package along the lines of the above will allow a lender to enforce its security over the assets on default, using the options available to it in the security document (and generally at law).  Enforcement options are likely to include the appointment of receivers, the exercise of the power of sale over the assets and taking possession of the secured assets where appropriate.  The proceeds from realisation of the assets will then be applied towards expenses incurred during enforcement and followed by repayment of the debt. It should be noted that to appoint an administrator out of court the security holder must have a qualifying floating charge, and lenders may be prevented from enforcing their security when an application for administration has been made or the company has gone into administration.

Under Irish law: the rights available to the lender in the security documents may be used following default as set out in the relevant security document and as provided under Irish law. Enforcement options typically include the appointment of receivers, the exercise of the power of sale over the assets and taking possession of the secured assets, where appropriate. Similarly to the approach in England, the proceeds from realisation of the assets will then be applied towards expenses incurred during enforcement and followed by repayment of the debt. A key difference between the two legal systems is that Ireland does not have an administration procedure equivalent to that in England and Wales.  

What perfection requirements are there and what happens if the security is not registered at an appropriate registry?

Under English law: all security granted by an English incorporated company, LLP or limited partnership (where the security is granted by its general partner and that general partner is a company or an LLP) must be registered at Companies House within 21 days of the security being granted (section 859A of the Companies Act 2006). A failure to register renders the security void against any administrator, liquidator or creditor of the company. When a charge becomes void, the money secured by it immediately becomes payable. The permission of the court (and an order providing the same) would be required to register security past the statutory cut off. It is worth noting that even if the governing law is not English, if the chargor is an English incorporated company or partnership, the registration requirement still applies. By way of example, an English company charging property pursuant to a security document governed by Irish law would need to register it at Companies House. 

Under Irish law: in Ireland, if the security is created by an Irish company, it must typically be registered with the Companies Registration Office (CRO) within 21 days of creation. Certain financial assets such as cash and shares are not subject to this registration requirement. Failure to complete a filing with the CRO within the specified timeframe can render the charge void against any liquidator and/or creditor of the company. In respect of real estate security, where security is created over registered land, it should be registered with the Land Registry section of Tailte Éireann (the Irish property registration authority) by filing a prescribed form (Form 52). Security created over unregistered land must be registered with the Registry of Deeds section of Tailte Éireann. Failure to register a charge over land with the applicable registry within Tailte Éireann will result in the charge being unenforceable as against third party creditors. Security over certain other assets, including intellectual property, ships and aircraft, must be registered at applicable registries.  

Do other creditors have priority on insolvency and can there be competing claims to the assets themselves? 

Under English law: the order of priority is broadly as follows: Fixed charge holders, administrator/liquidator fees, preferential creditors (HMRC/tax authority rates and taxes owing plus employee wages and salaries and accrued holiday remuneration), prescribed part (up to £800,000), floating charge holders, unsecured creditors and shareholders. To the extent that a lender takes part of its security package by floating charge there will therefore be claims that take priority over its claim and a portion of the floating charge realisations will be applied towards the prescribed part. 

Under Irish law: Ireland has a broadly similar order of priority, with fixed charge holders at the top, followed by insolvency costs, preferential creditors (notably the Revenue Commissioners and certain employee claims), followed by floating charge holders, unsecured creditors, and shareholders. 

What are the key vulnerabilities of security on insolvency?  

Under English law: assuming that the lender is not 'connected' to the company, security may be set aside (1) within 2 years of the onset of insolvency if the administrator/liquidator declares it was a transaction at an undervalue; (2) where granted within 6 months of the onset of insolvency, the transaction may be void for being a preference or (3) within 1 year of insolvency a floating charge may be set aside if not granted for appropriate consideration. 

Under Irish law: Irish insolvency law similarly permits challenges to security on several grounds: (1) Fraudulent preferences - transactions within six months of insolvency (or two years if the parties are connected) that prefer one creditor over others; (2) Invalid floating charges - floating charges created within 12 months of insolvency without adequate consideration (or two years if connected parties); (3) Transactions at an undervalue - dispositions for significantly less than market value within two years of insolvency. The court may set aside such transactions and require restoration of assets to the company.

What are the standard third-party costs involved in taking security or a guarantee in the jurisdiction? 

Under English law: any security documents written in a foreign language need to be fully translated before being filed at Companies House. The filing fee at Companies House is nominal. 

Under Irish law: filing fees with the CRO are currently €40 for each charge registration. In the case of real estate security, additional costs may include registration fees with Tailte Éireann. 

Are there any local law restrictions on a resident company granting security or a guarantee in favour of a lender? 

Under English law: there aren't any such restrictions, subject to the constitutional documents of the company and the terms of any investor/shareholder agreement permitting such transactions, and subject to the company being able to demonstrate the required corporate benefit for entering into the transactions.

Under Irish law: in Ireland, granting security or providing a guarantee in favour of a lender must also be subject to the constitutional documents of the company and the terms of any investor/shareholder agreement permitting such transactions, and subject to the company being able to demonstrate the corporate benefit for entering into the transactions. In addition, there are some specific Irish law restrictions in relation to financial assistance (discussed below) and on loans or quasi-loans in favour of connected persons. Pursuant to section 239 of the Companies Act 2014 a company may not (other than pursuant to certain exceptions) enter into certain credit transactions (for example, loans, guarantees, security), to a director of the company or of its holding company or to a person connected with such a director. However, these transactions may be validated by carrying out a summary approval procedure.

What about financial assistance issues? 

Under English law: whilst guarantees can be set aside for unlawful financial assistance, this only applies to a public company (or its subsidiary) giving financial assistance for the purpose of the acquisition of shares of a public parent company. This is therefore unlikely in the context of a typical ABL financing. 

Under Irish law: section 82(2) of the Companies Act 2014 creates a general prohibition on the provision by a company (either directly or indirectly) of financial assistance for the purpose of the acquisition of its own shares or the shares in its holding company. This includes financial assistance in the form of loans, guarantees and the provision of security. However, it is permitted where a valid summary approval procedure has been carried out. 

Concluding comments

Understanding the risks and vulnerabilities of lending by way of ABL and taking associated security in an unfamiliar jurisdiction will be of crucial importance to a lender, when making the decision to lend. The factors considered above are not exhaustive but aim to provide a detailed starting point for lenders, to assist them in this process. There are many parallels between the asset-based lending regulatory frameworks in England and Ireland, making Ireland an attractive market for England-based lenders. This is, as mentioned above, the third in a series of articles in which we compare ABL in this jurisdiction with another, so please watch this space for the next in this series!

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To discuss the issues raised in this article in more detail, please contact a member of our Banking and Finance team in Dublin or London.