Sarah Pickering and Richard Curran from law firm LK Shields explain how changes under the Companies (Accounting) Act 2017 affect lenders and creditors
Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. One hour of learning equates to one unit of CPD. We'd suggest that you use this as a guide when allocating yourself CPD units.
This article was first published in the September 2017 Ireland edition of Accounting and Business magazine.
Amendments have been made to the Companies Act 2014 by the Companies (Accounting) Act 2017, with consequences for lenders and other creditors of a company.
The main purpose of the 2017 act is to transpose EU directive 2013/34/EU on the financial accounting requirements for certain types of undertaking, but it also addresses anomalies in the 2014 act and implements other recommended changes to this act.
This article focuses on the following changes under the 2017 act, which will have an impact on the advice that accountants provide to lenders and other creditors of a company:
- A private company involved in intra-group lending and group treasury functions no longer falls within the definition of a ‘credit institution’ and can now register as a private company limited by shares.
- The crystallisation of floating charges into fixed charges no longer gives lenders priority over claims of preferential creditors.
- Charges created by an Irish company over shares held in a foreign incorporated company do not have to be registered with the Companies Registration Office.
These changes came into force on 9 June 2017.
LTD or DAC?
The definition of a credit institution in the 2014 act was very broad and included any company that accepted deposits or other repayable funds or grants credit on its own account. This definition was interpreted to capture companies that were involved in intra-group lending and group treasury functions, as well as those carrying out traditional banking activities. As the 2014 act prohibited a private company limited by shares (LTD) from carrying on the activity of a credit institution, any company involved in intra-group lending and group treasury functions had to be registered as a designated activity company (DAC), not an LTD.
Section 12 of the 2017 act amends the definition of a credit institution. Only companies that accept repayable funds from the public need to be registered as a DAC. Therefore clients engaged in intra-group lending and group treasury functions can be made aware that they have the option of registering as an LTD.
The 2014 act provided a priority system for claims of different classes of creditors of a company in the event of its insolvency. The claims of fixed charge holders rank first, followed by those of preferential creditors, floating charge holders and lastly unsecured creditors.
This priority of claims was considered by the Supreme Court in JD Brian Limited (in liquidation) t/a East Coast Print and Publicity and others v. Companies Acts  IESC 62 (Belgard Motors). In Belgard Motors, the lender served a notice on each chargor company in accordance with the terms of the underlying debenture, with the intention of crystallising the floating charge into a fixed charge. The question arose as to whether service of such a notice gave the lender (as a crystallised fixed charge holder) priority over preferential creditors. The Supreme Court held that where a floating charge had crystallised and become fixed prior to the date of winding-up of the chargor company, the lender (now a fixed charge holder) gained priority ahead of preferential creditors.
While the Supreme Court decision in Belgard Motors benefited lenders who held floating charges, it created uncertainty for preferential creditors.Following recommendations by the Company Law Review Group, the 2017 act reverses the Supreme Court decision in Belgard Motors. Section 92 of the 2017 act amends section 621(7)(b) of the 2014 act so that claims of preferential creditors take priority over those of holders of charges created originally as floating charges. Clients should therefore be aware that this priority will now apply irrespective of the crystallisation of floating charges into fixed charges.
Additionally, pursuant to section 98(d) of the 2017 act, amending section 440(1)(a) of the 2014 act, any receiver appointed under a floating charge that has crystallised into a fixed charge must ensure that claims of preferential creditors are paid before those of the charge holder.
Shares in foreign companies
Under the 2014 act, an Irish company is required to register particulars of charges over certain assets with the Companies Registration Office (CRO). Pursuant to section 408(1) of the act, a charge created over shares in a ‘company’ did not need to be registered with the CRO. A ‘company’ referred only to one formed and registered under the 2014 act (ie an Irish company). This created uncertainty as to whether the exemption in section 408(1) applied where the shares charged were held by an Irish company in a foreign incorporated company. Failure to register a charge with the CRO within 21 days of execution rendered it void (as against any liquidator and creditor of the company).
Section 98(c) of the 2017 act amends section 408(1) of the 2014 act to specifically include shares in a body corporate (ie a foreign incorporated company). Therefore there is no longer any requirement to register charges created by an Irish company over shares held in a foreign incorporated company.
This clarification, together with the amended definition of a credit institution, removes unintended anomalies in the 2014 act and will be welcomed by professional advisers and their clients.
The amendments made by the 2017 act to the priority system for floating charge holders mean that advisers may need to revisit advice given to lenders and other creditors of an insolvent company. While preferential creditors will benefit, lenders could consider requesting fixed asset registers from companies when entering into negotiations, and taking ‘all asset debentures’ from those companies on completion. Such debentures incorporate fixed charges over the assets stated on the fixed asset register and a floating charge over those assets that cannot be secured by way of fixed charge. This should allow lenders to maximise their position as a fixed charge holder, should a chargor company become insolvent, and provide them with some comfort when extending credit.
Richard Curran is a partner and Sarah Pickering an associate solicitor at law firm LK Shields
"Amendments to the priority system mean that advisers may need to revisit advice given to lenders and other creditors of an insolvent company"