Will the Companies Bill damage your access to credit?
Written by 20th July 2014on
The issues raised in this article have been addressed in the Companies Act 2014.
The new Companies Bill is likely to become law later this year or early in 2015. Changes in the Bill to rules setting out lenders' security over companies and their assets are set to create uncertainty that may well lead to less, rather than more, lending. That unintended consequence would run counter to Government strategy which has focused heavily on initiatives to make credit more readily available to business. However, there is a significant risk that the Companies Bill changes will undermine this objective.
The Companies Bill maintains the existing system that allows lenders to preserve entitlement to significant categories of loan security by filing particulars of their security in the company's public register kept by the Companies Registration Office. This system enables any member of the public to see whether there is a priority claim over a company's assets before dealing with that business. Under the new Bill, where two lenders have security over the same company assets, legal priority is given to the first lender who files their charge with the Companies Registration Office.
In most cases the enhanced security filing rules should allow lenders to safeguard loan security when the provisions of the Companies Bill apply. But, those provisions will only apply when the loan security is a "charge" as defined in the Companies Bill. This "charge" definition is new and very broad, but it excludes security over specified categories of assets, notably cash and claims to cash.
Generally, the excluded security categories are protected under a European Union initiative to simplify and harmonise rules for preserving and enforcing financial collateral in money market transactions. This initiative is now law in Ireland. However, those regulations only protect "cash" claim security if the claim is to "money credited to an account, or a claim for the repayment of money (for example, money market deposits)". "Cash" does not have this restricted meaning under the new Companies Bill.
As a result, the courts will likely give "cash" claim its everyday meaning of "any right to payment". That interpretation will mean that a lender will not have the benefit of the security preservation and priority rules under the Companies Bill for security over a company's customer debts (known as trade receivables) or any other payments owing to the company, even though they might be specifically included in the lender's security document.
Typically, lenders give significant weight to the value of a company's trade receivables in assessing its capacity to repay debt. So, the receivables influence the amount that a lender will be willing to lend and the duration of the loan.
Given this link, lenders have developed a variety of strategies for ensuring they get the benefit of the trade receivables book in the event the loan defaults. That includes taking a fixed charge on book debts or buying the trade receivables at a discount under debt factoring arrangements. Lenders may also rely on registering a floating charge, if satisfied that potential leakage to preferred creditors (principally the Revenue Commissioners and employees) won't prevent recovery of the loan.
If those security preservation and priority provisions are thrown into doubt when the new Companies Bill becomes law, lenders are likely to question the value of their charge - fixed or floating - over trade receivables.
The alternative, debt factoring or selling on invoices, may not work for all companies.Doubts about the recoverability of loans will translate into less credit being made available.
The Companies Bill will make other security changes that could prove controversial or cause uncertainty.That includes conferring statutory priority to a floating charge that has been filed prior to a fixed charge with the Companies Office.
Such changes introduce uncertainty, at least at the outset, which will not encourage lenders to lend.In lending and security law, change should only be introduced when the resulting gains outweigh the benefits that commercial parties derive from certainty.
This article first appeared in the Irish Independant on 28 August 2014.