Legal Status of Companies
Companies are “legal” persons that can borrow, enter contracts, hold property and grant security in much the same way as an individual can do. However, there are particular Companies Acts rules which may invalidate or affect a security. Generally the lender’s legal advisers should have put in place procedures so that the requisite formalities have been complied with.
Most countries, including Ireland and the UK, recognise companies formed in other jurisdictions. Companies are regulated by the legislation of the country in which they are formed. Generally, these rules decide the mechanics of how a company can grant a mortgage or enter a legal transaction.
In some cases, where a company formed in one country and has a place of business in another country, it is necessary to register documents in both countries’ Companies Registration Offices. There may also be certain restrictions and rules which apply to all companies within the jurisdiction even those formed abroad.
In the case of an Irish company entering a transaction in the UK, most Irish company law rules will apply to the taking of the security. If UK based legal advisers acted in the loan, then best practice would be that they obtained a so called “foreign lawyer’s opinion” from an Irish lawyer in relation to be the validity of the security by the Irish company from the perspective of Irish Companies law.
Companies Law Compliance Issues
A company must have certain “objects” or purposes in its founding documents. This requirement and restriction has been reduced over time, particularly in the case of UK incorporated companies.
A mortgage by a company may be invalid because it is outside the powers of the company. Guarantees for the benefit of other companies are particularly prone to invalidity. Because the bank’s agents will usually have seen the company rules certain protections that apply to third parties dealing with the company, may not b available. Therefore, it is generally necessary to ensure that the loan and mortgage and its purpose are within the company’s powers.
Under Irish company law, loans, guarantees and mortgages given for the benefit of directors and certain persons connected with directors are usually invalid. There are limited circumstances in which it is possible to follow particular procedures so as to validate the loan, guarantee or security. There is also a very broad prohibition under Irish company law on companies assisting in the purchase of their own shares. There are also certain procedures by which such transaction may be validated, in certain cases. The procedures in both cases are intricate and strict.
UK companies are subject to broadly similar legislation. The UK legislation has been made less restrictive recently. The prohibition on a UK company giving financial assistance has been removed in the case of private companies.
Company charges / Floating Charges
A company is not subject to the restrictions which apply to individuals granting mortgages over moveable items. A company can create a charge over any or all of its assets, including goodwill, moveable goods and present and future goods. This facilitates the creation of a “floating” charge over all of a company’s assets. A “debenture” is the name commonly given to a deed incorporating a fixed and floating charge given by a company.
A floating charge is a charge over all the assets of the company. It does not attach to particular assets, but leaves the company at liberty to deal with them in the normal course of business. A floating charge is “crystallised” (i.e. attaches and becomes fixed) on being enforced. The result is that the entire business and undertaking of a company can be mortgaged, lock stock and barrel, so that a receiver can step in and commence to trade either for the purpose of making payments or for the purpose of effecting a sale of all or parts of the business assets.
Upon “crystallisation” such as on cessation of business, appointment of a receiver or winding up, the charge becomes fixed to the assets. This gives the debenture holder priority over the general unsecured creditors.
Certain preferential creditors such as employees and certain pension contributions rank ahead of the rights of the lender in relation to the proceeds of sale of the floating charge assets. The UK state or “crown” no longer has priority. However, the unsecured creditors are entitled to a defined part of the proceeds of the floating charge assets.
In the case of debentures granted prior to September 2003, a lender can enforce a fixed and floating charge by appointment of a so-called administrative receiver. This is a receiver with powers to take control, manage and sell the company’s assets as a whole or as a going concern. In the case of debentures after September 2003 the floating charge holder may only appoint an administrator.
Insolvency laws limit the benefits of floating charges. A certain proportion of the assets covered by a floating charge must be made available to other creditors. A floating charge given within 12 months before insolvency other than for full value, may be set aside in certain circumstances. The company must have been insolvent at the time the charge was given or have become insolvent as a result of the charge in order to be set aside.
Full value means that new advances must have been made which are proportionate in value to the security. Therefore a floating charge given in the 12 months period prior to commencement of insolvency proceedings for a pre-existing debt or for inadequate new funds is vulnerable to challenge.
Registration
A charge by a company must be registered in Companies House within 21 days. Failure to register means that the security will be invalid as against a liquidator or a creditor. These obligations are in addition to those which apply to individuals. The rules apply to all kinds of mortgages and securities granted by companies, and not just those over land and buildings.
The rules which apply to a company depends on the Companies legislation of the country in which the company is formed. Both the Irish Companies Act and the UK Companies Act require that a charge or mortgage given by a company must be registered within 21 days with the Registrar of Companies.
In both countries, failure to register means that the mortgage or charge is void and of no effect against liquidator or creditors of the company. Failure to register would cause serious prejudice to a mortgagee. When the security is most needed – on insolvency, the liquidator is in a position to treat the mortgage as void and accordingly take the assets for the benefit of the creditors generally.
In addition to the requirement to register in the home companies register (e.g. an Irish Company registering in Ireland) a company may have an obligation to register in the country where the mortgaged land is situate (e.g. England). This is the case where the company has a branch or place of business in the country concerned (e.g. England).
Where an Irish registered company creates a mortgage in England and Wales and has a branch or place of business in England, that mortgage should be registered both in the Irish companies office and in the UK Companies House as a mortgage by an “overseas” company.
Where registration does not take place within 21 days, it is necessary to apply to court for an extension of time. It must be shown there is no prejudice to other creditors. The court may grant the extension on such terms as it sees fit. Once a company charge is registered, the registrar issues a certificate of registration.
Limited Liability Partnerships
A limited liability partnership (usually called an “LLP”) is formed under the Limited Liability Partnership Act in England and Wales. It has much in common with a company. It is deemed to be a separate legal entity from its members. This has the important consequence that the members are not liable for the debts and obligation of the LLP, unless they guarantee them or give some equivalent undertaking.
LPPs may grant charges in much the same manner as companies. They must be registered in the UK Companies Office within 21 days.
