Commercial Lending


When in business, it is generally not practical to observe the honourable maxim of Polonious; “Neither a borrower nor a lender be”. In today’s commercial world, the more apt maxim is; “borrower beware”. An informed decision on borrowing and granting security is often pivotal to commercial success. The following list of issues is aimed at providing you with useful information on the core features of commercial lending and equipping you with the brass tacks for such fundamental decisions. This list of issues is not intended to be exhaustive and should serve as a guide only. For more detailed advice on these transactions, you should contact a member of the Hayes solicitors Property and Private Client Department. The contact details for our team are also listed below.

1.       Capacity of Borrower

  1. The vast majority of commercial lending involves companies. In the first instance, it is important to establish proof of incorporation of the company by identifying the Certificate of Incorporation. It is then important to conduct appropriate company searches to ensure the company has not been struck off. Careful checks also need to be carried out in relation to the powers and authority for borrowing which are stated in the company’s Memorandum and Articles of Association. There are various further regulatory requirements imposed by virtue of the Companies Acts and some of these are discussed in further detail below.

2.       Loan Facility\ Offer

  1. The Loan Facility or Offer is usually issued by way of letter to the proposed borrower.  Typically, it sets out the amount to be advanced, conditions precedent, interest rates, terms of default, repayment dates, security required, warranties from the Borrower, data protection consents. It also requires signature (i.e. acceptance) of the borrower. In certain circumstances, spousal consent and independent legal advice may be required.
  2. The major drawback from a Lender’s perspective of lending to a company is that neither its directors nor its shareholders have any personal liability. It is therefore often the case that the Loan Facility or Offer will require personal guarantees from the directors in addition to the company entering into the commercial lending arrangement.

3.       Types of Security

  1. The purpose of taking security is to ensure a quicker and more assured   
    payout in the event that a borrower becomes insolvent. On insolvency, there is a priority of persons to be paid in particular order with creditors secured by a fixed charge or mortgage (i.e. the bank) ranking as the first payee followed by preferential creditors and then creditors secured by a floating charge who are followed by ordinary creditors (with no security).
    The importance of establishing proper and effective security from the lender’s perspective is therefore crucial and as a borrower you will be required to execute one of these documents, most often, a mortgage.
  2.        A mortgage may either be a legal mortgage or an equitable mortgage. A
    legal mortgage is a transfer of a legal estate or interest in land or other  
    property for the purposes of securing the repayment of a debt. In real  
    property terms, a mortgage (when signed by the borrower) transfers the land interest to the mortgagee (the lender). An equitable mortgage is one which passes only an equitable estate or interest and is generally achieved by the taking of the title deeds by the lender.
  3.    The main elements of a mortgage include the covenant to pay,  
    the clause relating to the property and assets of the borrower to be secured, negative pledge restricting the borrower from creating any other charge over those assets ranking equal to the current charge, a statement that the security is continuing until full repayment and a description of the events that give rise to default and which justify the appointment of a Receiver in order to enforce the security.  

  
4.       Supporting Securities

  1. In addition to the borrower entering into a security of the type described in the previous section, it is common that a lender will also insist upon a guarantee by a third party to be answerable for the default of another and in that instance it is vitally important that independent legal advice is offered to the proposed guarantor in relation to the nature and effect of venturing into the guarantee.
  2. A lender will also generally insist upon a Life Assurance Policy on key    personnel for the value of the loan being taken out and signed. Failure to timely organise such life policies as required is often a cause of delays in completing a lending transaction.
  3. Frequently, the guarantor and more particularly the controller of a company will be required to create a charge over his or her individual property to support a loan to his or her business. In these circumstances it is important that the provisions of the relevant Family and Consumer Credit legislation are considered.
  4.   Lenders will also often require letters of lien, appropriation and    >combination to be signed on behalf of the borrower entitling the Bank to combine accounts at will. Specific advice should be sought in relation to the nature and effect of these documents, if they are required.

5.       Registration Requirements

  1. Where the Borrower is a company then particulars of the charge created must be delivered to the Registrar of Companies within 21 days from the date of creation. Failure to do so renders the charge void against any liquidator or creditor.
  2.   Where the asset covered by the security is land then registration of the    security in the Registry of Deeds or Land Registry records must be made in  
    respect of mortgages and charges.
  3.   Where a charge is created over a stock, it must be registered with the  appropriate County Registrar under the Agricultural Credit Act 1978 within one month from the date of its creation and this may involve registration in more than one county.

6.      Specific Legal Issues associated with lending to companies

  1. Section 60 (1) of the Companies Act 1963 provides that it is unlawful for a  company to give any financial assistance in connection with the purchase or subscription of shares in that company or its holding company. If an acquisition company is providing security to a lender to enable a target company to purchase the shares in the acquisition company then this constitutes the giving of financial assistance and it is prohibited by Section 60. The consequences of a breach of Section 60 are that the financial assistance is voidable at the instance of the company and the directors may be guilty of a criminal offence. It is therefore extremely important that legal advice is obtained as to whether or not Section 60 applies in respect of a particular transaction and the required steps to be taken to ensure compliance.
  2. Part 3 of the Companies Act 1990 places extensive restrictions on  transactions which could take place between a company on the one hand and its directors or connected persons on the other hand. Again, legal advice should be sought where such a transaction is proposed as there are significant consequences for failing to follow the correct legal procedures in relation to such transactions.
  3. These legal provisions also restrict a company from making a loan or granting security or making a quasi-loan or entering into a credit transaction or guarantee with a director of the company or a person connected with such a director.  The term “director” is very broadly defined in relation to these legal restrictions and includes shadow directors and persons connected with a director. There are a number of exceptions in relation to the transactions caught by this restriction and the consequences of breach are serious and include voidance of the transaction at the instance of the company. You are again urged to contact your solicitor if there is a possibility that this provision is relevant to your transaction.

 

Clearly, the features of commercial lending are vast and often complex and having hopefully familiarised you with some of the core features and the drastic consequences of not meeting certain requirements, we would be delighted to provide you with further practical assistance on these matters.

Joseph O’Malley
Partner
jomalley@hayes-solicitors.ie