True Sales under Irish Law – Market Approach Confirmed
The Irish High Court has recently ruled on the test for determining whether the transfer of a debt is a "true sale" or is by way of a charge. It has, helpfully, adopted the well-established test taken in a long line of English cases which emphasises that the legal form of the contract adopted by the parties will determine its nature, provided the contract is not a "sham".
Re Eteams (International) Limited (in voluntary liquidation) is the first Irish High Court decision dealing with these issues in the context of debt sales or invoice discounting ( IEHC 393). To date, Irish lawyers advising on whether a transaction is a "true sale" have had to base their advices on an assumption that the Irish courts would take a similar approach to those English cases. The decision means that this assumption is no longer necessary. His decision confirms that Irish law is effectively the same as English law on this issue.
The claim involved in Eteams was relatively modest. However the decision is important in the context of analogous transactions typically involving significant sums of money, such as the outright transfer of debt portfolios in structured finance and securitisation transactions or the correct characterisation in Irish law of securities sale/repurchase transactions where Irish counterparties are party to these structured products.
Eteams (International) Limited (the "Company") entered into a debt sale agreement with Bank of Ireland (the "Bank"). It was a straightforward invoice discounting agreement whereby the Bank agreed to buy (at a discount to face value) debts owed to the Company by its customers. The Company went into liquidation. The Company's liquidator contended that the agreement was a charge, which was void because it was not registered with the Companies Registration Office under the then-applicable charges registration regime (namely section 99 of the Companies Act 1963.)
The liquidator's arguments and the court's response
The liquidator advanced a number of arguments – which the judge described as "increasingly unfocussed" - in support of his contention that the transaction was an unregistered charge.
These included the following:
- The first was that a director had asserted that the transaction was a form of security. This was dismissed by the judge as inadmissible hearsay. It was also dismissed based on the well-known principle that in interpreting a contract, and looking at its background, the subjective intentions of a party are inadmissable; and
- The second was a contention that a debt factoring agreement which does not transfer the commercial risk in the underlying debt is necessarily a charge. This argument was dismissed as not supported by the authority cited for the proposition (which was on the nature of factoring in the context of VAT treatment), and inconsistent with case law indicating that it is quite normal for security to be provided to support a party's obligations in a sale contract.
The court also dismissed an argument that the contract was a charge because no notice of assignment was given to the Company's debtors of the assignment of the underlying debt (all this meant was that the assignment was an equitable assignment.) A similar fate befell a standard fall-back boilerplate clause providing that if the assignment failed for whatever reason, the Company held any receipts on trust for the Bank. The court accepted this was a standard "belt and braces" provision.
The court's overall reasoning and decision
The court adopted the approach taken in a consistent line of English authority dating from the 19th century (citing with approval cases from Re George Inglefeld Ltd  Ch 1 through to Welsh Development Agency v Export Finance Co. Ltd  BCLC 148) which has emphasised the following:
- Parties to a contract are free to adopt whatever legal structure they choose. Provided this is not a "sham" the court will recognise and give effect to that structure (a "sham" is where the parties deliberately adopt a structure which they know does not reflect the true nature of the transaction);
- Accordingly parties are free to adopt a sale and purchase structure in order to allow the debt vendor to obtain finance on the basis of its receivables. The fact that this "looks like" a loan secured on the debts is irrelevant;
- The labels adopted by the parties are not dispositive: the court will look at the substance of the entire contract; and
- The fact that the contract provides for the debt purchaser to transfer back receivables does not of itself mean that the contract is a charge.
In Eteams the liquidator did not contend that the contract was a "sham." An allegation that the parties have engaged in a "sham" is tantamount to alleging fraud. Accordingly in the unusual cases where this is alleged, full particulars must be provided.
Impact of Companies Act 2014
The Companies Act 2014 ("CA 2014") has exempted from registration certain types of asset. These include (relevantly) cash and monies in a bank account. However a charge over "book debts" still needs to be registered. Accordingly the issue continues to be relevant under CA 2014.
Eteams is an important decision for lawyers giving a "true sale" opinion in structured finance transactions. It confirms that Irish law is substantially the same as English law in allowing the parties freedom to adopt the legal structure of a sale and purchase transaction where finance is raised on the basis of a debt portfolio.
While Irish and international arrangers of relevant transactions (including rated securitisations) have always been satisfied with the level of comfort provided in Irish true sale opinions, these can now be strengthened further and finance parties should enjoy reduced qualifications in these opinions in future. The Eteams decision further enhances Ireland as a primary jurisdiction for the structured finance and securitisation industries.
Should you have any questions or would like to discuss the above, please contact your usual Maples and Calder contact.