Integrity
SPRING 2011
Methods of Realisation and
Enforcing Security in respect
of Irish Real Estate Loans
and Security
Note:
This is a high level summary of enforcement and realisation options open to lenders holding loans secured over real estate assets
in Ireland.
Enforcement strategies will depend on the particular circumstances involved, including:
» the structure, domicile and nature of the borrower - for example whether it is an operating entity or simply a property
holding vehicle
» the security package - we would usually expect this to include mortgages granted by SPV borrowers over the real estate assets,
probably a floating charge over the whole or substantially the whole of the borrower’s assets, a share mortgage/charge
of the shares in the borrowers (which may be governed by foreign law if the parent company is not an Irish entity) and various
security assignments of contractual rights
» whether enforcement will be against individual assets or portfolios
Enforcement Methods
Method of
enforcement
Receivership
Features
Advantages
Disadvantages
A receiver is typically appointed
by a secured creditor under
contractual powers granted by
the debtor under the terms of a
debenture or mortgage or other
security document. Depending
on the form of security, the
receiver may be appointed in
respect of a particular asset,
or all the assets, business and
undertaking of the company.
This is the most straightforward and commonly
used practice for enforcing
security in Ireland.
Where there is leasehold
property, appointment of a
receiver may be a termination event under the lease.
Realising value from the
property could take time (for
example, it may be best to
wait for a refurbishment to
be complete or for the
market to improve before
selling. Depending on the
It does not create a
moratorium against other
creditors taking action
against the borrower.
Unlike in the UK, a receiver
Timing/Cost
considerations
The procedure for
appointing a receiver is
as follows:
(a) the bank would notify
the borrower that an event
of default has occurred and
demand repayment in full
of the facilities by issuing a
letter of demand and serving
it on the borrower;
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Method of
enforcement
Receivership
(contd.)
Features
Advantages
Disadvantages
The receiver’s function is to take
possession of the secured assets
and discharge any unpaid
indebtedness from the proceeds.
powers expressly granted
in the security document,
a receiver can manage the
property during this period.
The powers conferred on a
receiver, and the circumstances
of a receiver’s appointment,
depend to a large extent on
the provisions of the particular
security document.
A receiver (which is typically
an accountant although no
particular qualification is
required) should have the
necessary skills to maximise value from the property
which the mortgagee may
not have.
has limited statutory and
common law powers in
Ireland and is therefore very
dependent on the terms of
the security document for
its powers. The terms of the
security document need to
be reviewed in each case to
confirm what powers a
receiver appointed
thereunder may exercise.
The terms of the security
document may provide for
the appointment of a receivermanager, in which case the
receiver can continue to operate
the business during the course
of the receivership with a view
to maximising the value of the
charged assets. It would be
common in such circumstances
for the debenture or other security
document to confer a range of
specific powers on the receiver,
such as the power to carry on
business, to borrow, to sell and to
compromise. Unlike in the UK,
none of these powers are invested
in a receiver under statute, so it is
important that they are covered off
in the security document.
The appointment of a
receiver does not change the
status of the company.
Where a petition is presented
for an examiner to be
appointed to a company
within 3 days of a receiver
having been appointed, the
receiver can be forced by a
court to cease to act.
Statutory conditions must be
satisfied for the power to be
available (broadly these require a
payment default to be outstanding
(c) after the close of
business on the day on
which the demand referred
to in (a) is made, the bank
would, under the powers
granted under the security
document, appoint a
receiver over the assets of
the borrower by executing
a deed of appointment of
a receiver;
(e) where a receiver is
appointed in relation to the
whole or substantially the
whole of the property of the
company by the holder of
a floating charge, notice of
appointment must be sent
to the company and, within
fourteen days, the company
must make a statement as
to its affairs and submit it to
the receiver. This statement
must then be sent by the
receiver to the company
itself, the Registrar of
Companies, debenture
holders or any trustees of
debenture holders, together
with a note of the receiver’s
comments, if any.
A receiver is obliged to obtain the
best price reasonably obtainable in
disposing of the company's assets.
A statutory power available to
mortgagees, but commonly
expressly granted (often in
broader terms) in the relevant
security document.
(b) the borrower must then
be given an opportunity to
repay the debt, but the time
period required should be
no more than would be
necessary to visit a bank
to instruct funds to be
transferred (in practice, one
business day is standard);
(d) notice of the
appointment of the receiver
must be filed with the
Companies Registration
Office but the appointment
is effective from the date of
the Deed of Appointment;
The receiver must consider any
prior chargeholders in carrying out
his duties as a receiver would have
to pay indebtedness owing to a
third party holding prior-ranking
security notwithstanding that he
was appointed by a different
creditor of the company.
Similarly, if the receiver is
appointed on foot of a floating
(rather than fixed) charge, statute
provides that certain preferential
creditors (notably employees and
the Revenue Commissioners) must
be paid what they are owed first.
Power of Sale
Timing/Cost
considerations
A Mortgagee is in control
of sale process (including
timing and method of sale auction/private sale etc).
It does not create a
moratorium against other
creditors taking action
against the borrower.
The property is sold free of
subordinate charges (which
are paid off in order of
priority from sale proceeds,
if sufficient.)
A mortgagee may not
exercise its power of sale
without a court order or the
consent of the mortgagor
although this statutory
There are statutory grace
periods of 2-3 months before
power of sale can be
exercised (but these are
often reduced or removed in
the security document itself).
A mortgagee may not
exercise its power of sale
without a court order or the
METHODS OF REALISATION AND ENFORCING SECURITY
SPRING 2011
Method of
enforcement
Power of Sale
(contd.)
Features
Advantages
for specified period, or a breach
of some other provision of the
mortgage). However, these are
often contractually relaxed or
removed in the security document
itself.
The mortgagee is obliged to ensure
as far as reasonably practicable
that the property is sold for the
best price reasonably obtainable.
A mortgagee exercising the power
of sale has power to convey the
property freed from all estates,
interests and rights in respect of
which the charge has priority but
subject to all estates, interests
and rights which have priority to
the charge.
Taking
Possession
A mortgagee has a statutory right
to enter into possession of a
mortgaged property.
While statute provides that a
court order or the consent of
the mortgagor is required before
the mortgagee may enter into
possession, this requirement
may be relaxed in the
security document.
The mortgagee has control
of the property and is
entitled to receive income
from it (such as rent,
although other aspects of
the security package may
also give direct access to
income streams such as a
rent assignment).
Taking possession does not require
the mortgagee to take physical
occupation of the property, but
does require the mortgagee to have
taken control/management of the
property away from the mortgagor.
Title to the property remains with
the mortgagor.
Disadvantages
Timing/Cost
considerations
requirement may be relaxed
in the security document.
This will have timing and
cost implications.
consent of the mortgagor
although this statutory
requirement may be relaxed
in the security document.
If the mortgagee enters into
possession it will take on
liabilities in respect of the
property which, depending
on the nature of the
property, could be
significant. Examples of
same are listed under
“Taking Possession” below.
Otherwise, costs and timing
will reflect a normal asset
sale (and will therefore
depend on nature of the
property and the market).
In entering into possession,
the mortgagee will take on
liabilities in respect of the
property which, depending
on the nature of the property,
could be significant. The
following should be noted:
A quick remedy for
commercial property, but
the potential liabilities need
to be carefully analysed and
in practice most mortgagees
seek to avoid taking
possession if possible.
Costs of property advisers
may need to be incurred if
the mortgagee does not have
the necessary experience.
– the mortgagee can be
liable to maintain property
in good repair and take
reasonable care of it;
– the mortgagee can incur
liability under environmental
and occupiers liability
legislation; and
– the mortgagee can be
liable to comply with title
and lease covenants.
It does not create a
moratorium against
other creditors taking action
against the borrower.
Sale or
Appropriation
of Financial
Collateral
Under the Financial Collateral
Regulations, on the occurrence of
an enforcement event relating to
security over financial instruments
(which includes shares in
companies), a collateral taker has
a right to realise its financial
collateral by sale or appropriation
and by setting off the instrument’s
value against, or applying that
value in discharge of, the relevant
financial obligations.
This is a useful remedy where
The bank becomes owner
of “financial collateral”
without the need for
court involvement.
A financial collateral
arrangement has effect in
accordance with its terms
despite the commencement
or continuation of
winding-up proceedings
or examinership protection
in relation to the collateral
provider or collateral taker.
If the value of the collateral
exceeds the outstanding
debt, the balance is paid to
the borrower.
If available, this is a quick
and cost effective remedy.
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04
Method of
enforcement
Sale or
Appropriation
of Financial
Collateral
(contd.)
Features
Advantages
Disadvantages
Can be a method of gaining
access to property that is
outside the security net.
Unlikely to be of an
advantage where the
borrower and any
guarantors are already in
financial difficulty.
Timing/Cost
considerations
security is taken over shares.
However, the definition of
financial collateral does not
include shares in a property
holding SPV (see definition of
financial collateral below).
“financial collateral” means cash
or financial instruments provided
under a financial collateral
arrangement, but does not include
shares in a company whose
exclusive purpose is (a) to own
means of production that are
essential for the collateral
provider’s business, or (b) to own
real property.
In June 2011, new regulations
will come into effect in Ireland to
include “credit claims” as
“financial collateral”. A “credit
claim" is defined in the new
regulations as a pecuniary claim
arising out of an agreement under
which a credit institution, as
defined in Article 4(1) of the
Recast Credit Institutions Directive,
including the institutions listed in
Article 2 of that Directive, grants
credit in the form of a loan.
Obtain
Summary
Judgment
A creditor can seek summary
judgment in respect of its unpaid
debts (a process which it may
also consider even where it holds
security) as it may wish to fix the
judgment on assets over which it
does not hold any security.
The summary judgment process
is designed to enable a plaintiff to
recover a liquidated sum of money
expeditiously on foot of affidavit
evidence without the need for a
full exchange of pleadings and a
consequent oral hearing.
Once judgment has been obtained,
the judgment may be enforced
by seeking to register a judgment
mortgage against any property held
by the debtor and then obtaining
a Well Charging Order and Order
for Sale.
It does not create a
moratorium against other
creditors taking action
against the borrower.
Obtaining judgment may be
of little benefit if the borrower
has secured all its assets in
favour of other creditors.
Timing is dependent on
court process.
Court costs will be incurred.
METHODS OF REALISATION AND ENFORCING SECURITY
SPRING 2011
Method of
enforcement
Registration
of a Judgment
Mortgage
Features
Advantages
Disadvantages
Where judgment has been
obtained, the registration of a
judgment mortgage against any
property of the debtor is a useful
enforcement mechanism where
the debtor has property outside the
bank's security net, particularly if it
is unencumbered.
Could allow access to
other valuable land outside
security net.
The judgment mortgage
procedure can be very
lengthy and costly. Each
step takes considerable time
and there is no guarantee
of funds being available at
the end of the sale to pay
the debt.
Searches should be carried out in
the Land Registry and the Registry
of Deeds to ascertain the details of
all property held by the borrower.
Timing/Cost
considerations
Slow - a judgment must first
be obtained.
Court costs will be incurred.
A judgement mortgage
takes effect subject to all
prior security and all other
pre-existing equities and
unregistered rights. If
such other creditors or
security-holders exist,
they will be paid off in
full in priority to the
judgment mortgagee.
Once registered, the judgment
debtor is prohibited from dealing
with the property to which the
judgment mortgage attaches until
the judgment is discharged.
Registering a judgment
mortgage may be of little
benefit if the borrower has
secured all its assets in
favour of other creditors.
Well Charging
Order and
Order for Sale
Following registration of a
judgment mortgage, the judgment
creditor can initiate the process of
realising the property’s value by
applying for a Well Charging Order
and Order for Sale.
If the sale is ordered, then this will
occur by way of public auction.
An independent auctioneer must
value the property and a sealed
valuation submitted to the
Examiner of the High Court, which
forms the basis of the reserve price
for the property.
The Examiner of the High Court
will preside over the auction of the
property and if he receives bids
that are at least equal to the
sealed valuation then the property
will be sold. A certificate of result
will be issued and the funds paid
into Court.
Could allow access to other
valuable land outside
security net.
Only available for the
amount of the judgment
debt - so a judgment must
first be obtained.
If the property is sold but
realises insufficient
proceeds to repay prior
charges and leave a surplus,
the lender is unlikely to
recover the amount of the
judgment debt.
It does not create a
moratorium against
other creditors taking action
against the borrower.
This may be of little benefit
if the borrower has secured
all its assets in favour of
other creditors.
Slow - a judgment must first
be obtained.
Court costs will be incurred.
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06
Restructuring/Insolvency tools
Restructuring
/Insolvency
tools
Compulsory
Liquidation
Features
Advantages
Disadvantages
The company’s assets are realised
and distributed to creditors in a
defined order prior to the company
being dissolved.
Lenders with fixed charge
security are the first to
receive payments from
realisation of the
company’s assets.
Lenders with floating charge
security rank behind fixed
charges, preferential
creditors and the expenses
of the winding up and may
therefore not recover debts
owed to them if realisations
are poor.
The bank could petition the
High Court to have a liquidator
appointed to the borrower on the
basis that it is unable to pay its
debts. As evidence that the
borrower is unable to pay its debts
(in the absence of a judgment
ordering payment of amounts
owing or other proof of insolvency),
the bank could produce a written
demand for payment made on the
borrower that has remained unpaid
for a period of at least three weeks
after the demand.
The company will generally
have stopped trading
and realisations may be
affected accordingly.
The negative PR associated
with liquidation is also
likely to adversely
affect realisations.
Timing/Cost
considerations
The liquidator’s costs must
be met from the company’s
assets, but after payment
of any debts secured by
fixed charges.
In a compulsory liquidation,
the time and expense of
court proceedings will
be incurred.
The process of putting a
company into liquidation
can take time, and it will
also take time to realise
the assets before any
repayments to creditors
can be made.
Where there is leasehold
property, liquidation may be
a termination event under
the lease.
It would be unusual for a
secured creditor to appoint a
liquidator to a company rather
than a receiver, as the liquidator is
obliged to act for the benefit of all
the creditors of the company, not
merely the creditor who seeks
his appointment.
A liquidator is appointed to
collect in and distribute the
company’s assets. He acts as
agent of the company.
The liquidator acts primarily in the
interests of unsecured creditors
and members of the company.
Liquidators have the power to
review past transactions and set
them aside for certain reasons and
can disclaim onerous contracts in
order to increase the company’s
assets. Liquidators also have the
power of sale and are able to do
all things necessary to wind up the
company’s affairs and distribute
its assets, although some powers
require court sanction.
Examinership
Where a company is or is likely to
be unable to pay its debts and no
resolution subsists or order has
been made for its winding-up, a
creditor (among others) can
petition the court to be placed
under court protection on the basis
of a report from an independent
accountant. From the date the
petition is lodged in the Central
Office of the High Court, the
company is effectively protected
A creditor may support a
company in examinership
and vote for an examiner’s
proposals for a scheme of
arrangement in the hope
that the company may trade
out of its difficulty.
Save in respect of Financial
Collateral, during the period
of court protection, a
secured creditor cannot
take any action to enforce its
security without the consent
of the examiner.
Any receiver appointed
within 3 days of the petition
for examinership may be
forced to cease to act.
The period of protection is
for an initial period of up
to seventy days which can
be extended by a further
period of thirty days and the
court can further extend the
period to allow it to arrive
at a decision on the
examiner’s proposals.
Court costs will be incurred.
METHODS OF REALISATION AND ENFORCING SECURITY
SPRING 2011
Restructuring
/Insolvency
tools
Examinership
(contd.)
Features
from any action which may be
taken by its creditors including the
commencement of winding-up
proceedings, the appointment of a
receiver, the attachment of assets,
the repossession of goods under
hire purchase or retention of title
arrangements and generally, any
action to realise security, except
where the consent of the examiner
is obtained.
The period of protection is for
an initial period of up to seventy
days which can be extended by a
further period of thirty days and the
court can further extend the period
to allow it to arrive at a decision on
the examiner’s proposals.
Before a court will consider the
appointment of an examiner, the
petitioner must satisfy the court
that the company is or is likely to
be unable to pay its debts and that
there is a reasonable prospect of
the survival of the company and
the whole or any part of its
undertaking as a going concern.
If the petition is successful, upon
his appointment, an examiner
is obliged within thirty five days
to bring forward proposals for a
scheme of arrangement. A
scheme of arrangement will
usually involve proposals
regarding new investment and
reaching a compromise with
creditors. This scheme of
arrangement is then put to a
meeting of each class of creditors.
If the scheme of arrangement is
accepted by at least one class of
creditors whose interests are
impaired and then confirmed by
the court, the proposals will
become binding on the
shareholders, the creditors
(including secured creditors)
and the company itself. If the
court decides to confirm the
scheme of arrangement, it can
then fix a date within twenty one
days of the court’s decision for the
implementation of the proposal.
The date of implementation of the
scheme of arrangement is the date
on which the company comes out
of court protection and the
examinership ceases.
Advantages
Disadvantages
Upon the appointment of an
examiner, a floating charge
that has crystallised will
automatically de-crystallise.
An examiner can, with
the sanction of the court,
sell assets the subject of a
fixed charge (although the
examiner must apply the
proceeds of same in
discharge of sums owed to
the fixed charge holder).
A scheme of arrangement
can write down a
company’s debt,
including its secured debt.
The costs and expenses of
the examiner rank in priority
to secured creditors.
It is unusual for a creditor
to petition to appoint an
examiner as it will be difficult
for a creditor to establish
the reasonable prospect of
survival of the company.
Timing/Cost
considerations
There could be significant
legal and other professional
costs incurred.
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METHODS OF REALISATION AND ENFORCING SECURITY
SPRING 2011
Other Specific Actions:
Depending on the nature of the security, other specific actions may be taken, which we have not addressed in this briefing.
They include:
(a) enforcement of share security to take ownership;
(b) perfection of an assignment of a chose in action (e.g. a debt or lease) by notifying the debtor; and
(c) crystallising a floating charge to a fixed charge.
Contacts
For further information, please do not hesitate to contact any one of the following partners:
Cormac Kissane Partner
Head of Capital Markets
Glenn Butt Partner
Capital Markets
+353 (0)1 618 0529
[email protected]
+353 (0)1 618 0549
[email protected]
Orla O’Connor Partner
Head of Financial Regulatory
William Day Partner
Head of Corporate Recovery
and Insolvency
+353 (0)1 618 0521
[email protected]
+353 (0)1 618 0509
[email protected]
Mark Barr Partner
Head of Property
+353 (0)1 618 0303
[email protected]
Deirdre Barrett Partner
Property
+353 (0)1 618 0330
[email protected]
Spring 2011
This memorandum is a general summary and is not a complete statement of the law. It is not intended to give specific legal advice. If you require
advice please contact your usual Arthur Cox contact or any of the persons listed above.
Dublin
Belfast
Earlsfort Centre, Earlsfort Terrace, Dublin 2, Ireland
tel: +353 (0)1 618 0000 | fax: +353 (0)1 618 0618
email: [email protected]
Capital House, 3 Upper Queen Street, Belfast BT1 6PU, Northern Ireland
tel: +44 (0)28 9023 0007 | fax: +44 (0)28 9023 3464
email: [email protected]
London
New York
12 Gough Square, London EC4A 3DW, England
tel: +44 (0)20 7832 0200 | fax: +44 (0)20 7832 0201
email: [email protected]
One Rockefeller Plaza, New York NY 10020, USA
tel: +1 (1)212 782 3294 | fax: +1 (1)212 782 3295
email: [email protected]
www.arthurcox.com
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