Financial Services Update: A Review of Key Developments in 2017
15 January 2018
A decade after the dark days of the crisis, the Irish banking industry has significantly restored its reputation. After a long period of deleveraging (downscaling banking operations), commercial lending is likely to significantly accelerate in 2018. Non-performing loans, or NPLs, across the domestic banks are down almost 60% from their peak.
Ratings agency Fitch recently upgraded its rating on Ireland, citing its improving banking sector and the IMF has reported that profitability amongst Irish domestic banks is now above the average of EU peers.
Key legal developments in 2017 include:
Penalty Clauses – Recent Supreme Court View
The traditional test
Until recently, the century-old test for penalty clauses applied in Ireland and in the UK had been to assess whether the amount payable was a genuine pre-estimate of the probable loss of the innocent party caused by the breach. If it was not a genuine pre-estimate, then the clause would be struck down as an unenforceable penalty clause.
New UK approach
In 2015, The Supreme Court in the UK reformulated the traditional test in Cavendish Square Holding BV v Talal El Makdessi (Cavendish) holding that the true test is whether the provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party.
Irish Supreme Court view
In a recent Irish Supreme Court case, Launceston Property Finance Limited v Burke, Mr Justice McKechnie made a number of comments, albeit non-binding in nature, about his views on the new UK approach. He said that he was not convinced that a change to the traditional test was necessary in Ireland or that the Cavendish test was necessarily a superior one.
Although Mr Justice McKechnie’s comments were not binding, they may have been considered by the Court of Appeal when it heard the appeal in the Sheehan v Breccia case in November 2017 (decision awaited). A decision to follow the Cavendish test here would be welcomed by lenders as it is a less rigid, more commercially-friendly test that reflects common sense and commercial reasonableness.
Changes to Companies Act Impacting Lenders
Although the main purpose of the Companies (Accounting) Act 2017 (Act) was to transpose the 2013 Accounting Directive into Irish law, it also fixed a number of anomalies identified under the Companies Act 2014 (CA 2014).
The fixes of particular note for lenders are set out below.
Definition of credit institution
The definition of credit institution under the CA 2014 resulted in the unintended consequence that where a company granted credit/loans (including group loans), it fell within the definition of a “credit institution” and therefore had to be registered as a DAC rather than a LTD.
The Act has amended the definition of credit institution to provide that a company providing loans but not accepting deposits or other repayable funds will not fall within the definition of credit institution.
Clarification on requirement to register charges over shares in a foreign company
While the CA 2014 removed the requirement for an Irish company to register a charge over shares in a “company”, there had been some debate over whether this exemption covered shares in a foreign company. This is because a company, as defined under the CA 2014, is an Irish company. The Act amended the CA 2014 to bring shares in any body corporate within the exemption.
This has clarified that a charge over shares in a foreign body corporate does not require registration.
Priority of preferential debts over floating charges (Belgard Motors case)
In a Supreme Court case heard in July 2015, the Court held that a notice served prior to the commencement of a winding-up can validly crystallise a floating charge giving priority to that charge over the claims of preferential creditors. The Act has amended the CA 2014 to provide that, crystallisation of a floating charge by notice prior to a liquidation will not affect the priorities of the preferential creditors, who will rank ahead of the holders of floating charges.
Central Credit Register Reporting Requirement
All lenders and acquirers of loan portfolios (bar limited exemptions) have a new obligation to report information about certain borrowers for loans in excess of €500 to the Central Bank of Ireland for the purpose of maintaining a Central Credit Register. Lenders must also access the Register when a consumer or business makes an application for a loan in excess of €2,000, in order to ascertain their creditworthiness.
Phase 1 (consumer loans)
The Phase I reporting requirement came into effect on 30 June 2017 with lenders (other than local authorities or moneylenders) required to provide personal and credit information on qualifying consumer loans by 31 December 2017 and each month thereafter.
Phase 2 (business loans)
The Phase 2 reporting requirement will require lenders to provide personal and credit information on qualifying business loans by 30 September 2018. Information relating to guarantors must be reported by September 2019.
It is hoped that the Register will promote greater financial stability by:
- providing borrowers with an individual credit report detailing their credit agreements
- providing lenders with comprehensive information to support credit assessments, and
- providing the Central Bank with better insights into national trends
Emerging from the financial crises period, the outlook for the Irish Banking sector in 2018 and beyond is improving, arising from both the Government’s various crisis management initiatives and the improving European and global economic growth. While a steady reduction in crisis legacies is underway, continuity in recovery efforts will be key to ensuring that gains are sustainable. The outlook is positive, but externally-driven uncertainties such as Brexit or a major geo-political disruption or conflict may pose challenges.