The Irish High Court 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 adopted the market analysis based on English cases which emphasise that the legal form of the transaction adopted by the parties will determine its nature, provided the contract is not a 'sham'. The decision in the Eteams (International) Limited case concerned invoice discounting, but its ramifications are important in the context of 'true sale' opinions in structured and asset finance transactions.
The company had entered into a debt sale agreement with the bank: this 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 (now section 409 of the Companies Act 2014).
The court rejected the liquidator's contentions that the legal structure adopted by the parties did not govern their contractual relationship. In particular, the court dismissed as unsupported by authority a contention that a debt factoring agreement which does not transfer the commercial risk in the underlying debt is necessarily a charge.
The court adopted the approach taken from a line of English cases dating from the 19th century which establish the following principles:
- The court will give effect to the contractual structure chosen by the parties provided this is not a 'sham'.
- Parties are free to adopt a sale and purchase structure 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.
- The fact that the contract provides for the debt purchaser to transfer back receivables does not mean that the contract is a charge.
The Eteams decision confirms that Irish law is substantially the same as English law in allowing the parties freedom to adopt a sale and purchase structure where a debt portfolio or some other asset is used to raise finance. While Irish and international arrangers (for example, of rated securitisations) have always been satisfied with the level of comfort as to re-characterisation risk provided in Irish true sale opinions, these may now be strengthened by reduced qualifications. The Eteams decision further enhances Ireland as a primary jurisdiction for structured finance and securitisation deals.