The International Capital Markets Review - Ireland Chapter - Charges, Mortgages, Indemnities

INTRODUCTION

i Legal framework

In 2013, the international capital markets (particularly within the EU) continued to endure the effects of pre-2011 economic crises and uncertainties albeit with some tentative signs of recovery in certain Member States, and Ireland's interaction with those markets has been no different. While domestic corporate issuance of capital markets debt in Ireland has always been modest, significant volumes of structured-finance debt were issued as part of collateralised loan obligations (CLOs), collateralised debt obligations (CDOs), residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and repackaging transactions out of Ireland. This was significantly curtailed in 2011 and 2012 but has seen some return to activity (especially CLOs) in 2013. In addition, there have been significant reductions in the volumes of Irish bank debt issuances through the variety of debt programmes normally utilised by banks to access the capital markets. This turmoil extended in 2011 to affect the debt capital markets through emergency capital markets legislation giving special powers to the Irish government, and increased judicial activity in the Irish courts (although this fell off in 2012). Some stability has returned to markets in 2013 and while the volume of transactions characterised by the levels in 2006–2007 is unlikely to return, the capital markets continue to be accessed in other ways. Market participants have recently shown that they will continue to use Ireland as one of the preferred international financial locations.

Capital markets transactions law

Irish capital markets law is generally integrated into parallel systems of common law, equity and statute, without any specialised tribunals governing its administration or enforcement. The fundamental legal principles governing debt and contractual obligations created under bonds and securities are still rooted in the original provisions set out in the Bills of Exchange Act 1882 but have been overtaken and enhanced significantly by a plethora of domestic and EU-originated.

Current regulatory and legal status

The principal regulator of capital markets in Ireland is the Central Bank of Ireland (the Central Bank).

The country's only regulated stock exchange is the Irish Stock Exchange (ISE). The ISE has two markets on which debt can be admitted: the Main Market, which is regulated, and the Global Exchange Market (GEM), which is not. Both of these include general corporate debt and specialist securities including asset-backed securities, specialist bonds and warrants. The Main Market and GEM have each developed a large following in the international capital markets because of their quick turnaround times on 'reads' or reviews of draft listing documents and prospectuses, and on well-settled content requirements for relatively complex obligor structures. In 2012 and 2013, there has been a significant increase in the number of general corporate debt issuers seeking a listing in Ireland. Most notably, a number of medium term note (MTN) programmes have migrated their listings to Ireland. In addition, the GEM has seen a number of high-profile listings including the first Eurobonds issued by Microsoft.

The key legal, statutory and regulatory provisions relevant to debt securities include:

contract law;
statutory company law (including, in particular, the Irish Companies Acts 1963–2012);
common law;
Directive 2003/71/EC, as amended by Directive 2010/73/EU (the Prospectus Directive);
Commission Regulation (EC) No. 809/2004, as amended by Commission Delegated Regulations (EU) 486/2012 and 862/2012 (the Prospectus Regulation);
Directive 2004/109/EC (the Transparency Directive);
Directive 2003/6/EC (the Market Abuse Directive); and
The Listing Rules and the Admission to Trading Rules of the Main Securities Market (Listing Rules) or the Listing and Admission to Trading Rules, Global Exchange Market (GEM Rules), as applicable.

There are also statutory provisions and regulations applicable to particular classes or types of securities including in particular commercial paper, certificates of deposit, RMBS or CMBS, general securitisations and uncertificated securities. The Companies Acts regime also incorporated (in 2006) certain exempting provisions from the general formal requirements for Irish companies issuing debentures for particular restricted classes of debt securities, to facilitate the use of private companies for non-public bond transactions.

Privately placed, unlisted debt securities are not ordinarily subject to the rules of the Prospectus Directive, the Prospectus Regulation, the Transparency Directive or the Market Abuse Directive. The interplay of regulations within this regulatory environment is a complex area and invariably requires detailed specialist advice.

However, while the regulatory structure outlined above provides the backdrop to much of the structuring and formal requirements of the legal documentation surrounding capital markets transactions in Ireland, most securities issued in Ireland tend to be listed for legal or tax reasons. Accordingly, the key focus on production of a prospectus (in the case of the Main Market) or listing particulars (in the case of GEM) for such securities is on the requirements of the Prospectus Directive and Listing Rules or the GEM Rules, as applicable, and the production of prospectus or listing particulars in a form acceptable to the Central Bank (in the case of the Main Market) or the ISE (in the case of the GEM).

Other regulatory frameworks – listed securities

Where an issuer lists its debt on the Main Market of the ISE, in addition to the obligation to publish a prospectus complying with the requirements of the Prospectus Directive, the issuer will also be regulated under the Market Abuse Directive and the Transparency Directive.

Obligations under the Market Abuse Directive include:

the prohibition of market abuse and market manipulation by the holders of inside information;
an obligation to disclose value-sensitive non-public information to the market;
the preparation and maintenance by the issuer or any other person of lists of holders of inside information; and
the obligation to make fair recommendations to investors.

Obligations under the Transparency Directive include:

the publication of audited accounts within four months after the each financial year end and the preparation of half-yearly financial reports (where the minimum denomination of the securities is less than €100,000);
the requirement to treat security holders equally;
the requirement to maintain a flow of information to security holders on an ongoing basis; and
the requirement to appoint a paying agent.

The Market Abuse Directive and the Transparency Directive only apply to securities listed on a regulated market, unless those securities derive their value from another security or instrument traded on a regulated market. Thus, GEM-listed and unlisted securities will typically not be subject to the Market Abuse Directive or the Transparency Directive. However, it should be noted that a number of the GEM Rules mirror the requirements of the Transparency Directive (which forms the basis of the listing rules for the Main Market). In addition, the GEM Rules specifically require that GEM listed issuers comply with the requirement to disclose inside information imposed by the Market Abuse Directive.

ii Structure of the Irish courts

The Supreme Court, the Court of Criminal Appeal, the High Court, the Circuit Court and the District Court constitute the various courts in the Irish legal system. The Courts (Establishment and Constitution) Act 1961, together with the Courts (Supplemental Provisions) Act 1961, provided for the establishment of, and prescribed the jurisdiction of, the various courts.

The Court of Criminal Appeal, given its limited function as a court for the conduct of appeals against conviction or sentence from criminal trials, is irrelevant for present purposes. Likewise, the district and circuit courts do not play an appreciable role in dispute resolution in a commercial context because of their limited jurisdictions.

It follows that the High Court is invariably the court of first instance for significant commercial disputes. Within the High Court structure, there is a specialist list called the Commercial List (or the Commercial Court), which is a division of the High Court. There is currently a proposal to amend the Irish Constitution to enable the creation of a Court of Appeal for civil matters. This is required to address the current backlog of appeals before the Supreme Court.

iii The Commercial Court

The establishment of the Commercial Court in 2004 represented a radical departure in the manner in which commercial disputes were managed under the Irish legal system. Following similar reforms in England and Wales, the Commercial Court was established to reduce the often inordinate delay in the conduct of commercial proceedings in the ordinary High Court. In that regard, it was typical for a dispute in the ordinary High Court to take several years from commencement of proceedings to the handing down of the judgment. This can still apply for disputes not admitted to the Commercial List.

The establishment of the Commercial Court has been a considerable success, largely because the rules established for the conduct of proceedings in the Commercial List provide a specific procedural framework designed to handle complex commercial disputes in an efficient, expeditious and cost-effective manner. This division of the High Court has also been proactive in promoting alternative dispute-resolution (ADR), particularly mediation.

The Commercial Court rules (Order 63A of the Rules of the Superior Courts) detail a largely self-contained system for dealing with pretrial procedure, although it should be noted that the Commercial Court rules operate in tandem with the Rules of the Superior Courts; there are, however, some notable differences – chiefly the ability of the Commercial Court judge to take a proactive role in case management and conduct of the proceedings.

Jurisdiction

The jurisdiction of the Commercial Court is invoked by one or other of the parties to proceedings making an application for entry to the Commercial List. The primary criterion for entry is that the case is a 'commercial proceeding'. A number of categories of 'commercial proceedings' are defined in Order 63A. By far the most frequently invoked category of commercial proceeding is a claim arising from a business document, business contract or business dispute where the value of the claim or counterclaim is at least €1 million. In addition, the Commercial Court judge has a residual discretion to admit a claim that does not meet this threshold, having regard to the particular commercial or other aspects thereof.

Based on the fairly minimal threshold of €1 million and the relatively broad concept of what constitutes a 'commercial' dispute, together with the residual discretion of the Commercial Court judge, the Commercial Court has become the forum of choice for the resolution of the majority of banking disputes in Ireland. This has had a particularly beneficial effect on the conduct of such cases, and should generally have a positive effect on the conduct and undertaking of complex financial cases in the future, including financial cases, and including many of the likely complex capital markets transactions that may find their way into the courts.

Once admitted, Commercial Court proceedings are closely case managed to aggressive time frames. Typically, the time limit for each step in the proceedings is either two or three weeks. The ensuing requirement for parties to focus on the merits of their respective cases at an early stage in the proceedings often acts as a catalyst for settlement well in advance of the trial date. The Commercial Court's case management has also led to the introduction of procedural steps that are not normally a feature of ordinary High Court cases, such as the exchange of witness statements and the ability to serve interrogatories without the leave of the court.

The Commercial Court has extensive powers to impose costs sanctions for delays and defaults in compliance with its directions, and may, in the case of more substantial default, order that the proceedings be removed from the Commercial List. This latter sanction creates a significant incentive for plaintiffs to ensure their case is dealt with expeditiously.

While the Commercial Court requires parties to expedite proceedings, it is also supportive of ADR. Specifically, the Commercial Court has jurisdiction to adjourn the proceedings to allow the parties to consider the use of mediation, conciliation or arbitration to resolve the dispute and in the event that the parties indicate agreement to proceed via ADR, the Commercial Court may extend the time for compliance by the parties with the timetable in place. It is worth noting that the Commercial Court has discretion to impose costs on a party that unreasonably refuses to engage in mediation.

Time frames

While the majority of significant commercial disputes are heard before the Commercial Court, admission to the Commercial Court is at the discretion of the judge appointed to manage the Commercial Court. Where the value of the claim in question is less than €1 million, the likelihood is that the Commercial Court judge would exercise his or her discretion to refuse entry to the Commercial List – clearly this is unlikely to apply to most capital markets transactions. Furthermore, in practice the Commercial Court judge may refuse entry to the Commercial List in circumstances where the party seeking entry has failed to demonstrate sufficient urgency in issuing its claim and in making its application for entry, notwithstanding the party's compliance with the express time limits in the rules. This might affect a number of capital markets transactions as, given their complexity, sometimes they are not litigated for some time after potential issues have arisen.

The rationale behind this is that the finite resources available to the Commercial Court should not be afforded to cases where there is a lack of real urgency. What constitutes delay will vary depending on the circumstances, and any prospective litigants should be warned that, as a rule of thumb, they must institute proceedings and proceed with their application with all due expedition. Any significant time-gaps must be explained on affidavit.

The alternative is for the proceedings to be dealt with in the overly congested ordinary High Court list, where the latitude afforded to a party inclined to delay the proceedings is much greater. The result is that one can expect proceedings may take some years, in contrast with the Commercial Court, where cases are quite often concluded within about six months, and in all but the most complex cases, within one year.

iv Appellate jurisdiction

The Supreme Court has appellate jurisdiction only, and is the only domestic court of appeal from a decision of the High Court (including the Commercial Court) in civil matters. An appeal from a decision of the High Court may be brought as a matter of right to the Supreme Court on a point of law, or on issues of liability or quantum. Generally, the Supreme Court will be slow to interfere with findings of fact by the High Court. Appeals to the Supreme Court can be characterised as uncommon as a proportion of High Court judgments, and the delay to hearing can be up to three years. A certificate of urgency may be obtained in certain circumstances, in which case the delay to hearing is still likely to be in the order of 12 months. As noted above, it is proposed to hold a referendum to amend the Constitution to provide for the establishment of a civil Court of Appeal.

The Court of Justice of the European Union (ECJ) has a limited supervisory jurisdiction from the High Court to hear and determine points of European Community law, typically by way of reference under Article 267 of the Treaty on the Functioning of the European Union.¹

While ordinarily referrals to the Supreme Court or the ECJ would be rare, it is interesting to note that the nature of some of the legal arguments that have been made in Irish courts in contesting some of the emergency measures implemented legislatively in Ireland have involved constitutional and EU law arguments, suggesting increased recourse on such matters. Similarly, there have been arguments considered in the area of breach of human rights under the European Convention on Human Rights, which would require recourse to the European Court of Human Rights.

v Tax

Ireland's Section 110 regime² allows the taxable profits of qualifying Irish debt special purpose vehicles (SPVs) to be calculated on the same basis as a regular trading company. In addition, provided the Section 110 company is appropriately structured, a full deduction should be available for interest and profit-dependent payments payable by the company on its debt securities, allowing the company to operate on a tax-neutral basis.

To benefit from the Section 110 regime, a company must satisfy a number of conditions. It must be resident in Ireland for tax purposes and must acquire, hold or manage qualifying assets or have entered into certain arrangements, such as swaps or loans, that themselves constitute qualifying assets. Importantly, the market value of the qualifying assets must be €10 million or more on the initial date they are acquired, held or entered into.

Although initially targeted at securitisations, the flexible nature of the regime has led to its use in a range of international financial services transactions including repackagings, CDOs and investment platforms. Ireland's Finance Act 2011 expanded the scope of the Section 110 regime to allow companies to hold commodities and plant and machinery in addition to financial assets, while also introducing highly focused restrictions on the Section 110 company's ability to deduct profit interest accrued or paid in certain structures.

There should be no Irish withholding tax on payments of interest by a Section 110 company, provided the securities are listed on a recognised stock exchange (such as the ISE) and qualify as quoted Eurobonds. Other Irish withholding tax exemptions are available, such as where the investors are persons who are EU-resident or resident in a treaty partner of Ireland. Transfers of securities issued by Section 110 companies will generally be exempt from Irish stamp duty.

Generally, no withholding tax should arise on bonds issued by any Irish issuer that similarly qualify as quoted Eurobonds or for payments to EU or treaty-resident companies. Ireland has an extensive double taxation treaty network that facilitates capital markets transactions. There are also some other non-treaty-related withholding exemptions available to certain capital markets transactions (e.g., short-term paper).

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Originally published in The International Capital Markets Review, Third Edition by Law Business Research Ltd.

Footnotes

1 Formerly Article 234 of the EC Treaty.

2 Section 110 of the Irish Taxes Consolidation Act 1997.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ireland: The International Capital Markets Review - Ireland Chapter