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 ([2017] 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.

Relevant facts

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...