“True Sale” Analysis Confirmed by Court of Appeal

Background

Eteams International Ltd (“Eteams”) and Bank of Ireland (the “Bank”) entered into a debt purchase agreement (the “Agreement”) pursuant to which the Bank agreed to purchase the debts (“Debts”) owing to Eteams from its customers from time to time.  Eteams subsequently went into liquidation.  The liquidator argued that the terms of the Agreement were such that, properly interpreted, they constituted a loan secured on the Debts rather than a true sale of the Debts to the Bank.  If that argument succeeded and the Bank’s interest in the Debts was re-characterised as security rather than ownership, the Bank’s security would be void against the liquidator because it had not been registered as a charge in accordance with the requirements of the Companies Act. 

The argument outlined by the liquidator is generally described as “re-characterisation risk” and is the subject of detailed legal analysis for participants in the receivables finance and structured finance industries in Ireland. 

What did the Court of Appeal Decide?

Most importantly, the Court of Appeal refused the liquidator’s appeal and approved the reasoning and decisions adopted by the High Court in relation to "true sale".  For a summary and analysis of the High Court judgment, see our earlier client briefing, available here.

Interpretation

The Court of Appeal also made some helpful statements outlining the approach to be taken to the interpretation of the Agreement, which have more general application.  Provided the Agreement was not a “sham” (and it was agreed by all in this case that it was not) it should be interpreted in accordance with the usual provisions of Irish law.  In particular:

• “…the approach to the transaction must be to analyse its express terms and its true substance by an analysis of the whole of the Agreement and the provisions expressly contained therein.  The test must be to ascertain the substance of the Agreement as recorded and expressed...”;
• in assessing the Agreement, “…there is no one clear touchstone by which it can necessarily and inevitably be said that a document which is expressed as an agreement for sale must necessarily, as a matter of law, amount to no more than the creation of a mortgage or charge…”;
• the starting point for the interpretation of the Agreement is that “…the court will not look at the economic effects of an agreement but to the legal nature of the transaction…”.  This is a helpful confirmation as one of the principal arguments for the re-characterisation of debt purchase agreements as secured loans is that they have a similar economic effect and should, therefore, be treated in the same way.

Credit Risk

Re-affirming the High Court’s judgment, the Court of Appeal also emphasised that it was not necessary for credit risk on the Debts to pass to the Bank for the Agreement to constitute a “true sale”.  In reaching this conclusion, the court specifically noted that neither of the following were inconsistent with the Bank’s ownership of the Debts:

• the availability of recourse to Eteams (by virtue of a right to require Eteams to re-purchase any Debt specified by the Bank); or
• the provision of security to the Bank for Eteams’ obligations.

Comment

This decision of the Court of Appeal underscores the Irish courts’ respect for parties’ freedom to contract, especially in business transactions.  The affirmation of the High Court’s views provides welcome certainty to the Irish receivables finance and structured finance markets, where the concepts of “true sale” and re-characterisation risk are frequently the subject of detailed consideration.