True Sale (finally) Approved

In a recent judgment the Irish High Court for the first time confirmed as “good law” in Ireland the approach taken by the English courts to the circumstances in which a transaction, documented as a sale of receivables, may be re-characterised as a secured loan.  Invoice discounting, factoring and similar receivables financing products are important sources of working capital finance for SMEs and are increasingly a funding tool offered by alternative lenders. In addition to supporting the invoice discounting market in which the dispute the subject of this judgment arose, the decision brings welcome clarity to Irish structured finance markets more generally, where the legal analysis of transactions and certain collateral arrangements as true sales, and the elimination of re-characterisation risk, is frequently key to the availability of required legal, regulatory and capital treatments.


Whereas there is a long line of English case law on the issue of "true sale" and related re-characterisation risk, the matter had not been determined by the Irish courts until the recent High Court decision in Bank of Ireland v Eteams (International) Ltd (in voluntary liquidation)1

The settled English position is that parties can choose to structure financing by way of a sale and purchase of an asset (a true sale) or by way of a secured loan and, absent a sham, their choice as evidenced by the substance of their agreement will be upheld.  The distinction between a true sale and security is very important from a legal perspective as the creation of security over certain assets requires registration and failure to register such security within the requisite period renders the security void against a liquidator or other creditor. Accordingly, where parties have operated on the basis that an arrangement effects a true sale as opposed to the creation of security, its re-characterisation as security will have serious implications for its validity.  This is often referred to as the ‘re-characterisation risk’.    

After considered analysis of the English case law on this matter, from the decision of the English Court of Appeal in Re George Inglefield Ltd2 to the leading decision in the area of re-characterisation of financial transactions in Welsh Development Agency v Export Finance Co. Ltd3 (“Exfinco”), Keane J has upheld the line of English authority in this respect.  


The Case


Eteams, an Irish company providing translation services, had entered into an invoice discounting agreement with Bank of Ireland, involving the sale to the bank of debts owing to Eteams.  The company went into liquidation in 2013 and the liquidator sought to have the sale of debts re-characterised as a loan secured by a charge over the debts.  Such a re-characterisation would have had the effect of rendering the bank’s claim void as it had not been registered as a charge (as would have been required by the then-applicable Companies Act).       


The English Authorities


The English courts have approached the issue of characterisation of financing transactions by looking at the rights of the finance provider to ascertain whether they reflect those of a purchaser or a creditor.  In Re George Inglefield Ltd, Romer L.J. identified the following three key distinctions between a security interest and a sale:

  • a seller is not entitled to recover the assets sold by returning the purchase money, whereas a security provider is entitled to recover the secured assets by discharging the secured obligations;
  • a purchaser is not required to account to the seller for any profit made on a resale of the assets sold, whereas a security provider is entitled to amounts realised on the sale of the secured assets in excess of the secured obligations;
  • a seller is not, by reason only of having sold the assets, required to account to the purchaser for any loss incurred by the purchaser on a resale of the assets sold whereas, if secured assets realise less on sale than is required to discharge the secured obligations, the security provider remains liable for the shortfall.  However characterisation of an arrangement as a sale does not require the purchaser to bear the risk of any such loss; the fact that such risk is offset by guarantees and/or other security for such shortfall will not affect the characterisation of the arrangement as a sale rather than a secured loan (see further below).

In the Exfinco case the English Court of Appeal placed considerable emphasis on the intention of the parties to the transaction and applied an “inconsistency” test to the effect that the “label” given to, and language used in, contracts should be respected by the English courts unless the terms of the contract are clearly inconsistent with them or represent a sham (i.e. create quite different legal rights and obligations to those which the contract gives the appearance of creating).  In the Exfinco case, Staughton L.J. indicated that there were two routes by which a court could come to the conclusion that the true nature of the agreement was different to the label given to it by the parties:

  • the “external route”, which is to show that the contract does not represent the true intention of the parties and was a sham; and
  • the “internal route”, which is to ascertain from the operative parts of the contract whether it amounts to a transaction of a legal nature consistent with the description which the parties have given to it.

The Decision

Finding in favour of the bank, Keane J noted that there was no suggestion that the transaction had been a sham, that nowhere in the agreement was there reference to the provision of funds by way of a loan or to the creation of a charge, and that the agreement in fact effected a true sale and not a secured loan. 

In addition, Keane J considered and formally approved for Irish law purposes some very useful principles identified in the English case law:         

Freedom to contract

Parties are entitled to carry out their legal transactions in whatever form they wish. There is nothing improper in obtaining finance by way of the sale of assets.  While this form of financing may have elements similar to a secured loan this does not convert the sale of assets into a secured loan, provided that the transaction is not a sham.    

Form of agreement

The courts should look to the nature of the agreement entered into and the rights and duties imposed on the parties thereunder in order to decide whether in any particular case the agreement constitutes a true sale of, or security over, assets.  The substance of the agreement will be determinative in this respect and not the form, object or economic effect of the agreement.  

Transfer of risk

The failure to assume risk does not transform an agreement for sale of assets into a secured loan.  The provision of guarantees or other security for the recovery of the shortfall of unpaid debts does not alter the essential nature of the underlying transaction as a sale and not a secured loan.


The approval by the Irish High Court of the line of English authority on true sale and related re-characterisation risk brings welcome clarity to banks and alternative lenders offering receivables finance products to businesses in Ireland, as well as to the structured finance industry generally, aligning Irish law with the English law position in this respect.


  1. [2017] IEHC 393
  2. [1933] Ch. 1
  3. [1992] BCLC 148

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.