So far we've outlined the key factors in ensuring capcity to sell and preparing for sale. The third and final step to successful debt disposal focuses on avoiding post-disposal commitments.

Avoid making post-sale remediation commitments

Performing front-end remediation is central to successful debt disposal, as outlined in Step 2: Preparing for sale. Where possible perform front-end remediation with the goal of avoiding making post-sale commitments. A typical post-sale commitment arises from providing indemnities or funds to be retained in escrow pending completion of remediation or clawback of an agreed portion of the purchase price should any of the remediation be deemed impossible post-completion. Such arrangements make clean disposal less likely.

Comply with the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the “CPRCSF Act”)

Unregulated entities that purchased debt should be aware of the requirements of the CPRCSF Act, which came into effect on 8 July 2015. The act’s intention is to protect consumers where their loans have been sold to unregulated entities. Previously the unregulated entities that purchased loan books from regulated lenders were not subject to censure by the Financial Service Ombudsman nor were they obliged to adhere to the various codes to protect consumers and SMEs (such as the Consumer Protection Code, Code of Conduct of Mortgage Arrears, Code of Conduct for Business Lending to Small and Medium Enterprises) unless they voluntarily submitted to do so. The CPRCSF Act creates a new regulated entity called a “Credit Servicing Firm” which is relevant to any previously unregulated purchasers of loan books who should become authorised or appoint an agent as its Credit Servicing Firm to avoid censure.

Litigation

In many cases there will be litigation in being between the borrowers and the original lender and possibly with the party that has acquired the debt. Minimising post-sale involvement in litigation is key; ongoing litigation at the time of sale may lead purchasers to seek indemnities for any detrimental impact on the acquired debt/secured assets.

Actions that can be taken to extract oneself from litigation include:

  • review any existing litigation to assess the level of involvement
  • assess whether indemnities received on acquisition are assignable
  • reach settlement where prudent or, where possible, expedite the litigation to conclusion.

The vendor should consider ensuring that appropriate indemnities are contained within the loan sale documents in order to mitigate so far as possible the risk of becoming embroiled in litigation, in particular for any cause of action that post-dates the transfer of the loans. In contrast the purchasers may seek covenants in relation to co-operation and assistance from the vendor to mitigate the risk of any extant litigation or where there is litigation risk, (for instance a threat of legal action by the borrower). This should be resisted in order to avoid post disposal commitments.

A working example of such a commitment is in the event that it is necessary to formally prove the debt due for the purposes of court proceedings (for instance seeking summary judgment against the borrower) the purchaser may seek to insist on a vendor representative being nominated to assist with and if necessary swear affidavits confirming the debt post-sale/acquisition. Otherwise issues can arise pursuant to legislation such as the Bankers’ Books Evidence Act as demonstrated by the decisions in Bank of Scotland v Stapleton [2012] IEHC 549 and Ulster Bank v Dermody [2014] IEHC 140.

The future for debt sales

The issues covered in our three-step overview of successful debt disposal are part of a new and rapidly evolving landscape in this jurisdiction. Interested parties should pay close attention so that they are updated on live issues. It is prudent to seek appropriate professional advice in relation to transactions involving the sale or acquisition of debt. We will be happy to discuss any questions you may have.