By government order promulgated on 4th May 2017 (the Order)1, France has adopted new rules providing a solid foundation for the granting of guarantees and security interests directly in favour of a security agent designated by creditors, while ensuring that any such security, as well as the proceeds of enforcement thereof, is protected from competing claims by the personal creditors of the security agent.
The main points covered by the Order are as follows:
- Any guarantee or security interest may be obtained, registered, administered and enforced by a security agent, who acts in its own name for the benefit of the creditors of the guaranteed or secured obligation. The security agent is the title owner (titulaire) of such guarantees and security interests, and the rights and assets acquired by the security agent in carrying out such functions form separate property allocated thereto, distinct from the security agent’s own property.
- The agreement designating the security agent must mention the capacity in which the security agent is designated, the purpose and the term of such designation and the scope of the security agent’s powers. The security agent must identify itself as such when acting in such capacity.
- The security agent may exercise any action necessary in order to defend the interests of the secured creditors, including filing claims in insolvency proceedings.
- Any assets and rights acquired by the security agent in the exercise of its functions may not, except in the case of fraud, be attached except by creditors whose claims result from the holding or administration of such assets and rights. The opening of insolvency proceedings against the security agent has no effect on the property allocated to the exercise of such functions.
- Even if there are no specific contractual provisions relating to its replacement, in the event that the security agent fails to comply with its obligations, jeopardises the interests confided in it or is the subject of insolvency proceedings, any of the creditors benefiting from the relevant guarantees or security interests may bring an action before a court requesting the designation of a temporary security agent or the replacement of the security agent. Any replacement of the security agent, whether by contract or by such action, results automatically in the transmission of the relevant property to the new security agent.
- The security agent is liable, on its own property, for any fault committed in the exercise of its functions.
The Order is codified as new Articles 2488-6 to 2488-12 of the French Civil Code, and Article 2328-1 is abrogated. The Order will enter into force on 1st October 2017. Prior to this Order, the sharing of security in syndicated financing transactions was governed by various principles and regimes, which did not provide a fully satisfactory framework for creditors.
Under traditional French law analysis, guarantees (other than “autonomous” guarantees) and most security interests are considered to be ancillary (accessoire) to the obligations which are guaranteed or secured thereby. It followed that, in a syndicated financing transaction, such guarantees or security interests subject to French law were required as a technical matter to be granted directly to each of the lenders or hedging providers individually and that, even if such finance parties designated a security agent for logistical purposes such as execution of documents or taking action to protect or enforce the rights of the finance parties, changes in the composition of the financing group could require amendments to the documentation and/or new perfection measures.
In several legal systems, similar issues have historically been dealt with by the designation of a security trustee who actually holds legal title to security interests (and the proceeds of enforcement thereof) granted directly to such security trustee as the legal title owner thereof but held for the benefit of the finance parties as beneficiaries of the security trust and beneficial owners of such security. Changes to the composition of the Finance Parties therefore do not require changes to the security documents since the security trustee remains the legal title holder thereof. Moreover, since such security is held on trust, personal creditors of the security trustee are not entitled to satisfy their claims against the trust property, and in the event of insolvency of the security trustee, such trust assets are not available to distribute to creditors of the security trustee, they remain impressed with the trust for the benefit of the secured lenders.
Until promulgation of the Order, France lacked a simple and reliable mechanism which provided similar advantages to such a structure for French law guarantees and security interests. Where the underlying finance documentation was governed by English or New York law, the practice developed of providing for “parallel debt”, i.e., independent and separate debt identical in tenor and amount to that owed to all of the finance parties but which is owed directly and solely to the security trustee. Amounts paid in respect of the debt owed to the finance parties decreases the amount of the parallel debt and vice versa, so that if either the underlying obligations to the beneficiaries or the parallel debt is reduced, the corresponding debt is also reduced so as to prevent double recovery from the obligor of the same debt. The French law guarantees and security interests were then granted directly to the security trustee to secure such “parallel debt” rather than the obligations owed to the finance parties themselves.
The validity of the parallel debt structure was validated by the French Cour de Cassation (the highest French court for civil, commercial, labour law and criminal law matters), in the seminal Belvédère case in 20112, in which the court recognised the rights of a trustee designated under a New York law bond issue to file creditors’ claims directly in the insolvency proceedings of a French guarantor and also recognized the ability of a security agent to file creditors’ claims based on the parallel debt created pursuant to the New York law documentation. In both cases, the court deferred to New York law as to the legitimacy of the designation of the trustee and the creation of the parallel debt, rather than applying French law to such issues.However, this did not mean that a similar analysis would be adopted if the financing documentation itself were governed by French law.
Prior to adoption of the new Order, several attempts had been made under French domestic law to develop a mechanism that permits security to be granted in syndicated secured credit transactions directly to a single party for the benefit of all of the Finance Parties while also protecting such Finance Parties against potential competing claims by the ordinary commercial creditors of such party, but these were either too complex or not entirely adequate.
A law of 19th February 20073 created the fiducie, an arrangement under which one or several parties could transfer assets, rights or security interests, or an ensemble of assets, rights or security interests, present or future, to one or several fiduciaries (fiduciaries) who, holding them separately from their own property, would manage such assets, rights or security interests with a defined objective for the benefit of one or several beneficiaries, while providing that the opening of insolvency proceedings against the fiduciaire did not affect the fiduciary property (patrimoine fiduciaire), and that with limited exceptions, the fiduciary property could not be attached other than by creditors whose rights arose out of the actual administration of the fiduciary property. While this theoretically provided a good mechanism for permitting security to be held by a single entity for the benefit of all of the finance parties in a syndicated credit transaction, while protecting such beneficiaries from competing claims by the ordinary commercial creditors of such entity, the fiducie is a complex structure which requires registration with the tax authorities, publication in certain instances and filing with a national register of fiducies.
A separate provision of the French Civil Code, Article 2328-1, was also added in 2007 and subsequently amended in 2008, which provided that any security interest could be created, registered, administered and enforced for the benefit of the creditors of the secured obligation by a person whom they designate for such purpose in the instrument setting forth such obligation. The intention was clearly to create a regime similar to that of the “security agent” under Anglo-American practice, but there remained a number of issues insufficiently dealt with in such provision. Guarantees, as opposed to security interests, were not covered by the article, the requirement that the designation occur in the document actually creating the debt meant that transactions with multiple layers of debt might be compromised, and the article failed to specify whether beneficiaries of the security were shielded from claims of ordinary commercial creditors.
Faced with continuing uneasiness over the scope of the existing provisions, the French Parliament adopted legislation in December 2016 as part of an omnibus law on the economy, entitling the government to adopt measures modifying Article 2328-1 in order to deal with such open issues4. By adopting the Order, the government has finally resolved such issues in a manner likely to satisfy both the banking and the legal community.
The new language thus extends the concept of security agent to guarantees as well as security interests, permits such designation to be made in any document, not just in the document creating the secured obligation, and provides specifically that the security agent is the actual owner of such guarantees and security interests but that any assets or rights acquired thereby form distinct property (a concept known under French law as patrimoine d’affectation), thereby shielding the secured assets and rights from claims of the personal creditors of the security agent, including in the event of the opening of insolvency or bank resolution proceedings being opened in respect of the security agent. While recognising the ability of the beneficiaries to provide by contract for the replacement of a nonperforming security agent or one subject to financial difficulties or in respect of which insolvency procedures have been commenced, the new language also creates a legal right to request a court to order such replacement, ensuring that in such case the benefit of the security will pass automatically to the new security agent.