A Q&A guide to finance in France. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge clauses, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
During the last 12 months margins have increased in the lending market and the terms of lending (in the documentation) are now much less favourable to borrowers. The global financial crisis has led to:
Reduced credit available in the lending market.
Loan terms being reduced.
French law distinguishes between immovable and movable property. The following fall under the definition of real estate:
Immovable property, such as land or buildings on land.
Movables attached to immovable property, including:
fruits on trees;
animals used for exploitation.
The most common forms of security are outlined below.
Mortgage (hypothèque conventionnelle). This is a non-possessory security interest giving, among others, the secured creditor a preference right over the proceeds resulting from the disposal of the secured property. In certain circumstances, a mortgage can take the form of a rechargeable mortgage (hypothèque rechargeable), that is, a mortgage that can be used to guarantee loans other than the initial amount borrowed.
Lender's lien (privilège du prêteur de deniers). A lender's lien is also a non-possessory security interest giving, among other things, the secured creditor a preferential right over the proceeds resulting from the disposal of the secured property. A lender's lien is less expensive than a mortgage as it requires fewer formalities (see Question 34). Therefore, it is usually preferred to a mortgage. However, a lender's lien is also less flexible, as it must be in the French language and governed by French law, while the underlying mortgage loan agreement can be in another language and governed by any acceptable law.
Gage immobilier (previously antichrèse). This is a type of mortgage where a secured creditor takes physical possession of the property (including the proceeds resulting from its realisation). The gage immobilier also gives the secured creditor the right to receive revenue from the property. The creation of this security generally involves the leaseback of the secured property by the secured creditor to the borrower (pledgor), to allow the borrower to stay in possession of the property.
Unlike a mortgage, a gage immobilier gives the secured creditor a right of retention (droit de retention), which allows him to keep the asset until the full payment of the debt. However, this right of retention is not enforceable against third parties who have registered their security (that is, a mortgage) before the registration date of the gage immobilier. The gage immobilier is not really used in practice.
The following formalities apply.
Mortgage and rechargeable mortgage. A mortgage must be executed by a notarised deed. The notarised deed must also state a maximum secured amount or the mortgage will be void. The deed must be in French. However, unlike a lender's lien, the underlying mortgage loan agreement may be in English and governed by any acceptable law.
To be enforceable against third parties, a mortgage must be registered in the local land registry. However, no legal deadline for a mortgage registration is specified. A mortgage ranks from the date of its registration in the local land registry. The creditor must renew registration of a mortgage either:
At the latest, one year after the last maturity date (échéance) stated in the registration (the duration of a mortgage cannot exceed 50 years).
Where no maturity date is stated, at the latest 50 years after the registration date.
Lender's lien. A lender's lien must be executed by a notarised deed. In addition, the lien must be in French and governed by French law. To be enforceable against third parties, the lien must be registered in the local land registry within two months from the date of the related sale agreement (Article 2379, French Civil Code (Civil Code)). The lien will then rank from the date of execution of the sale agreement.
Gage immobilier. Like a mortgage, a gage immobilier must be created by a notarised deed. To be enforceable against third parties, the notarised deed must be published in the local land register.
Tangible movable property comprises, among other things:
Materials.
Furniture.
Animals.
Inventory.
The most common forms of security granted over tangible movable property are the:
Privilege (privilèges). This is a statutory security benefiting certain creditors (for example, the French tax administration benefits from a general privilege over the assets of taxpayers).
Possessory or non-possessory pledge (gage avec ou sans dépossession). Both types of pledge give the secured creditor a right to retain property.
Retention of title (propriété retenue à titre de garantie ou clause de réserve de propriété). See Question 11, Retention of title.
Charge over business as a going concern. This covers certain business assets (although not, for example, inventory). For more details, see Question 7, Common forms of security.
The following formalities must be complied with:
Privilege. No formalities generally apply, although there are exceptions. For example, the tax privilege (privilèges fiscaux) must be registered on a public register held by the clerk of the competent court's office in certain circumstances.
Possessory or non-possessory pledge (Article 2333 et seq, Civil Code). Pledges must:
be in writing;
specify the amount of the secured debt.
To be enforceable against third parties, the requirements differ, depending on the type of pledge:
non-possessory pledge: this must be registered on a specific register held by the clerk of the competent court's office;
possessory pledge: the secured asset must be transferred to the secured creditor or a third party to hold the asset on the creditor's behalf.
Financial instruments are defined as (Article L. 211-1, Financial and Monetary Code):
Financial securities (titres financiers).
Financial contracts (contrats financiers).
Financial instruments include, for example, shares and debt securities (in dematerialised form only and represented by book-entries).
The most common forms of security over shares are a:
Pledge over shares (nantissement de parts sociales).
Pledge over financial securities account (nantissement de comptes-titres).
Creation and perfection requirements differ, depending on the corporate form of the company whose shares are pledged.
Pledge over shares. This can be created through either a:
Société civile immobilière (SCI). An SCI is a civil company which has a separate legal identity distinct from its members and has no minimum capital requirement; it is often used to hold real estate assets. A pledge is created in writing by a notarised deed or by a private contract. Its perfection requires:
registration of the pledge agreement (if it is a private contract) with the French tax authorities;
notification in writing by a bailiff to the company if entered into under a private contract or acceptance of the pledge by the civil company in a notarised agreement (Article 1866, Civil Code); and
registration of the pledge agreement with the clerk of the competent commercial court (greffe du Tribunal de Commerce) (Article 53 et seq, Decree No. 78-704 of 3 July 1978 (as amended and reinstated)). The competent commercial court is determined by the company's registration (Decree No. 2006-1804 of 23 December 2006).
Société en nom collectif (SNC) or a société à responsabilité limitée (SARL). SNCs are partnership companies in which all the partners are jointly and severally liable for all the debts of the company. SARLs are limited liability companies which have separate legal identities and no minimum capital requirements; they are often used for small and medium-sized businesses. A pledge must be created in writing by private deed (acte sous-seing privé) rather than a notarised deed. Its perfection requires publication of the pledge in a special register, held by the competent commercial court's clerk.
Pledge over financial securities account (Articles L. 211-20 et seq, Financial and Monetary Code). This can be created through either a:
Société anonyme (SA). An SA is a limited liability company and the most commonly used structure for large businesses in France. A pledge is created by pledging the financial securities account (nantissement de compte-titres). The relevant shares are transferred by a written act to a special account, opened in the debtor's name (this account must be opened in the corporate books held by an authorised intermediary, depository or the issuing company itself). The statement of pledge (déclaration de nantissement de compte-titres), signed by the debtor, constitutes the pledge which is enforceable against third parties, including other creditors.
Société par actions simplifiée (SAS). An SAS is a highly flexible structure which is much used in practice, whose shares are held in a dematerialised financial securities account. A pledge is created using the same method as an SA (see above).
The custodian or account holder issues a certificate of pledge (attestation de gage) to the creditor.
Claims and receivables could include, for example, debts or monetary rights under contracts (security granted over cash deposits are covered in Question 6).
The most common forms of security over claims and receivables are:
A pledge of receivables (nantissement de créances) (Articles 2355 to 2366, Civil Code). A pledge of receivables can secure a present or future debt. For future debts, the pledge agreement must identify the debts or contain elements which enable their identification. Specific provisions apply where the pledged receivable matures before the maturity of the debt claim against the debtor.
A Dailly assignment of receivables by way of security (cession de créances professionnelles à titre de garantie) (Articles L.313-23 et seq, Financial and Monetary Code). An assignment of receivables can only secure finance granted to the assignor. It cannot secure a third party's obligations. The assignee must be a licensed bank or credit institution. This can include a foreign bank, provided it is an EU-authorised credit institution. The assignment can cover one or several debts. The debt can be existing, contingent or future, provided it can be sufficiently identified (which usually means that it must arise out of an existing agreement). Finally, it is not required that the assigned debt must be a "professional debt" (that is, incurred in a business context) except if the assigned debtor is an individual (personne physique).
The following creation formalities apply:
A pledge of receivables. A pledge must be executed in writing and is enforceable against third parties from the date of its execution. The pledge only becomes enforceable against the relevant debtor on notification of the pledge to the debtor.
A Dailly assignment. An assignment is created by an assignment deed (bordereau) delivered by the assignor to the assignee and listing the relevant claims (including the type and amount). The bordereau must expressly refer to the relevant articles of the Financial and Monetary Code and include specific provisions required by law. The assignment becomes enforceable against third parties (including the assigned debtor) from the date of the bordereau.
There are no registration formalities.
The most common forms of security over cash deposits are:
Cash collateral agreement (gage-espèces).
Pledge over bank account (nantissement de solde de compte bancaire).
In a cash collateral agreement, the parties agree to transfer the secured amount (cash) to an account that is created/opened in the name of the creditor.
Since the secured asset (cash) is fungible in nature, the secured creditor has full ownership (pleine propriété) of the cash. Therefore, the creditor can use the money on the condition that it will return the same amount when the secured debt is paid. If the secured debt is not paid, the secured creditor can enforce its security by way of set-off (compensation) between the secured debt and its own restitution debt (créance de restitution).
Although cash collateral does not fall within any specific category under the Civil Code, French jurisprudence has adopted a pragmatic approach through which its effectiveness has been confirmed.
However, the Ordinance of 23 March 2006 significantly reformed the law of security rights and guarantees. The Ordinance has raised questions as to whether a number of its provisions, such as those relating to security over tangible movable assets (Gage de meubles corporels), may be applicable to cash collateral agreements (see Question 3).
For a pledge over bank account, see a pledge of receivables in Question 5, Common forms of security.
Intellectual property includes:
Patents.
Trade marks.
Copyright.
Designs.
It is possible to grant a pledge over patents, software, trade marks, and designs and models. Intellectual property rights may also be covered by a general business charge (nantissement de fond de commerce). The general business charge is not a floating charge. It covers the following:
Professional equipment and machinery.
The trade name and logo.
Patents, trade marks, licences, goodwill and lease rights (droit au bail), which may be specified generically.
It does not cover estate property, stocks, inventory, receivables and accounting books.
Pledges over intellectual property rights must be executed in writing and are enforceable against third parties once they have been both:
Registered with the national trade marks and patent authority (Institut National de la Propriété Industrielle).
Published in the official bulletin of industrial properties (Bulletin officiel de la propriété industrielle).
A general business charge must be executed in writing and registered within 15 days of the execution of the pledge:
With the French tax authorities.
At the Trade and Companies Registry (Registre du Commerce et des Sociétés).
Failure to comply with registration requirements makes the security void. The creditor must renew the registration after ten years.
Subject to certain conditions, future assets can be subject to security. These include:
Securities and financial instruments.
Future receivables.
Buildings under construction and new constructions.
Ships and aircraft.
Films and other assets.
Order No. 2006-346 dated 23 March 2006, which reformed the French security regime, facilitates creation of security over future assets (such as movables or receivables), depending on whether they are sufficiently determinable and specific. Where they are, the creditor acquires a right over them at the date when the assets come into existence. Where they are not, the assets must be charged separately under a covenant, typically included in the relevant security document, when they are specified and determined. However, this may involve bankruptcy preference risks, compliance risks and additional costs.
Fungible assets can be subject to a possessory or non-possessory pledge. The secured creditor must keep fungible assets that are subject to a possessory pledge separate from its assets of the same nature. The pledgor can dispose of fungible assets that are subject to a non-possessory pledge provided that both:
The disposal is expressly authorised under the relevant pledge agreement.
The pledge agreement provides for a replacement by the pledgor of those fungible assets by equivalent assets.
A pledge over third parties' assets will be declared void (Article 2335, Civil Code).
There is no specific mechanism for releasing common forms of security. However, a distinction can be made between registered and unregistered security.
Generally, a release of security is carried out between the parties. A release letter is sent by the security agent (or creditor) to the debtor. The purpose of the release letter is to inform the debtor that:
The security is unconditionally and irrevocably released.
He is discharged from all his obligations under the security agreement.
If the secured asset involves a third party, additional formalities may be required. For example, in the case of a pledge over financial instruments account, a copy of the release letter must be submitted to the company so that the released pledge can be recorded in the company's:
Share transfer register (registre des mouvements de titres).
Shareholders register (compte d'actionnaire).
For a registered security (such as charge over a business or pledge over intellectual property), the security is also struck off the Trade and Companies register (radiation).
It is not common practice to take security over the shares of an SPV set up to hold certain of the debtor's assets. The preferred route of lenders is to take security over assets to avoid structural subordination, subject to corporate benefit and financial assistance rules (see Question 14).
Sale and leaseback is common in France. It involves a company that owns equipment or other industrial or commercial assets selling the assets to a leasing company, which then immediately makes it available to the company through a leasing transaction. There is currently no jurisprudence to suggest that this type of transaction would be recharacterised as a security transaction.
Factoring is common in France. It is achieved by contractual subrogation (subrogation conventionnelle). A factor undertakes to pay off the creditor's receivables, which subrogates the factor in all its rights up to the amount paid. On payment, the receivables and title (ownership) to them are transferred to the factor. The factor is only entitled to recover the amount paid to the creditor for the receivables. The creditor must send the factor a valid subrogation receipt (quittance subrogative) on the payment date. There is currently no jurisprudence to suggest that this type of transaction would be recharacterised as a security transaction.
A finance company purchases an asset on a buyer's behalf and then leases the asset to the buyer. During the repayment period the buyer has the possession and use, but not the title, of the asset. The title passes to the buyer only on the full repayment of the loan. There is currently no jurisprudence to suggest that this type of transaction would be recharacterised as a security transaction.
Retention of title (clause de réserve de propriété ou propriété retenue à titre de garantie) (Articles 2367 et seq, Civil Code) allows a seller to retain the title to assets delivered to the buyer until the buyer pays the price in full. The retention of title must be in writing. No other formalities apply. Since the security reform of 2006, retention of title is expressly recognised under the Civil Code as a new type of security (Article 2329-4°, Civil Code) which is particularly efficient in insolvency proceedings.
There are no other quasi-security structures used in France.
Negative pledge clauses are standard provisions in finance documentation. The aim of this covenant is to ensure that the borrower does not give security over its assets to future lenders and therefore to preserve the borrower's assets and future revenues.
Generally, negative pledge provisions prohibit borrowers from encumbering their assets through the creation of liens, mortgages or other encumbrances. However, a negative pledge covenant does not create a security interest as a matter of law.
Two types of guarantee are commonly used:
Guarantee (cautionnement). The cautionnement is an undertaking by an individual or legal entity (guarantor) to pay a creditor the borrower's debt if the borrower fails to do so. Its effects depend on whether the undertaking is:
several, in which case the guarantor is not required to pay until the creditor has unsuccessfully enforced its claim against the borrower; or
joint and several (cautionnement solidaire) (in practice, the most frequent type of guarantee), in which case the creditor can choose whether to enforce its claim against either the guarantor or the borrower.
First demand guarantee (garantie à première demande or garantie autonome). Under a first demand guarantee, the guarantor's undertaking is independent of the borrower's debt to the creditor. A separate agreement must be executed to document the first demand guarantee which will be independent from any obligation of the borrower under the credit agreement. No particular cost is involved in drafting the first demand guarantee. However, if the guarantee is drafted in English, an officially sworn translator must translate it into French before it is submitted as evidence in any action or proceeding before a French court or public body.
Joint stock companies (including SAs and SASs) must not provide financial assistance in the form of advances, loans, guarantees or security to facilitate the subscription or purchase of their own shares by a third party (Articles L. 225-216, Commercial Code). Financial assistance by a joint stock company in favour of its parent or holding company is therefore, generally, impossible. There are minor exceptions in favour of banks and employees. For example, the arm's length transactions of a bank or the acquisition of the company's shares by employees under a specific employees' scheme are exempt.
No whitewash proceedings are available.
Financial assistance prohibitions do not apply to partnerships for non-commercial purposes (including SCIs), general partnerships (SNCs) or limited liability companies (SARLs). However, corporate benefit rules apply to any type of commercial company or partnership (see below, Corporate benefit).
Where a director grants a guarantee which creates an obligation for another person's debt, this may be deemed an abuse of the company's corporate assets (abus de biens sociaux) and trigger criminal liability. More specifically, up- and cross-stream guarantees may be prohibited as a misuse of corporate assets or credit. However, according to case law, a company can grant a security interest to secure the obligations of another company in the same corporate group, provided the following conditions, among others, are met:
The company must enter into the transaction to further its economic, social or financial interests within the framework of a common policy defined for the group as a whole.
The financial commitments must be given in return for consideration and not disturb the balance between the respective commitments of the companies involved.
The financial commitments undertaken must not exceed the company's financial capabilities to fulfil these commitments.
Company loans to directors (administrateurs) are prohibited and, where granted, void. However, loans granted to a director which is a company (personne morale) are authorised (the relevant rules for an SA are contained in Articles L. 225-43 and L. 225-91 of the French Commercial Code).
Usury rules, restricting the rate of interest, no longer generally apply. The Law dated 1 August 2003 (initiative économique) abolished the usury rate for all loans granted to a company which carries out industrial, commercial, craft, agricultural or professional activities except in relation to interest charged on an overdraft (Article L. 313-5-1, Financial and Monetary Code).
For an SA, an issue of a security or guarantee requires the prior authorisation of the board of directors (Article L. 225-35, Commercial Code). The lack of authorisation invalidates the issue and the board cannot ratify the issue retrospectively.
Regulated agreements (conventions réglementées) usually require the prior authorisation of the board of directors (Article L. 225-38, Commercial Code). A regulated agreement is entered into between a company and either:
One of its directors or general managers (whether an individual or a legal entity).
An enterprise where the director or manager is also a partner, manager or the owner.
Without authorisation, the security or guarantee may be void if it prejudices the company (Article L. 225-42, Commercial Code). This also applies to contracts in which the director or manager has an indirect interest, whether it is issuing the security or guarantee directly or through another person or entity.
For a SARL, regulated agreements are subject to the subsequent oversight of the partners (Article L. 223-19, Commercial Code), unless the agreements are concluded on an arm's-length basis (conditions normales). No prior authorisation is required. However, when there is no statutory auditor (commissaire aux comptes) in the SARL, regulated agreements concluded with a manager (gérant) who is not a partner must be subject to a prior authorisation.
For French civil companies that are economically active (for example, SCIs), regulated agreements are also only subject to the subsequent oversight of the partners (Article L. 612-5, Commercial Code).
A lender may be liable for environmental damage under the general civil law. For example, it may be liable for clean-up costs if it owns, or controls the company that owns, the affected land. However, Council Directive 2004/35/CE on environmental liability with regard to the prevention and remedying of environmental damage excludes a lender's responsibility for environmental damage caused by the borrower, provided the lender does not interfere with the operation and management of the borrower. The Directive has been implemented by:
Law No. 2008-757 of 1 August 2008. In relation to Article 12, order No. 2009-229 of 26 February 2009 is applicable.
Decree No. 2009-468 of 23 April 2009.
A lender that takes possession of secured land (for example, following enforcement of a share pledge or a mortgage under a pacte commissoire (see Question 23)) may become a direct owner, or shareholder, of a company holding classified facilities (installations classées), or assets or operations, which have caused environmental damage. If a lender becomes a direct owner or shareholder, it will be liable for environmental compliance and clean-up costs, provided it is also the operator of a classified facility.
However, a lender can incur liability for past environmental damage to third parties only if it became the universal successor to the legal entity that caused the damage. Becoming a shareholder of a company holding classified facilities or assets or operations which have caused environmental damage would not generally trigger environmental liability. The only exception is if the company is fictitious (that is, it has no real activity or the shareholder acts as if in fact it operated the business), in which case the corporate veil may be pierced and the shareholder may be held liable. The shareholder may also incur indirect liability through the loss in the company's value.
Some creditor claims are subordinated under statute, for example:
Participating loans.
Subordinated bonds.
Super-subordinated bonds.
In addition, creditors can contractually agree to subordinate their claims to some or all creditors on the borrower's insolvency.
Contractual subordination of debt is usually achieved by inter-creditor arrangements and contractual turnover provisions. The contractual subordination provisions are only enforceable between the parties. They do not, therefore, give the senior creditor a proprietary claim and the senior creditor may need to take legal action to protect the subordination regarding the payment of realised proceeds on insolvency (see Question 24). From 1 March 2011, subordination agreements will be taken into account in safeguard or rehabilitation plans under Law No. 2010-1249 of 22 October 2010 on banking and financial regulation, which reforms a part of the safeguard procedure (procédure de sauvegarde) (see Question 24, Available rescue procedures).
Structural subordination is possible and can be combined with contractual subordination if needed. The aim of a structural subordination is to subordinate the ranking of creditors into a structure.
This form of subordination is different from contractual subordination because the creditors have two different debtors (the intermediary holding and the acquisition holding).
For example, in a leveraged buy-out (LBO) transaction, putting such a structure in place can lead to the creation of an intermediary holding, which gathers a certain type of creditors together. The acquisition holding then becomes a subsidiary of the intermediary holding.
This structure creates a structural subordination between the creditors of the intermediary holding and the creditors of the acquisition holding (banks).
A secured creditor can also agree to subordinate its security ranking to another secured creditor (cession d'antériorité) by entering into a subordination agreement. This agreement is only enforceable between the parties.
Secured debt is traded in France. The most common transfer mechanisms for a sale of the debt are:
Novation under Article 1271 et seq of the Civil Code. A transfer by novation will not invalidate the security if the creditor expressly reserves the security (Article 1278, Civil Code) and guarantees (Article 1281, French Civil Code) attached to the secured debt.
Assignment of rights under Article 1689 et seq of the Civil Code. A transfer must be notified to the debtor (if the debtor is French) in prescribed form by a bailiff. Lack of notice makes the transfer unenforceable against third parties. Costs of bailiff notification are nominal.
Security interests are automatically transferred with the debt, transferred in accordance with Article 1692 of the Civil Code. Therefore, an assignment will be valid against the assignor's creditors without the need for any registration in respect of the transfer of security.
Sub-participation is also used to trade debt in France. However, a sub-participant does not become a direct legal owner of the acquired debt.
The agent concept is recognised in France and is commonly used in syndicated loans.
French courts have recognised the effects of a trust between parties and, to a certain extent, its enforceability against third parties, regardless of the trust assets' location (that is, whether in or outside France) or the settlor's nationality. In these circumstances, it seems that the trust is considered to be vaild provided that it is not contrary to French public order (ordre public).
In the recent case of Belvédère (13 September 2011), the French Supreme Court recognised the effects of a trust and a parallel debt structure, both governed by New York law, in the context of French insolvency proceedings.
In this famous restructuring case, the main issue considered by the court related to the filing of the proof of claim by a foreign security trustee and by two foreign banks acting as security agents through a parallel debt mechanism, within French recovery proceedings.
The court upheld their proof of claim, finding that:
The filing of claims must be made under the French insolvency law applying Article 4 of EC Regulation 1346/2000 on insolvency proceedings (Insolvency Regulation).
The question of whether the trust agent acted as the owner of the receivables can be determined by ascertaining the choice of law in the contract under which the receivables were created: in this case, New York state law.
A parallel debt mechanism governed by a foreign law is not contrary to French international public law, provided the mechanism does not lead to a double payment for the debtor.
There is no reported case concerning what would happen where a foreign security trustee acts under foreign law in relation to assets in France and then later becomes insolvent.
France has not ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985.
The use of a security agent (which is not part of the concept of the French trust (fiducie) (see below, Fiducie), is allowed. A security in rem can be entered into, registered, managed and enforced on behalf of the creditors of a secured obligation by any person that is designated for this purpose by the relevant creditors under the agreement acknowledging the obligation (Article 2328-1, Civil Code).
Under a fiducie, one or more settlor(s) transfers property, rights or security, or a group of properties, rights or security, which already exist or will exist, to one or more trustee(s), who must both (Articles 2011 et seq, Civil Code):
Hold this property separately from their property.
Act in accordance with a designated objective for the beneficiaries' benefit.
A fiducie can be used for security purposes (Articles 2372-1 et seq, (for movable assets)and Articles 2488-1 et seq (for immovable assets), Civil Code). A fiducie used for security purposes can take the form of a rechargeable trust (fiducie rechargeable), which permits the same collateral to secure other present or future debts, provided that this is stated in the fiducie contract.
The French fiducie is different from the English trust in several aspects. The role of trustee is restricted to credit establishments, investment companies, insurance companies and certain categories of institution (such as the Public Treasury or National Bank (Banque de France)) and lawyers. The settlor and trustee must be residents of either:
The EU.
A country which has concluded a double taxation treaty with France containing an administrative assistance clause.
There are no particular restrictions on who can be a beneficiary of a French trust. The French trust is subject to a specific tax regime.
Insolvency proceedings against the trustee (fiduciaire) will have no effect on trust assets (Article 2024, Civil Code).
France does not have a universal corporate security document which covers all assets generically and future assets. It is therefore legally necessary to execute separate security documents for each type of security asset and interest.
Loan agreements must:
Comply with French principles relating to the validity of contracts.
Indicate, in writing, the (Article 1905 et seq, Civil Code and Article L. 313-2 et seq, Consumer Code (Code de la Consommation)):
conventional interest rate (taux d'intérêt conventionnel);
effective global rate (taux effectif global).
Additional mandatory rules exist for loans to consumers.
Security can only legally be enforced if the borrower has failed to meet a payment obligation under the relevant agreement (for example, the loan agreement). First, a secured creditor must summon the relevant borrower to make the outstanding payment (sommation de payer). If the borrower does not pay within the period specified in the summons, the secured creditor can start enforcement proceedings.
The following rules apply to the enforcement of guarantees:
Guarantees. When the borrower fails to perform the contract, the creditor can ask the guarantor to pay the debt. In the case of a several guarantee, the creditor must first bring its claims against the borrower. In the case of a joint and several guarantee (which, in practice, is the most frequent type of guarantee), the beneficiary can choose whether to bring its claims against either or both of the guarantor and the borrower. However, the guarantor may rely on all defences available to the borrower relating to the debt (for example, set-off, invalidity of the debt), except for defences that are purely personal to the borrower.
First demand guarantees. The guaranteed creditor can ask the guarantor to pay at first demand a certain sum without any reference to the amount due and unpaid by the borrower. Unlike with a guarantee, the first demand guarantor cannot raise defences relating to the debt.
See Question 13.
French law provides for three types of enforcement proceedings:
Public sale (vente publique). This is where the secured creditor is paid out of the proceeds of the public sale.
Judicial foreclosure of the secured assets by the secured creditor (attribution judiciaire). This is where the secured creditor requests the court to attribute the secured assets as payment of the secured liabilities.
Contractual attribution of the secured assets to the secured creditor (pacte commissoire). This is where the parties agree in the security agreement that title to the secured assets can be transferred to the creditor on the debtor's failure to pay. However, the pacte commissoire is not permitted for a pledge over stock or charge over the business as a going concern.
Three pre-insolvency procedures are available in France.
Special mediation (mandat ad hoc). This can be opened at the request of a borrower that is in difficulty but still solvent. At the start of procedure the court:
Appoints a special mediator (mandataire ad hoc). The initial appointment is usually for three months but it can be renewed for an unlimited duration. The mediator reports to the court, although these proceedings are private.
Determines the mediator's duties, which are often to facilitate an agreement between the borrower company and its creditors.
The borrower can specify the special mediator that it wishes to appoint.
Conciliation proceedings (conciliation). These proceedings are available to a company, which is solvent or has not been insolvent (cessation des paiements) for more than 45 days, but faces actual or expected legal, economic or financial difficulties. A company's solvency is determined by a cash flow test (that is, whether a company can meet its liabilities, as they fall due for payment, with its available cash and liquid assets).
The president of the competent court appoints a conciliator (conciliateur). The debtor may submit the name of a conciliator to the court's president. The conciliator's mission is to facilitate agreement between the company and its main creditors. The conciliation procedure cannot exceed four months, subject to a single one-month extension. Management of the company remains in the hands of its chairman and/or board. In principle, conciliation proceedings do not suspend judicial or legal proceedings. However, such proceedings are stayed on the court approval (homologation) of a settlement agreement. A significant advantage of a court-approved settlement agreement is the "new money" privilege under Article L. 611-1 of the French Commercial Code on insolvency (see Question 27).
Safeguard proceedings. The following safeguard proceedings are available:
Ordinary safeguard proceedings. Safeguard proceedings are public. They grant court protection, by appointing a safeguard administrator, to companies which are both:
in difficulty that they could not overcome without the proceedings;
not insolvent.
Safeguard proceedings aim to:
ensure that the company continues to operate as a going concern;
preserve employment;
reduce the company's debt.
Under safeguard proceedings, the company continues to manage its business, with possible assistance from a safeguard administrator. On opening safeguard proceedings, an observation period (that may last up to 18 months) begins, during which debt payment by, and enforcement of security against, the company are stayed. During the observation period, the company must propose a plan to its creditors (plan de sauvegarde). Creditor committees for financial institutions (including all entities with which the debtor has concluded an operation of credit (loan agreement) and trade creditors must be established for a company that has more than 150 employees or a turnover up to EUR20 million (as at 1 December 2011, US$1 was about EUR0.7).
A safeguard plan is now only subject to approval by a 67% vote by value of creditors sitting on the relevant creditors' committee (see above). (Order No. 2008-1345 of 18 December 2008 has removed the requirement of a 51% majority vote by number of creditors.) The plan can impose grace periods on certain debts, which generally last for up to ten years and require a minimum 5% payment each year, starting from the third year of the plan. Guarantors will be able to rely on the safeguard plan except when guarantors are companies. Where the creditors' committee votes to write off the debt and the plan is approved by the court, all creditors on the committee will be bound by the debt write-off. There are also specific provisions regarding writing off debt to public authorities. Law No. 2010-1249 dated 22 October 2010 on banking and financial regulation made some changes on the ordinary safeguard proceedings by clarifying and extending some rules relating to grace period payments, debt conversion in capital, and consultation of creditors (see below).
Accelerated financial safeguard proceedings. Law No. 2010-1249 dated 22 October 2010 on banking and financial regulation creates a new type of safeguard proceeding. It will come into force on 1 March 2011. This accelerated financial safeguard procedure intends to facilitate the restructuring of borrower companies which face financial difficulties but are still economically operational. It allows the borrower company to obtain court approval of an arrangement which has already been negotiated with its main financial creditors during the conciliation procedure. The new law gives a legal framework to the pre-existing practice of pre-pack in France. The draft arrangement is subject to the same voting rules as for the traditional safeguard proceedings (see above).
In addition to these proceedings, French courts can, under the Civil Code:
Defer, or otherwise reschedule, payment dates for up to two years, taking into account the debtor's financial position and the creditor's financial needs.
Decide that any rescheduled or deferred payments must bear interest at a lower (official) rate and that any payment made must first be allocated towards repayment of the principal rather than interest.
In theory, appointment of a special mediator does not stay judicial or legal proceedings. However, in practice, it does.
In conciliation proceedings, there is no suspension of judicial or legal proceedings. However, if an arrangement between the debtor company and its creditors is approved (homologué) or recorded (constaté), creditors that have signed the agreement cannot pursue the borrower (the borrower's guarantors may also benefit from the agreement's provisions) during the implementation of the arrangement for payment.
The opening of safeguard proceedings results in the following:
Security enforcement proceedings against the debtor are stayed. The stay prevents, for example, attachment orders, enforcement of security, acceleration of debt and registration of security interests and preferential rights. However, secured creditors benefit from the requirement that proceeds from the secured assets' sale (by the administrator) must be transferred into a special account.
A moratorium on debt service is imposed on secured debt.
The conclusion or enforcement of a pacte commissoire (see Question 23) is frozen.
The right of retention (droit de retention) under Article 2286-4° of the Civil Code (relating to non-possessory pledges) ceases to be enforceable during the observation period and the safeguard scheme.
Rehabilitation proceedings (redressement judiciaire) are used when the debtor is insolvent. These proceedings aim at ensuring the company's survival, the preservation of its activities and employment, and the discharge of its liabilities. The regime of rehabilitation proceedings is quite similar to the safeguard proceedings relating to constitution of creditor's committees and the adoption of a rehabilitation plan (see Question 24, Available rescue procedures).
The opening of rehabilitation proceedings (redressement judiciaire) has a similar effect to the safeguard procedure concerning payment of previous debts or suspension of individual action, but not for the guarantors (who cannot rely on the rehabilitation plan).
The opening of compulsory liquidation procedures (liquidation judiciaire):
Accelerates all claims and liabilities against the insolvent entity, including those that were not due and payable.
Enables secured creditors to enforce their security, provided the liquidator has not proceeded to realise secured assets within three months from the beginning of insolvency procedures.
Certain transactions can be set aside where a company goes into rehabilitation or liquidation proceedings (see below). This does not apply to safeguard proceedings (see Question 24).
Under insolvency laws, the following transactions can be declared void (Article L. 632-1, Commercial Code):
Any gratuitous act, including all forms of gifts or transactions for no consideration that result in a transfer of real or personal property.
Any bilateral contract, under which the borrower's obligations significantly exceed those of the other party.
Any payment, in whatever form, made in relation to a debt which has not yet become due for payment.
Any payment of due debt where the payment was made in a manner, other than by cash, bills of exchange (and the like), securities, wire transfer, assignment of debts under Law No. 81-1 of 2 January 1981 or any other mode of payment commonly recognised in business relationships.
Any deposit and consignment of money under Article 2350 of the Civil Code, unless made in accordance with a final and binding court decision.
Any mortgage or pledge over the borrower's assets, granted for existing indebtedness.
Any measure taken to protect a creditor's right unless the measure was taken prior to the date of cessation of payments.
Share options.
An assignment of goods or rights to a fiduciary patrimony (patrimoine fiduciaire), unless the assignment is executed to secure a debt, undertaken simultaneously with the assignment execution.
Any amendment to a fiduciary agreement (contrat de fiducie), which assigned goods or rights to a separate patrimony, to secure debts undertaken before the amendment.
The payments and transactions above must have been made during the suspect period (période suspecte). The suspect period starts at the date of cessation of payments and ends on the date on which the court orders the opening of insolvency proceedings. The suspect period cannot exceed 18 months. However, the suspect period for gratuitous acts can be extended by the court for an additional period of up to six months.
Repayment of due debts after the date of cessation of payments, and transactions for significant consideration (sales agreements) performed after that date, are voidable if a third party was aware of the cessation of payments. The court's decision is discretionary and the actual knowledge of the state of cessation of payment will be required. Mere knowledge of the insolvent company's financial difficulties will not suffice.
All notices from the tax authority (avis à tiers détenteur), attachments (saisie-attribution) and/or oppositions can also be declared void when they are delivered or made by a creditor after the date of the cessation of payments, provided the creditor (or tax authority) was aware of the cessation of payments.
Council Directive 2002/47/EC on financial collateral arrangements (as implemented by order No. 2005-171 of 24 February 2005 and Decree No. 2005-875 of 25 July 2005 and recently updated by order No. 2009-15 of the 8 January 2009 relating to financial instruments) could have an impact on any avoidance provisions involving financial collateral. A financial arrangement concerning a relevant financial obligation will be legally enforceable and binding on third parties even on insolvency.
On the borrower's insolvency, the order of repayment is the following:
Statutory claims, such as:
employees' claims under super privilege (claims incurred in the last 60 previous working days);
legal expenses incurred for conducting insolvency proceedings;
tax claims;
debts secured by the new money privilege (in case of conciliation). New money providers who make credit available within the terms of the court-approved arrangements for the purposes of ensuring the continuation of the company's business during the conciliation period will have priority to claims of creditors which arose prior to the date of the opening of the conciliation proceedings, if the company is subsequently placed into rehabilitation proceedings, preservation proceedings or judicial liquidation (new money privilege).
Preferential debts for specific and limited purposes, undertaken after the order commencing the insolvency proceedings. However, preferential debts do not rank above the following security interests in case of liquidation proceedings:
retention rights over movable property;
security interests over immovable property (for example, mortgage);
pledges over professional equipment and machinery.
Secured creditors. However, creditors benefiting from a right of retention (see above), retention of title clauses and creditors to whom the debtor assigned its business debts under the Dailly law can enforce their rights irrespective of insolvency proceedings and the claims above. (This does not apply to creditors benefiting from the right of retention under Article 2286 of the French Civil Code, relating to non-possessory civil pledges, which cannot be enforced during the observation period and the safeguard plan.)
Unsecured creditors. Pari passu is a fundamental principle of French insolvency law. This means that all creditors of a particular class, including unsecured creditors, must be treated equally and participate in the distribution of proceeds from the debtor's assets in proportion to their claims.
Subordinated creditors. Creditors can agree to subordinate their claims but contractual subordination will only be enforceable between the parties to the subordination agreement. However, from 1 March 2011, subordination agreements will be taken into account in safeguard or rehabilitation plans under Law No. 2010-1249 of 22 October 2010 on banking and financial regulation, which reforms a part of the safeguard procedure (see Question 24, Available rescue procedures).
If more than one creditor holds the same security interest over the same asset, priority between them is determined either by execution date of the security agreement (for example, for a pledge of receivables under Articles 2335 et seq of the Civil Code) or the registration date of the security interest (for example, for a mortgage).
If a security has not been validly perfected, the security holder will rank as an unsecured creditor on the borrower's insolvency.
There are no restrictions on granting security to foreign lenders.
For a Dailly assignment of receivables, the creditor must be either a French credit institution or an EU credit institution authorised to carry out cross-border banking activities under Council Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions (European Passport Directive) (Réponse ministérielle of 27 January 2003).
The general principle is the freedom of financial relationships between France and foreign countries. However, payments between French and foreign residents that exceed specific thresholds must be disclosed (obligation de déclaration) for statistical purposes (Article R. 152-1 et seq, Financial and Monetary Code). Further, certain categories of foreign investment (for example, the acquisition by a foreign company of more than 33.33% of the share capital or voting rights of a French company) must be declared to the French administration (Article R. 152-5, Financial and Monetary Code).
France has ratified the Rome Convention on the law applicable to contractual obligations (1980/934/EEC) (Rome Convention), which has been amended by Regulation No. 593/2008 on the governing law of contractual obligations (Rome I Regulation). The Rome I Regulation entered into force on 24 July 2008 and applies to agreements entered into on or after 17 December 2009. The Rome Convention continues to apply to agreements concluded before 17 December 2009. According to the Rome Convention or Rome I Regulation, a contract must be regulated by the law chosen by the parties. Therefore, the law of the security agreement (lex contractus) will generally be applied. However, where all surrounding circumstances of the case, at the time of the choice, are connected with one country only, the lex contractus must not prejudice the application of mandatory rules of that country.
Under French law, real estate assets are always regulated by the law of the jurisdiction in which the assets are located (lex rei sitae).
In practice, it may be difficult for a French judge to enforce a security interest governed by a foreign law against a French obligor, particularly if the security interest is not recognised under French law (for example, a floating charge).
For a mortgage, the costs, based on the amount secured actually registered, are as follows.
Subject to certain exceptions, there are no stamp duties on credit or security agreements.
The fee amounts are as follows:
Publicity tax: 0.715% of the registered amount (including assessment and collection fees).
Land Registry fee (salaire du conservateur): 0.05% of the secured amount, registered at the Land Registry.
Except for real property, registration fees are generally not substantial.
Notories' fees are 0.55% (including value added tax (VAT) at 19.6%) of the registered amount (principal only).
Some strategies may be used to find the right balance between the cost of taking security, the ability of the borrower to continue to operate its business and the efficiency of security for lenders.
For example, a lender's lien is usually recommended rather than a mortgage to secure a loan for property acquisition, because a lender's lien is less expensive (see Question 2, Common forms of security). However, a lender's lien is also less flexible as, unlike a mortgage agreement, the underlying agreement must be in French and governed by French law.
The time it takes to enforce security can be reduced through the use of the pacte commissoire, where possible (see Question 23). This is less time consuming than the public sale or than judicial foreclosure.
In certain specific areas such as property finance, the use of subrogation (Article 1250, French Civil Code) will permit creditors to benefit from the existing first-ranking mortgage without any supplemental cost.
There are no current proposals for reform.
T +33 1 40 06 54 00
F +33 1 40 06 54 54
E sabah.boughida@allenovery.com
W www.allenovery.com
Qualified. France, 2007
Areas of practice. Banking professional support lawyer.
T +33 1 40 06 54 00
F +33 1 40 06 54 54
E geoffrey.levesque@allenovery.com
W www.allenovery.com
Qualified. France, 1997
Areas of practice. Banking and finance; syndicated loans; acquisition finance; LBOs; real estate finance; financing of PPPs/PFIs.
Recent transactions. Recently advised MLAs Crédit Agricole CIB, Banca IMI, BBVA, Santander, BLB, Dexia, KfW and SMBL on the EUR650 million financing for the GSM-R project for Réseau Ferré de France (also involving financings from European Investment Bank and Caisse des dépôts et consignations, Direction du Fonds d'Epargne).
T +33 1 40 06 54 00
F +33 1 40 06 54 54
E julien.roux@allenovery.com
W www.allenovery.com
Qualified. France, 2002
Areas of practice. Banking and finance; structured finance (including CMBS); restructuring; real estate finance.
Recent transactions. Recently advised key investors on the restructuring of Cœur Défense, Europe, the largest commercial property in La Défense (Paris).
