November 26 2010
On September 21 2010 the Dijon Court of Appeal confirmed the effectiveness of the technique of parallel debt within French law.(1) Under this mechanism, the security agent of a syndicated credit is recognised as the creditor of all amounts due under the financing transaction and takes the collateral in its own name. Accordingly, the court recognised that the security agent alone had the right to register the whole secured claim in an insolvency procedure, prior to the enforcement of security interests.
The parallel debt technique is intended to implement the effects of the Anglo-Saxon trust that confers upon the trustee the ownership of collateral for the benefit of creditors, even though the trust is not recognised in France pending ratification of the Hague Convention of July 1 1985 on the law applicable to trusts and their recognition. The parallel debt technique avoids:
Since the creation of the contractual structure, as reviewed by the French courts, French law has introduced two legal regimes that purport to implement the effects of the Anglo-Saxon trust.
In the technique of parallel debt the debtor undertakes, directly in favour of the security agent, to pay an amount equal at any time to the amount due to the lender under the credit transaction (or to the bonds subscriber, in the case of bond issues). This second debt, which mirrors the first, is said to be 'parallel'. In addition, each creditor undertakes not to recover its own debt in the event that the agent brings proceedings for all creditors, so that the borrower does not have to pay twice.
This was the method used by the company Belvedère SA in 2006. It was scrutinised by the Dijon Court of Appeal after Belvedère issued notes under an indenture governed by the laws of the State of New York, which were offered to the public and secured by security interests granted by the issuing company and its subsidiaries. In this respect, the two security agents had been vested by the agreement as creditors of the bond issue.
At the time of the opening of safeguard procedings against the issuing company and its subsidiaries in France, both security agents jointly registered their claims in the procedure against all companies, each up to the full amount of the bond issue, as a secured claim. The admissibility of such claims in the proceeding, contested by the issuing company, was ordered by the judge, jointly between the trustee and the two security agents.
The Dijon court, on appeal against the orders of the bankruptcy judge, confirmed the validity of the claims registrations made as a secured claim by the security agents against the insolvency proceedings initiated against the debtor and its subsidiaries, and upheld in the meantime the legality under French law of the parallel debt provision.
By establishing the legality of parallel debt, the ruling brought the Paris market into line with certain major international financial centres which widely use this practice - in particular, Germany and the Netherlands.
The ad hoc regime of the security agent
The ad hoc regime of the security agent, introduced in 2007 through Article 2328-1 of the Civil Code, allows a single institution (even if it does not hold the claim) to establish, register, manage and enforce the real security interests in its own name and on behalf of the creditors of the secured obligation.
The purpose of this new system, which was inspired by Luxembourgish law, is to provide for a legal instrument equivalent to the security trustee that takes, manages and enforces alone the security interests, securing the debt in its own name and on behalf of all creditors.
It entitles the security agent to establish, register, manage and enforce the collateral on behalf of creditors as beneficiaries without the need for those creditors to participate in the agreement or deed. The security agent appointed by lenders acts in its own name and on behalf of the original creditors, as well as on behalf of future creditors, during the lifetime of the collateral, regardless of the changing composition of the pool. The debt transfer does not require the completion of other formalities.
Given the current wording of Article 2328-1 of the Civil Code, it is recommended that, in case of the opening of insolvency proceedings involving the debtor, the agent receive a special mandate to register the claim of creditors on the grounds of this article.
The fiduciary security agent
The fiducie, a French trust also introduced by the Law of February 2007, allows a fiduciary security agent (like a trustee) to register and manage the security interests, whether personal or real, that it owns in a separate patrimony from its own, in the interests of the creditors as beneficiaries of the debt. This offers protection to the beneficiaries in case of default of the fiduciary security agent.
The scope of transferable collateral in fiducie is wide. It includes personal as well as real security interests. Regarding the security interests of foreign law, they must be referred to in principles established by the Rome I Regulation on the law applicable to collateral, as the fiducie is collateral in itself. The parties may therefore choose the law applicable to collateral, at least on movable property, subject to the law of location of the underlying asset that governs the enforceability of the security interests regarding third parties and the enforcement of the security interests. Security interest under French law may not include properties located abroad.
However, the fiducie is subject to formalities and legal publicity requirements, making its use particularly restrictive in the case of transfer of secured debt.
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