January 03 2001
The securitization of future receivables is now possible under French law after recent amendments to French legislation.
Securitizing future receivables is an attractive means for companies to finance their activity since it allows them not only to finance the time-lag existing between when an obligation is performed and when the debt relating to it is paid or redeemed by its debtor, but also the time-lag between when the securitization transaction is set up and when the obligation subject is actually performed. There is no doubt that the securitization of future receivables will open (and has already opened for certain companies) a wide variety of securitization opportunities under French law. These include:
Future receivables may be safely assigned via the transfer of commercial debts subject to the Law 81-1 of January 2 1981 (the Dailly Law). This is used for the direct or indirect sale to a special purpose vehicle, or the transfer of receivables as provided in the Law 88-1201 of December 23 1988 (the Securitization Law). This introduced the French securitization vehicle known as the Fonds Commun de Créances. Both the Dailly Law and the Securitization Law expressly provide that the assignment of future receivables is legally completed by way of a transfer deed - a very simple document, which is binding on third parties from its date of execution without the need of notifying the debtors.
However, any assignment, and especially any assignment of securitizable assets, remains subject to the general provisions of Law 85-98 of January 25 1985 on bankruptcy (the Insolvency Law). If the originator of future receivables goes bankrupt, his or her bankruptcy receiver is entitled to suspend payments with respect to ongoing contracts, and among them any transfer agreement of receivables that the originator may have entered into. The assignment of future receivables might also be challenged under Articles 107 and 108 of the Insolvency Law. According to these, when a payment is made during the suspect period (which may extend up to 18 months prior to the date when the insolvent originator is declared unable to pay its debts), it is automatically declared void should it relate to debts not yet due. It may be declared void should it relate to debts due, but for which the assignee has knowledge of the originator's insolvency.
In addition, a dispute has arisen as to whether the application of the prohibition stated in Article 33 of the Insolvency Law pursuant to which, upon the insolvency proceeding's opening judgement, the payment of any debt originated before this judgement is forbidden, was applicable to the assignment of future receivables under Dailly Law. The main issue was whether a payment resulting from the assignment of future receivables that occurred before, but was payable after, the opening of the originator's insolvency proceeding, would fall into the scope of Article 33 and, as a consequence, fall in the originator's bankruptcy estate. In a decision made on April 26 2000, the Court of Cassation followed the reasoning of the Douai Court of Appeal. The Court held that the Dailly Law assignee is prevented from recovering payment from the existing assigned receivables that become due after the opening of the insolvency proceeding, the receiver in bankruptcy of the originator being entitled to receive such payment. This decision was construed as restricting the safety offered to the bank acting as assignee under the Dailly law. This decision may also be applicable to assignment under the Securitization Law.
The most efficient means to circumvent these bankruptcy risks is to separate the underlying business of the originator in a special purpose vehicle that is independent from the other originator's assets.
Tax uncertainties related to the assignment of future receivables became clearer after authorities took an official stand in favour of them. The securitization of commercial receivables used to be beset by the problem of VAT related to securitized receivables. If VAT is due upon collection of the receivables by the originator, tax authorities may pretend that the payment to the originator of the purchase price of the receivables (and related VAT) enables the treasury to require payment of VAT, even if the receivables have not yet been paid by the debtors. In that case, the originator would lose most of the benefits of the securitization in terms of cash flow. In an instruction letter dated November 8 1999, the tax administration expressly provides that VAT due upon collection of receivables is actually payable upon payment by the debtors and not payment of the purchase price to the originator.
The assignment of future receivables raises another tax issue which practitioners solve by innovative constructions of the existing tax regulation. The assignment of future receivables may cause a variation of the net assets of the originator, since the future receivables are not accounted for as assets on the originator's balance sheet, but the purchase price will be. This variation may be characterized as a profit immediately taxable under Article 38 of the French General Tax Code. The consequence may be an acceleration of the tax paying process for the originator. In order to reduce this adverse effect, the originator of future receivables should be authorized to set aside provisions for deductible charges that correspond to the charges that would have been necessary to generate the future revenues if the originator had not sold the future receivables. Another way to deal with this tax acceleration would be to have this immediate taxability postponed by a strict construction of Article 38-2 of the French General Tax Code. This involves presenting the profit resulting from the aforementioned variation of net assets as taxable when the relating goods or services rendered are actually delivered or completed and not when they are transferred to the securitization vehicle. Tax authorities have no clear position on either matter.
The originator's bankruptcy, as well as the risk of tax acceleration, remain the two main issues that need to be accurately considered by practitioners when implementing any securitization of future receivables in France. However, although these issues may make the securitization of future receivables under French law more complex, efficient securitization structures have already been set up.
For further information on this topic please contact Gilles Saint Marc or Carine Louisfert at Gide Loyrette Nouel by telephone (+33 1 40 75 29 34) or by fax (+33 1 40 75 69 77) or by e-mail (email@example.com).
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