Introduction

Articles 59 and 60 of Law 2016-1691 (the Sapin II Law) on transparency, anti-corruption and the modernisation of economic life established a system of immunity from the execution of civil judgments on property in France which is owned by foreign states.

At the international level, the UN Convention on Jurisdictional Immunities of States and their Property, which was adopted in December 2004 and has since been ratified by France, provides for state immunity from restrictive measures affecting state property, as well as exceptions to such immunity in cases where:

  • the state has expressly waived its immunity;
  • the state has reserved or allocated property to satisfy creditor claims; or
  • the property concerned is not used for non-commercial public services.

In this respect, the convention incorporates the principles of customary international law. However, this convention is not in force internationally, as it has not yet been ratified by a sufficient number of countries.

Until the Sapin II Law came into effect, immunity from execution in France was left to the court's discretion. The Supreme Court ruled (in 2011 and again in 2013) that a state's immunity from execution could be waived if that state issued an express waiver regarding specified assets. However, the court then went on to reverse its jurisprudence by recognising that international law requires only that a waiver of immunity be express; there is no need for the waiver to relate to specified assets.

This change in approach, and the exequatur regime in France, led to an increase in the seizure of property belonging to foreign states. State-owned property has also been subject to attachments by creditors – in particular, hedge funds. Considering these types of seizure to be contrary to international law, the government sought, through the Sapin II Law, to provide better protection for states.

The Sapin II Law created:

  • a new general system of immunity from execution, which has been codified in three new articles enshrined in the Civil Enforcement Procedure Code; and
  • a specific regime under Article 60 designed to combat speculative practices by certain hedge funds.

General regime – the principles

The main purpose of this aspect of the Sapin II Law is to limit the risk of litigation arising from seizures or attachments of property belonging to foreign states. The regime affords greater protection against seizures of state property and ensures that international law on state immunity is upheld.

Court authorisation Protective and enforcement measures by a creditor against a state's property may no longer be taken without the prior authorisation of a court, pursuant to the procedure set out in Article L111-1-1-1 of the Civil Enforcement Procedure Code. This procedure filters out abusive or wrongful creditor actions.

The enforcement division of the Paris District Court is almost always the competent jurisdiction for such matters.

Conditions A court may authorise an enforcement measure against foreign state-owned property only if one of the following conditions listed in Article L111-1-2 of the Civil Enforcement Procedure Code is met:

  • the state has expressly consented to the application of such a measure;
  • the state has reserved or allocated the property concerned to satisfy the claim that is the subject of the proceedings; or
  • a judgment or arbitral award has been issued against the state and the property in question:
    • is specifically used or intended for use by that state for purposes other than non-commercial public services; and
    • has a connection with the entity against which the proceedings have been brought.

The Sapin II Law sets out a list of the principal assets considered to be non-commercial for these purposes, including:

  • bank accounts used or intended to be used to perform a diplomatic mission for the state or its consular posts;
  • military assets;
  • assets forming part of the state's cultural heritage;
  • part of an exhibition of scientific, cultural or historical interest not intended for sale; and
  • tax receivables.

Article L111-1-2 largely reproduces Articles 19 and 20 of the UN convention.

Autonomous immunity from execution for diplomatic missions For property used or intended to be used in exercising the diplomatic mission of a foreign state or its consular posts, the state must provide a special waiver of immunity from execution.

Special regime to combat speculative hedge fund practices

The Sapin II Law introduced special provisions to restrict attachments of state property in cases where a hedge fund holds against that state the debt securities and instruments referred to in Articles L213-1 A and L211-41 of the Monetary and Financial Code, making it more difficult for this type of creditor to seize property.

For such creditors, any interim protective or enforcement measure is subject to prior court authorisation. No such consent can be granted if the following cumulative conditions are met:

  • The state is on the list of recipients of official development assistance established by the Organisation for Economic Cooperation and Development.
  • When the debt securities were acquired, the state was already in default or had offered to amend the terms of the debt securities.
  • The default or the initial offer to amend the terms of the debt securities dates back to less than 48 months. The courts can extend this period by 72 months in the event:
    • in the event of manifestly abusive conduct by the debt securities holder when the creditor seeks court authorisation to exercise interim protective measures or enforcement measures; or
    • where an offer to amend the debt securities has been accepted by creditors representing at least 66% of the principal amount of eligible claims.

Comment

Article 59 of the Sapin II Law has been the subject of heated debate. For certain commentators, it penalises companies that have proper and regular contractual relations with foreign countries. Indeed, France has some of the strictest legislation in this area.

In addition, by allowing states to waive their immunity from execution by express or specific waiver, the Sapin II Law has had a significant impact on the wording of waiver clauses in contracts entered into with states. Creditors are now tailoring waiver clauses in light of the Sapin II Law so that states do not restrict the assets to which the waiver of immunity applies.

For further information on this topic please contact Rhidian David or Agnes Braka-Calas at Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00) or email ([email protected] or [email protected]). The Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com).

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