14 Sep 2017

Practical questions on the new French regime for taking security in France

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The new legal regime for security agents introduced in the French Code civil and coming into force on 1 October 2017 will undoubtedly modernise the current practice of taking security interest in France in the context of domestic and cross-border financing transactions. It should give the French market legal tools comparable to those currently used in Anglo-Saxon jurisdictions.

While this new regime is relatively similar to the well-known “security trustee” regime and has numerous advantages, some practical limitations, highlighted below, will need to be taken into account when structuring and implementing your French law security package.

Who benefits from the security interest?

The new security agent regime is a combination of the mandate regime and the French trust regime (fiducie).

  • The security agent will still need to be appointed by the creditors of the secured obligations. Unlike the UK security trustee, the security agent cannot declare itself trustee (fiduciaire) for the benefit of a category of existing or future creditors. It must be appointed in writing by the creditors, who will determine the scope of the security agent's obligations and the conditions of its replacement.
  • However, once appointed, the security agent is the sole and direct holder of the security interest. It acts in its own name but for the benefit of all the creditors that appointed it. It is entitled to take any action (including in court) to defend the creditors' interest, without having to request their prior instructions. Rights and assets acquired by the security agent in such capacity are protected from its own creditors' claims and bankruptcy proof. Title to the security interest held by the security agent will be separate from its own assets.

Which obligations are secured?

Until now, in domestic financing transactions, the security interest is granted in favour of the creditors, represented by the security agent, to secure their obligations.

In cross-border financings, creditors have implemented, as an alternative to the security agency structure, a “parallel debt” structure whereby an independent and separate covenant to pay is created between the security agent and the obligor which mirrors the principal obligations owed by such obligor to the creditors. Any payment received under the principal obligations decreases the amount payable under the parallel debt obligation and vice versa.

When using a parallel debt structure, the French law security interest is granted directly in favour of the security agent to secure the parallel debt obligation owed to it. The creditors are usually not referred to as beneficiaries of the French law security and do not directly benefit from them.

With the new regime, the utilisation of a parallel debt structure would no longer be required. Indeed, even if the security agent is now the sole holder and beneficiary of the security interest, French law provides that the obligations secured shall be the principal obligations between the creditors appointing the security agent and the obligor.

As a result, the only obligations the security agent would be entitled to enforce are those of the creditors against the obligor which will need to be precisely detailed in each security document.

Who appoints the security agent and when?

The security agent must be appointed in a written agreement by the creditors of the secured obligations. While the law is silent on when it should be appointed, we are of the view that its appointment should be made prior to, or at the same time as, the taking of security, or in the event of multiple creditors of different ranking, in an intercreditor agreement or a specific separate agreement.

Creditors with different rankings may appoint the same security agent. They would all benefit, through the security agent, from the same security. The practice of taking senior and junior ranking security to reflect the ranking of the secured creditors should no longer be relevant if the one single security agent can be designated as sole beneficiary of the security. In case of enforcement of a common security, the enforcement proceeds would be shared by the security agent among the secured creditors according to their ranking and the waterfall provisions.

Can future creditors benefit from security interests already held by the security agent?

Any future creditor acceding to the rights of an original creditor that appointed the security agent should automatically benefit from the security held by that security agent. There is no need for it to renew the security agent's appointment, but it could confirm, accept or ratify such appointment.

However, if the new creditor, such as a hedging bank for example, was not a party to or represented in, the security agent's original appointment agreement, it is unlikely to benefit from the existing security granted in favour of that security agent which it did not appoint. To comply with French law requirements, this new creditor, unidentified at the time of appointment of the security agent, would need to reappoint the security agent and obtain new security to secure its obligations.

Does the new security agent's regime apply to all security interest?

The ordinance does not appear to put any limitations on the type of security interest that can be held by the security agent. The report to the French President presenting this new regime has taken a very broad approach that encompasses security interests regulated by the French Code civil, the French Code de commerce, the French Code monétaire et financier as well as foreign law.

Some French law security interests, however, are subject to the completion of very precise perfection formalities. This is the case for example for the French law receivables security assignment (so-called Dailly assignment); its assignee must be a licensed credit institution and some specific formalities such as the dating of the assignment form must be made by the secured assignee.

Thus, before entering into any security agent arrangement, a preliminary analysis of the mandatory requirements for the validity of a particular French law security interest should be carried out to check their compatibility with the new security agent's regime.

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Yann Beckers

Yann Beckers
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