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 Upd@te France
13 April 2010
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Legal News from France
Today you are receiving the Schultze & Braun Upd@te France newsletter which will be published every three months from now on.

Schultze & Braun would like to keep you informed about the newest developments in legislation and jurisdiction concerning French insolvency and business law.

In this issue, legislative proposals concerning the creation of sole proprietorship businesses with restricted liability and the newest developments concerning the insolvency proceedings “Cœur Défense” are discussed.

We hope you enjoy our newsletter.

Patrick Ehret
Attorney at Law in Germany
Attorney at Law in France
Spécialiste en Droit des relations internationales (Certified Specialist in International Law in France)

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Patrick Ehret
Patrick Ehret
Sole proprietors with restricted liability
The French legislator intends to create the status of sole proprietor with restricted liability as from 1 January 2011. This legislative proposal which was passed in January by the cabinet of the Fillon government was approved by the French national assembly on 17 February 2010 at its first reading and French senate on 25 March 2010.

The legislative proposal envisages that craftsmen, freelancers and sole proprietors by means of a corresponding declaration at the local Commercial Registry can assign part of their funds as liquidable assets to their commercial activity and thus make the rest of their funds inaccessible to the creditors.

The declaration of the sole proprietor must only be notarized if real estate forms part of the specified assets for the commercial activity. In order to serve justice to the legal security in business dealings, the entrepreneur must add “entrepreneur individuel à responsabilité limitée” (“EIRL” or sole proprietor with restricted liability) to his corporate name.

In the course of the legislative procedure, two amendments of the legislative proposal were added by the French national assembly:

Firstly, that the declaration concerning the restriction of the use of the funds must apply to all creditors, independent of the fact if the claim came into existence before or after the registration of the corresponding declaration with the Commercial Registry. Secondly, that the sole proprietor runs the risk of being liable with the totality of his assets if he has acted improperly or if he can be accused of not having observed his obligation duties, especially concerning the structure of the specified funds, or the obligation of separate book-keeping.

The first amendment was not approved at the first reading before the senate. It remains to be seen which scope of the limitation of liability will take hold in the course of the legislative procedure.

Under fiscal law, the sole proprietor with restricted liability is treated like a one-man limited liability company: profits are principally subject to income tax, as far as the subjection to corporate tax was not opted for.

This legislative proposal is supposed to allow sole proprietors to separate private and professional assets without the foundation of a limited liability company. It can be seen in relation to the provision already introduced in 2003 for craftsmen, freelancers and sole proprietors to make real estate which serves as principal residence to the declaring party, by means of a notarial act, inaccessible to the creditors asserting claims in connection with the business of the declaring party.

Even if the scope of the liability limitation in the legislative procedure is still disputed, companies in the French business sector should already be prepared that from the beginning of next year their business partners can make inaccessible a considerable amount of their assets inaccessible to creditors by a simple declaration at the Commercial Registry.

In view of the possibility existing in France to found a one-man limited liability company without notarial act with the initial capital of €1, the sensibility of this proposal seems highly questionable. It remains to be seen if this new form of liability limitation will be successful among sole proprietors or if it can be filed under pointless actions à la Sarkozy.

Patrick Ehret, Attorney at Law in Germany, Attorney at Law in France, Spécialiste en Droit des relations internationales (Certified Specialist in International Law in France)
Cœur Défense – The Court of Appeal annuls the Sauvegarde proceedings
The effects of the insolvency of the American investment bank Lehman Brothers in the Parisian business quarter La Défense are still keeping the French courts busy. By order of the Parisian Court of Appeal on 22 February 2010, the so-called Sauvegarde proceedings, which had been opened by the Parisian Commercial Court at first instance on 3 November 2008, were annulled.

The centre of this dispute is the largest office building of Europe with 180,000 sqm by the name of Cœur Défense. As its name suggests, this building is situated in the heart of the Parisian business quarter La Défense. It was built in 2001 at the price of €600 million and acquired by the American investment bank Lehman Brothers together with General Electric Real Estate at the price of €2.11 billion. This acquisition was financed by a credit of €1.64 billion which was sold as a certified bond to a pool of approximately 30 banks led by BNP Paribas.

After the American investment bank Lehman Brothers filed for Ch11 creditor protection in the Insolvency Court in New York on 15 September 2008, the securities of the bank pool had become worthless. In view of this, the proprietor of the office building, the association HOLD (Heart of La Défense) feared that the banks would claim the premature repayment of the credit and filed for the opening of the so-called Sauvegarde proceedings with the Commercial Court Paris. In an order on 3 November 2008, this motion was accepted concerning the association HOLD and its holding based in Luxembourg, the company named Dame Luxembourg.

French insolvency law makes it possible for the debtor to file for the opening of so-called Sauvegarde proceedings without actually being insolvent. The submitter must only prove that he is confronted with insurmountable difficulties which could lead to insolvency. Since the reform of the Sauvegarde proceedings which entered into force from 15 February 2009, these liability requirements were further simplified. From now on the difficulties need not even incur the possibility of insolvency.

In the course of the Sauvegarde proceedings the association HOLD attained the acceptance of a plan postponing the repayment of the credit to 2014 (instead of 2012).

Due to the order of the Parisian Court of Appeal annulling the insolvency proceedings, this plan de sauvegarde, too, has become redundant. The Courts of Appeal have also confirmed that the banks have access to the rental income to the amount of approximately €50 million per year via the security of the so-called Cession Dailly.

The association HOLD has lodged an appeal against the order of the Parisian Court of Appeal with the French Court of Cassation. However, an order of the highest French Court of Justice can be expected in one year at the earliest.

In France, the order of the Parisian Court of Appeal, in which it is explained that the association HOLD was actually not confronted with difficulties which would have justified the opening of Sauvegarde proceedings, is regarded as cornerstone for the legal security concerning certified bonds, especially so-called Asset Backed Securities (ABS).

Despite this success, the office building of the Cœur Défense should further keep the courts and legions of lawyers busy. At the moment, negotiations between the creditors and the association HOLD are taking place in order to refine the business model and to consider a restructuring of debts. Until now, however, the opposing parties have only agreed on one point: in light of the situation of the real estate market in Paris, the association HOLD should under all circumstances not be forced to sell the building.

Patrick Ehret, Attorney at Law in Germany, Attorney at Law in France, Spécialiste en Droit des relations internationales (Certified Specialist in International Law in France)

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