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21 April 2011
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French legal news

Our today’s newsletter addresses the current developments of the security trust (Fiducie-Sûreté) which was introduced in French law in 2007 and its first successful applications in practice.

Ellen Delzant
Attorney at Law in Germany and France

Ellen Delzant

Ellen Delzant

Current development of the security trust (Fiducie-Sûreté) in French law

The security trust which has been entrenched for decades in the German system of loan securities is the central security means in Germany. In France, however, the Fiducie-Sûreté was only introduced in February 2007 after 20 years of discussion. This introduction took also place due to the intensifying pressure exerted by the competition of especially the European legal systems. The security trust has been an inherent part of the local civil law not only in Anglo-American but also in the most continental-European legal systems for a very long time. In France, it has proved correct to fear the competition of these systems and a delocalization of commercial operations from France to a foreign country.

The French lawmaker integrated the institution of a trust in general and rules its prerequisites and effects without differentiating between its two forms of Fiducie-Sûreté (security trust) and of Fiducie-Gestion (administrative trust) with law no. 2007-211 of 19 February 2007 in sections 2018 et seqq. of the French civil code. In the following, the characteristics and developments of the Fiducie-Sûreté will be presented.

Since the introduction of the Fiducie in the French legal system for years ago, the original rules have been changed and amended already four times by the French lawmaker in order to turn the Fiducie into an operative and attractive means. Despite these efforts, the security trust as a means of credit collateralization, however, is still rarely used in practice.

In the following, we would like to present some cases where the Fiducie was used in practice after a short description of prerequisites and effects of the Fiducie.

I. Prerequisites and effects of the Fiducie-Sûreté

In case of the Fiducie property, rights or securities or entireties of property, rights or securities are assigned from one or more trustors to one or more trustees which they hold separately from their own estate and who act for a certain purpose in the interest of one or more beneficiaries.

When the circle of trustors was initially limited to legal entities, it has meanwhile been extended to natural persons. The circle of potential trustees – originally only credit institutes, investment companies and insurance companies – has also been extended after according criticism from the Bar.  Since 1 February 2009 attorneys-at-law can also act as trustees.

The law decides which property comes into consideration as security collateral. In principle, all properties or rights can be the subject of fiduciary securities, whereas they can be existing or prospective moveable properties or immovables and impersonal entities like stocks of merchandise. Furthermore, rights like e. g. business shares can also be the subject of security assignments. The usage of a security trust generally requires the conclusion of a securities contract signed without notarization. This contract must obligatorily include certain legally mandatory information, especially regarding the collateral security, the secured claim, the involved assignor, trustee and beneficiary. As a next step, the amount of the collateral security must be specified. All information must obligatorily be stipulated in written form, or else the contract will be void.

The lawmaker rules in detail the effect of the security trust in case of default, which means in case of the default of the debtor. If the trustee is creditor (beneficiary) at the same time, he will automatically receive the full power of disposal regarding the collateral security in case of default of the debtor. In three-sided arrangements, which means if the trustee is not creditor, the law provides that in case of default the trustee must release the subject to the creditor. The trustee is only allowed to make use of it, if it is stipulated in written form in the securities contract.

In contrast to German law, the value of the security collateral must be decided by experts if the debtor gets into default. This is an obligatory rule which cannot be ceded in the securities contract. Thus, in case of default the drafting on an expert’s report on the value of the security collateral is mandatory. At the end of the recovery, the creditor must balance the difference between the value of the subject or the realized purchase price and the remaining amount of the claim.

The efficiency of securities can be assessed in the first place in case of an insolvency of the trustee. Originally, the French Lawmaker had not made arrangements addressing this very decisive question. The justified criticism especially from among the restructuring experts and insolvency professionals was picked up by the French lawmaker and a remedy found with an ordinance of 18 December 2008. The goal of this order was especially to find a balance between the interests of the creditors in an efficient security especially in times of crisis on the one hand, and the aim to continue and save an insolvent company on the other hand. In such a case, a Fiducie-Sûreté proves generally more advantageous in comparison to the conventional means of safeguarding in France.

A very essential advantage is that rights of a creditor secured by a security trust do not compete against the ones of other creditors of the trustor. This applies especially if other creditors have priorities as e. g. in French law to a certain extent claims of employees.

Another advantage is that a creditor secured by a security trust cannot become a member of the board of creditors according to French law. Therefore, they cannot be forced to accept a waiver of debts by majority decision or – as is possible in French insolvency law – the dept to equity swap (cram-down).

Thus, creditors secured by a Fiducie-Sûreté are generally much better off in insolvency proceedings of their debtor as the remaining secured creditors. Although Fiducie-Sûreté is a very effective security, it is only rarely used in practice, especially by banks. This may have its origin in the fact that the formal requirements regarding an effective usage of such a security are high and violations of the legal provisions can quickly lead to invalidity. Otherwise there has been no jurisprudence in this field so far.

II. Practical cases of Fiducie-Sûreté

Various examples of a successful usage of Fiducie-Sûreté became known.

1. In 2010 Fiducie was used as a means to safeguard claims of employees. The company Rol Pin, specialized in the manufacture of plywood and resin, a branch of the Smurfit Kappa Group, European market leader in the area of packaging paper, has passed a social plan in the first quarter of 2010. This plan provided for certain services to which the employees would be entitled to in the future, e. g. regarding education or re-classification.

In October 2010, the company Rol Pin was transferred into an investment fund. The social plan was not questioned; however, the concerned companies feared problems with the work council during the transfer. To calm down the employees and to permanently safeguard their claims, the claims were secured by means of a security trust. The money necessary for the safeguarding was transferred from the trustor, the company Rol Pin, to a trustee. An investment company specialized in this field was assigned as trustee which was entrusted with the administration of the means available as well as the payment to the beneficiaries on a regular basis, the employees individually concerned by the social plan.

Thus, it was and is the task of the trustee to place the funds onto an account held by him and to pay out to the employees at the stipulated due date.

By way of separating these funds in trust assets, the employees were protected from insolvency risks of the company Rol Pin and at the same time from the insolvency of the buying company.

Thus, the transfer of the company could be handled without any social confrontation with the employees. Besides, the trustor as well as the buyer of the company was largely relieved from the handling of the obligations arising from the social plan.
The trustee relationship still continues and will go on until the end of the obligations according to the social plan in December 2011.

2. Fiducie was used in the years 2009/2010 on the occasion of restructuring a big French trade centre.

This trade centre with 163 employees located in the Rhône-Alpes region has been suffering from substantial losses especially due to the death of its managing director. It was confronted with a blockade situation, when the suppliers were not willing to deliver any more in view of liabilities in the total amount of 8 billion euro. The suppliers were a national purchasing centre as well as various local purchasing centres. They had a borrowing requirement in the amount of about 14 million euro, whereas the banks cancelled short-term credits. In this crisis situation a pre-insolvency arbitration in the form of “mandat ad hoc” was called upon. These are conciliatory proceedings under the aegis of the locally competent commercial court, which are lead strictly confidentially and serve to avoid insolvency.

In the case at hand, all relevant parties especially the suppliers as well as the banks took part in this out of court arbitration.

The judicial situation presented itself as follows: All business shares in the trade centre were held by a holding company. This company also held all shares in two real estate companies as well as in a hardware store.

As a result, the banks granted a new credit to the holding company. In return, the holding company assigned her shares of one of the real estate companies on a trust basis to a trustee. A French investment company specialized solely in trust transactions was made trustee with the task to hold the shares on a trust basis and to supervise the payment of the credit by the holding company.

On the contractors’ part, the national purchasing centre agreed to pay the liabilities of the trade centre towards the local purchasing centres. Due to the payment of these liabilities the trade relations between the local purchasing centres and the holding company respectively were revived. In return, the holding company assigned her total shares in the trade centre to a trustee which held these shares for the national purchasing centre as beneficiary. The same French investment company was in turn appointed with the trust. The trustee took over the operative control about the administration of the trade centre and supervised the regular payments of the liabilities to the national trade centre.

These contracts were agreed upon in October 2010 during the arbitration. Both deeds of trust were concluded for a period of five years and still continue. After the expiration of the stipulated contract period, the trustee must re-transfer the shares in the real estate company and in trade centre to the holding company, if all repayment obligations towards the creditors were met. Otherwise the trustee must transfer the shares in the real estate company to the bank in favour and the shares in the trade centre to the national purchasing centre.

This case of the trade centre situated in the Rhône-Alpes region, threatened by insolvency, proves the efficiency of the Fiducie-Sûreté which has only existed in French law since 2007, but also of the pre-insolvency arbitration entrenched in the French system.

It can be expected that such successful restructurings by means of Fiducie-Sûreté will contribute to its success in the near future.

Ellen Delzant, Attorney at Law in Germany and France

New case-law and legislation in French insolvency law

In the following we would like to inform you about actual decisions of the French Courts in the context of insolvency and sauvegarde procedures.

Patrick Ehret
Attorney at Law in Germany and France
Spécialiste en Droit des relations internationales (Certified Specialist in International Law in France)
D.E.A. Droit des Communautés Européennes (Strasbourg III)

Patrick Ehret

Patrick Ehret

Court of Cassation rescinds order of the Paris Court of Appeal in the matter Coeur de Défense

By judgement of 8th March 2011 (10-13.988,P+B+R+I, Sté Heart of La Défense et a.c/ PG CA Paris) the French Court of Cassation rescinded the order of the Paris Court of Appeal of 22nd February 2010 (cp. our Update France of 13rd April 2010). In the opinion of the highest French civil court the court of appeal had wrongly annulled the opening of the Sauvegarde proceedings and thus the restructuring plan confirmed by the commercial court. With the exception of in a fraud case, a company could not be denied the opening of Sauvegarde proceedings for the reason of trying to skirt its contractual obligations, should the company be confronted with insurmountable difficulties that could lead to insolvency. the ruling was made under the legislation before the reform of the French insolvency law that entered into force at the beginning of 2009. By now it is not necessary any more to prove that the difficulties could lead to insolvency.

Grand Senate of the French Court of Cassation decides on the modalities of power of attorney when filing a Proof of Debt

With its decision of 4th February 2011, the Grand Senate of the French Court of Cassation gave its opinion regarding the power of attorney for the implementation of a Proof of Debt in French insolvency proceedings (Cour de cassation, Assemblée plénière, 09-14619, Arrêt n°588 P+B+R+I, SARL Martine bois et derives, Juris Data N° 2011-001033). In the case that had to be decided the question arose if a bank as pool leader must produce a power of attorney when filing a Proof of Debt for each member of the pool and if yes, until when such a power of attorney must be issued. The Grand Senate pointed to the fact that the filing of a Proof of Debt corresponds in its function to a legal enforcement of a claim, and thus any person filing claims for third parties – without being an attorney-at-law – must specifically be authorized for it in written form. This authorization has to be issued before the end of the deadline for the filing of a claim applicable in French law. The proof of authorization – and here lies the welcome and relevant development for the practice of the jurisdiction of the French Court of Cassation – , however, can be demonstrated until the day of oral decision of the court.

For the first time French Constitution Council decides on the constitutionality of a provision in insolvency law

The French Constitution Council has for the first time in a decision of 11th February 2011 (N°2010-101 QPC) ruled on the conformity of an insolvency law provision with the French Constitution, since on 1st March 2010 the possibility to have examined the reconcilability of a provision in French law with the constitution of 1958 in pending proceedings within the scope of a judicial review has been introduced.  It was realized that section L.243-5 of the French Social Code which limits the automatic release from interest on arrears and of interest for default in an insolvency to LLP's, contradicts the constitutionally protected principle of equal treatment. Said section must therefore also be applied in cases with lawyers who are not member of a LLP or equivalent. In other words, an attorney at law exercicing in private practice to whom in France insolvency law is applicable since 2006, must profit from the automatic release from interest on arrears and of interest for default with regard to social contributions.

Ordinance concerning the application of the Sauvegarde financière accélérée came into force

The ordinance concerning the application of the new accelerated Sauvegarde proceedings for financial restructurings that entered into force on 1st March 2010, was passed on 3rd March and published on 4th March in the Journal officiel of the French Republic (Décret no 2011-236 du 3 mars 2011 pris pour l’application des articles 57 et 58 de la loi no 2010-1249 du 22 octobre 2010 de regulation bancaire et financière). Thus, nothing stands in the way of its first application whereas the personal scope the of application (companies with less than 150 employees or with a turnover of more than 20 billion €) naturally limits the number of possible sauvegarde financière accélérée proceedings (cp. our Update France of 24.1.2011). A reduction of these criteria is currently discussed in order to open proceedings to a larger circle of companies.

Patrick Ehret, Attorney at Law in Germany and France


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