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Upd@te France
30 November 2011
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News from Schultze & Braun

ABI 2011 Winter Leadership Conference: Chapter 15, Cross-Border Filings and Other Cross-Border Issues Impacting Trade Creditors
American Bankruptcy Institute ABI, La Quinta, California/USA, 2011-12-01 to 2011-12-03
Speaker: Dr Annerose Tashiro, Attorney at Law in Germany, Registered European Lawyer (London)

French Legal News

In the last two months, the Cour de Cassation (the French Supreme Court) rendered two landmark decisions with regard to French insolvency law. On the one hand, the Court clarified the scope of the declaration of exemption from seizure concerning real estate during insolvency proceedings. On the other hand, the Highest French Court commented on the validity of the construction of Parallel Debt common in the context of internationally syndicated credit agreements. We will explain the effect of both decisions.

We wish you an interesting read!

Patrick Ehret
Attorney at Law in Germany and France
Certified Specialist in International Law in France

Patrick Ehret

Patrick Ehret

The French Supreme Court strengthens the notarized declaration of exemption of seizure for real estate

Per its decision of 28 June 2011 (No. 10-15482), the French Supreme Court clarified for the first time that real estate concerning which the debtor has notarized and published a declaration of exemption from seizure before the opening of insolvency proceedings cannot be realized by the insolvency administrator in order to distribute the proceeds among the insolvency creditors.

Since 2003, section L. 526-1 of the French code de commerce provides that tradesmen, craftsmen or freelancers can issue a declaration of exemption from seizure concerning real estate which is their own property and used as principal residence. This declaration, which can be issued regarding other non-commercially used real estate since the reform of the Commercial Code in 2008, allows the protection of the real estate against seizure by the creditors on the grounds of receivables held against the tradesman due to his professional activity and accrued after the publication of the declaration of exemption in the register of real estate or mortgage register.

The possible effects of such a declaration of exemption from seizure in insolvency proceedings of tradesmen have been controversial for a long time. The predominant view in literature and the view advanced by appellate courts assume that the real estate could be realized by the insolvency administrator if the body of creditors held claims which acurred before publication of the declaration of exemption from seizure. The minority in literature, however, was of the opinion that the exemption from seizure concerning real estate – no matter if only a part of the creditors should be concerned by it – would be leading to its inability of being realized by the insolvency administrator for not being covered by the divestment of the debtor.

In the outcome, the French Cour de cassation took up the opinion of the minority and annulled the decision by the juge commissaire (chief judge for insolvency matters), by which the insolvency administrator was authorized to realize real estate comprised in the declaration of exemption from seizure. The access on real estate is therefore limited to creditors with claims not connected to the professional activity of the debtor. This decision makes it possible for tradesmen to use the suggested possibility in the wording of the law to protect their private assets from the access of professional creditors. This case law  shows the current tendency in French law, to create several (insolvency) estates for a debtor or restrain the effects of the proceeding to a specific class of creditors which further undermines the basic principle of equal treatment of creditors (cp. our Newsletter Upd@te France of 24 January 2011 regarding the Sole Trader with Limited Liability and Upd@te France of 14 July 2011 regarding Sauvegarde financière accélérée proceedings).

It is already discussed in French literature, how a solution could look like, if during insolvency proceedings only creditors are represented who have filed a corresponding claim and who are not affected by the declaration of exemption from seizure − be it because the claims acurred before the publication of the declaration or be it due to a private claim. Would the real estate even in this case not be covered by the divestment or, to the contrary, would the insolvency administrator be authorized to realize it? A voice to which great importance is attached in literature wants to allow the realization by the insolvency administrator in this constellation. For reasons of legal security, however, this view is not persuasive. It should not depend on the composition of the body of creditors if the declaration of exemption from seizure becomes valid in the insolvency, the more so as by publishing it in the land register the fact of publication is given.

One cannot help but get the impression that by splitting the estate in recoverable assets and assets not covered by the divestment on the grounds of a declaration of the debtor more problems are caused than solved.

Trust and Parallel Debt mechanism under New York law are now recognized in French Insolvency law

Per its decision of 13 September 2011, the Cour de cassation approved three decisions of the Cour d’Appel (court of appeal) Dijon, to the effect that a trustee under New York law is allowed to file a claim in a French insolvency proceeding and that the concept of parallel debt does not contradict the French Ordre public.

The following circumstances were the basis of this landmark decision:

In 2006, the Belvedere Group dealing in beverages such as vodka, spirits and wine with its seat in France, placed a variable high yield bond issuance in the amount of 375 million Euros with the Bank of New York Mellon repayable in 2013. The agreement in this regard provided the appointment of the Bank of New York Mellon as trustee of the so called floating rates notes. Beside the French parent company, Belvedere SA, seven subsidiaries in total, six among them with their seats in Poland, had undertaken to guarantee the repayment.

In the collateral sharing agreement under New York law, Natixis France and Raiffeisen Bank Polska were appointed as security agents. To this end, the Belvedere Group granted – in addition to their prime obligation towards their creditors – an independent and separate debt (parallel debt) to pay an amount equal to the security agents.

In 2008, insolvency proceedings – the so-called procédure de sauvegarde often referred to as Chapter 11 à la française proceedings – were opened over the assets of the French Belvedere SA as well as its subsidiaries in Poland. The trustees as well as the security agents have filed their claims in full in the different proceedings in each case. However, the insolvency debtor challenged the admission of the filed claims mainly due to the following two reasons:

The trustee did not have the position of a creditor, but was acting merely on behalf of the bond creditors. Without a special written authorization of the actual claimant, the trustee would not be authorized to file a claim under French law. Therefore the proof of claim would have to be rejected.

The filing of a claim by security agents would not be possible due to the violation of the French Ordre public. The mirroring of the original liability by creating an artificial parallel debt (without causa) violates the principle of equal treatment of all creditors and would bear the risk of the double satisfaction of the bond creditors.

In view of the amount of the filed claims, the solving of these questions was of outstanding economical importance and decisive for the further course of the insolvency proceedings.

The Cour de cassation had stated rightly that according to section 4 of the European Insolvency Regulation the lex concursus and thus the French law indeed governs the prerequisites for the filing, examination and admission of the claim, however, a creditor as such is defined by the lex contractus. Thus, the trustee recognized as creditor under New York law would be authorized to file the claims without an additional authorization by the bondholders. It is remarkable in this regard that the Cour de cassation recognizes the trust as such and does not try – as did the court of appeal – to classify it by comparing it to a legal concept in French law.

Regarding the parallel debt mechanism, the Cour de cassation declared that a violation of the Ordre public could be excluded as it was stipulated in the agreement that every payment regarding the main liability would automatically lead to the corresponding reduction of the parallel liability. Thus, a multiple payment is excluded and the equal treatment of all creditors secured. Moreover, the lack of legal grounds for the parallel debt would not imperatively be a violation of the Ordre public. Moreover, in the case at hand the overall context and the inherent security purpose would have to be taken into account.

This landmark decision strengthens considerably the legal security in case of financing French companies or companies with their COMI in France via international syndicated loans or bonds. It will be exciting to see if jurisdiction will take the next step and transfer this solution on securities situated in France.

Patrick Ehret, Attorney at Law in Germany and France, Certified Specialist in International Law in France


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