In a cross-border transaction, a French Obligor is likely to give a guarantee governed by overseas law. For instance, on a European leveraged finance transaction, if the facilities agreement is governed by English law then the French Obligor would usually sign up to the English law governed guarantee contained in that agreement. The Ordinance n° 2021-1192 (adopted on 15 September 2021) (the "new law") does not change the situation in respect of such guarantees because it should only apply to French law guarantees. This is on the basis that the Cour de Cassation held on 16 September 2015 that certain protections granted to the guarantor (i.e., in this instance, the requirement that a guarantor (when it is an individual) must handwrite in particular the maximum guaranteed amount of principal, interest and late interest and the duration of its guarantee) did not override mandatory rules of territorial application (lois de police) and thus were not applicable to an overseas law governed guarantee. We believe that this ruling should extend to the annual information duty under the new law.
However, if any French member of the Borrower Group provides a limited recourse security interest (sûreté réelle conventionnelle constituée par un tiers), that security document would fall within the ambit of the new law if it is governed by French law.
By way of a reminder, a limited recourse security interest means that the chargor which pledges its assets to secure the debts of another (usually one of its subsidiaries) does so on terms that should the security become enforceable, the beneficiary can foreclose on those assets to recoup its debt but cannot pursue the chargor for any remaining balance of that debt. A limited recourse security would generally be governed by the law of the jurisdiction in which it would need to be enforced. In the case of French assets owned by a French business, that would mean that such a security would be subject to French law.
The new law comes into effect from 1 January 2022 and will apply to both new and existing deals as from that date.
This means that the new law imposes the following new requirements on the beneficiary of a French law limited recourse security (that is, the security agent on a syndicated deal or the lender on a bilateral deal (as the case may be)):
Before the end of March in every year during the lifetime of the facility, the security agent/lender will need to inform the French chargor of the aggregate outstanding amount of the principal of the secured debt, plus all interest, costs and other sums outstanding and secured by the limited recourse security document as at 31 December of the previous year (itemizing how that figure is made up).
As an additional technicality, it also needs to inform the French chargor of the expiry date of the security, which on a cross-border transaction is generally going to be when the secured obligations have been unconditionally repaid in full or when the security has otherwise been released in full.
Additional requirements would apply if (unusually) a French law limited recourse security were to be granted by an individual.
Failure to do this in any year will result in the amount recoverable under that limited recourse security document being limited to the principal amount of the secured debt plus the amount (if any) of interest, fees or other sums which the French chargor had previously been notified about under this regime.
By way of example, if a French law governed limited recourse security agreement were to be executed in June 2022, the first notification would be required to be made by the beneficiary of the security during Q1 March 2023 in relation to the outstanding principal of the secured debt, plus all interest, costs and other sums secured by that security agreement as at 31 December 2022. If that obligation were not complied with for 2023 and the limited recourse security was to be enforced during that year, only the principal amount of the secured debt would be recoverable under that document. If no notification were to be made in 2023 but this omission was spotted and the obligation to notify was complied with in 2024 as regards the total amount of secured debt outstanding as at 31 December 2023, should an enforcement to occur during 2024, then the previous failure to notify in 2023 would not adversely impact the recoveries.
The new law also specifies that the costs of this notification requirement must be borne by the beneficiary.
Given the importance that is going to attach to the security agent / lender being able to evidence that this notification requirement has been met, it is prudent for the beneficiary of the security to send the required notification in writing by registered post to the French chargor (in addition, if required, to it being sent by email for ease).
Lenders and security agents should check whether existing cross-border deals include a French law limited recourse security to see which of their deals will be impacted by this change and diarize the need to comply with the notification requirements imposed by the new law. It would be wise to prioritize checking the distressed loan back book.
The new law does also contain some good news for lenders on cross-border deals. From 1 January 2022:
As regards pledges over securities accounts, the current regime requires a special proceeds account to be opened with a bank in France to capture proceeds arising from the securities within the scope of the pledge. However, in practice it is usually difficult for foreign pledgors to open this type of account in France. The changes will expressly allow the parties to decide whether or not the pledge over securities account should apply to proceeds. If the parties decide that the pledge should not cover proceeds, the foreign pledgor can avoid the requirement to have to open a special proceeds account. This is in fact a welcome clarification as most practitioners were of the view that the opening of such bank account was not mandatory.
The following new types of security interests will be created and/or recognized:
the assignment of receivables by way of security (which follows the existing regime for the assignment of claims), which was only available to credit institutions in connection with the granting of a facility (known as “Dailly” assignment); and
the cash pledge by way of security (which was already commonly used in practice).
The rights of the beneficiaries of pledges over receivables have been reinforced to provide that, after notice, the creditors will have a right of retention over the claim proceeds and therefore have the sole right to payment of the principal and interest comprising the receivable (instead of just a preferential right over the payment of the claims). With this exclusive right, the creditors of the pledge should be given priority over all other creditors.
The updates expressly allow for lower ranking pledges over account pledges and over receivables (which the practice already widely recognized).
The registration formalities for pledges over going concern will also be simplified no later than 1 January 2023. The requirement that this type of pledge be registered with the tax authorities and the public registry within 30 days of its signature in order to be valid has been removed.
If you would like to discuss these updates and how they impact cross-border transactions in more detail please do not hesitate to get in touch with a member of our Paris Banking team.
Authored by Charlotte Bonsch.