Introduction
Capacity of trustee to register claims without bondholders' special authorisation
Recognition of parallel debt
Towards a multiplicity of security agent regimes
On September 13 2011 the Supreme Court rendered a key decision for the international practice of syndicated financings by recognising, in the context of French insolvency proceedings, certain effects of the trust and the mechanism of parallel debt which were both governed by the laws of New York state.
In 2006 Belvedère issued a loan of $375 million in the form of floating rate notes offered to the public and governed by the laws of New York state. The issuance contract appointed the Bank of New York Mellon as trustee, principal paying agent, account holder and transfer agent. In such capacity, the trustee held the debt loan for the benefit of bondholders in whose name it had authority to make certain decisions. In addition, Natixis and Raiffeisen Bank Polska, the French and Polish subsidiaries of the issuing company which granted security interests to secure the repayment of these bonds, were appointed principal and secondary agents under a security interest-sharing agreement (also subject to New York state law). For these purposes the banks were recognised as creditors of the bond issue, along with the debt holders of notes.
The parallel debt intended to allow security agents to conclude, manage and enforce security interests in their name but in the interests of the holders and their guarantors. This mechanism was created to:
- overcome the lack of effect of the trust, as France has not ratified the Hague Convention on the law applicable to trusts and on their recognition; and
- prevent the security agent from being considered as the agent, thus avoiding:
- the registration of security interests in the name of each bondholder;
- carrying out legal publicity for the enforceability of security interests as against third parties in the event of the transfer of bonds; and
- having to obtain a special mandate for claim registration or the enforcement of security interests.
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As a safeguard procedure had been opened against the issuing company and its subsidiaries, the two security agents and the trustee each registered a claim for the full amount of the loan in each insolvency proceeding. Belvedère then challenged these claim registrations in order to reduce its liabilities from the bond debt amount.
The Supreme Court upheld the joint admission of the claims registered by the trustee and the security agents. In this respect, it recognised the effects of the Anglo-Saxon trust and the mechanism of parallel debt.
Capacity of trustee to register claims without bondholders' special authorisation
Claim registration in insolvency proceedings is treated as a statement of claim. As such, it is subject to the French civil procedure rules, including the need for any person registering the claim of a third party to provide proof of special authorisation (under Article 416 of the Civil Procedure Code) and to identify the real party to the court proceedings.
The issue for the court was whether the capacity to register a claim was to be decided under French law as the law applicable to the open insolvency proceedings, in which case the special authorisation of each bondholder was needed, or in accordance with New York state law as the law governing the bonds issue, in which case the trustee had sole capacity.
Creditor status is determined by law of the claim
In order to assess ownership of the claim, the court dismissed the application of French law for the benefit of the law governing the contract. It upheld the decision of the appeal court, which had ruled, as part of its discretionary power, that the trustee had legal ownership of the claim under the provisions of the contract and was entitled to claim as the creditor of the bondholders, despite the ambiguous terms in the cover letter of the claim registrations issued by the trustee (under which claims were registered "on behalf" of the holders of notes).
Recognition of effects of Anglo-Saxon trust
The courts consider a trust to be valid when it is set up under a law that recognises such institution. However, such validity does not result in the automatic recognition of a trust, and French case law has long held that international public policy reasons could prevent the recognition of trusts under French law. French case law has already upheld certain effects of the Anglo-Saxon trust in France. Until now, this has been limited to certain effects that may be obtained under existing concepts of French law (eg, the mandate).
In the case at hand, the Supreme Court did not refer to French legal theory. On the contrary, it dismissed all reference to active joint and several liability, according to which a debtor agrees to owe the full amount of the debt to several creditors, each of which is entitled to receive the full amount of the debt, provided that the recipient agrees to allocate to each creditor the portion due to it. A key difference between the trust and active joint and several liability is that unlike the creditor in active joint and several liability, the trustee need not have personally subscribed the bond debt in its own name. It simply has legal ownership of the whole bond debt by virtue of the trust agreement.
Since the introduction into French law of the trust (by the Law of February 19 2007), the concept of fiduciary ownership has been recognised in French law. This is likely to facilitate the recognition in France of the effects of a trust. However, the Supreme Court makes no reference to such trust.
It may be assumed that a trust can now be used successfully as a mechanism for holding security interests in France as, if the trustee validly holds the principal claim, it can register, manage and enforce in its own name the security interests securing such claim. However, in the case at hand, the parties used a parallel debt rather than a trust in favour of the security agent.
As noted by the Supreme Court, the parallel debt arose when the debtor entered into "a non-ancillary contractual commitment, equivalent to [the one that it] is obliged to in its relation with [the creditor]" as regards the security agent.
The court dismissed the argument raised by Belvedère and its subsidiaries, according to which the mechanism of parallel debt was contrary to French international public policy on the basis of the theory of 'cause' (a concept near to but not tantamount to 'consideration'), after noting that not all aspects of such theory relate to international public policy.
It was first alleged that as the parallel debt had the same cause as the principal debt, the debtor should have been able to raise against the security agent the same objections as those benefiting the principal creditor. The court noted that it was sufficient that the provisions of the issuance contract avoided the risk to the debtor of double payment made, on the one hand, to bondholders or to the trustee and, on the other hand, to security agents, through provisions of allocation and repayment.
In addition, the Belvedère companies argued that the parallel debt had no consideration insofar as some companies had not granted security interests to the security agent, although they had granted a parallel debt to such agent. According to the court, this did not constitute an obstacle to the admission of the parallel debt of the security agent to the debtor's bankruptcy proceedings "in the framework of an overall financing subject to foreign law".
Towards a multiplicity of security agent regimes
By putting an end to the legal uncertainty regarding the validity of parallel debt and by recognising the effects of the trust in French law, the Supreme Court has opened up the French market to foreign international financing techniques. This is a sign of a mature market and is all the more justified as in 2006, when the bond issue was structured by Belvedère, neither the security agent nor the trust regime existed under French law.
In 2007 French law implemented a specific security agent regime in Article 2328-1 of the Civil Code, allowing an agent to register, manage and enforce security interests in its name and on behalf of creditors. This regime is more reliable than the parallel debt regime, as its validity does not depend on the quality of contractual provisions and its legal nature prevents any risk of fictitiousness. However, some improvements would be helpful in order to make the regime fully competitive as regards parallel debt and trusts, particularly the possibility of using the mechanism to hold personal security interests and the clear recognition of the security agent's capacity to bring actions and to register claims without special authorisation of the creditors.
Under certain conditions, the trust can also serve as a legal framework for security agents in France.
For further information on this topic please contact Jean-François Adelle at JeantetAssociés by telephone (+33 1 45 05 80 08), fax (+33 1 47 04 20 41) or email ([email protected]).
An earlier version of this update appeared in the Butterworth Journal of International banking and Financial Law.