Background
Appeal lodged by EuroTitrisation
Conditions set for opening safeguard proceedings
Comment
On March 8 2011 the Cour de Cassation handed down its decision in the Coeur Défense case, which quashed the February 25 2010 decision of the Paris Court of Appeal.
In July 2007 SAS Heart of La Défense (HOLD), a special purpose vehicle owned by SARL Dame Luxembourg, purchased the Coeur Défense property. The acquisition was financed through:
- two loans from Lehman Brothers Bankhaus AG, which were secured by a mortgage over the property;
- daily security assignments of existing and future claims under existing or future leases of the property; and
- a share pledge given by Dame over its shares in HOLD.
Since the loans had variable interest rates, HOLD secured two hedging agreements with Lehman Brothers International. The loans were then transferred to the fonds commun de titrisation (FCT) of Windermere XII FCC, represented by EuroTitrisation which thereby became the sole creditor of these loans.
After the insolvency of the Lehman Brothers entities in September 2008, HOLD needed to put alternative hedging agreements in place. Having failed to find a replacement for Lehman Brothers, HOLD was notified by EuroTitrisation of the existence of an event of default. HOLD and Dame consequently decided to file a petition for the opening of safeguard proceedings.
On November 3 2008 the Paris Commercial Court opened safeguard proceedings against HOLD and Dame. This decision was challenged by EuroTitrisation, which argued that the conditions for the opening of such proceedings were not met. On September 9 2009 a safeguard plan was decided by the same court.
Then, on February 25 2010, the Paris Court of Appeal ruled in favour of EuroTitrisation and reversed the opening of safeguard proceedings. This decision was criticised by many commentators who considered that the court had added a new condition for opening safeguard proceedings that had not been envisaged by French law.
Appeal lodged by EuroTitrisation
Under Article 583 of the Procedural Code:
- any interested party is entitled to lodge an appeal against a decision on opening safeguard proceedings on the condition that:
- it was not a party to the proceedings; and
- it was not represented within the framework of the procedure (as is the case with creditors who are considered to be represented by the debtor); and
-
- creditors can lodge an appeal against a decision on opening safeguard proceedings if they have a personal interest in the proceedings or if the judgment unfairly prejudiced their interests.
EuroTitrisation argued that it did have a personal interest in the proceedings since it was the beneficiary of a share pledge granted by Dame over its shares in HOLD, and was thus the anticipated enforcer of the loans taken out by HOLD.
The Cour de Cassation confirmed the decision of the Paris Court of Appeal, which considered that EuroTitrisation was entitled to lodge an appeal against the judgment on opening safeguard proceedings against HOLD and Dame, insofar as it had a personal and legitimate interest.
The Cour de Cassation found that the appeal court had sufficiently justified its decision in stating that the only purpose of the safeguard proceedings was for HOLD and Dame either to avoid (at least temporarily) performing their contractual obligations towards Windermere XII FCC, or to force EuroTitrisation into negotiating changes to their contractual obligations.
The position taken by the Cour de Cassation therefore opens the floodgates for appeals by creditors against judgments on opening safeguard proceedings.
Conditions set for opening safeguard proceedings
Under Article L620-1 of the Commercial Code, safeguard proceedings can be opened if a debtor establishes that it is facing difficulties which it is unable to overcome on its own. At the time of the judgment in 2008, these difficulties had to lead to a suspension of payments.
In setting aside the decisions to open safeguard proceedings against HOLD and Dame, the Paris Court of Appeal held that HOLD and Dame were unable to prove that their activities (leasing for HOLD and fund management for Dame) were affected by the difficulties.
In its decision of March 8 2011, the Cour de Cassation considered that the appeal court, by referring to the core activity of the company, had added a new condition for the opening of safeguard proceedings that had not been envisaged by the law.
The Cour de Cassation decided that the only condition for an applicant to qualify for such proceedings is the ability to demonstrate that it is facing difficulties which it cannot overcome. Even if the purpose of the safeguard proceedings is to enable the applicant to pursue its economic activity, the difficulties faced by the applicant need not necessarily affect its core activity.
Furthermore, the appeal court considered that the obligation to replace a hedging agreement was not in itself a sufficient reason for the company to petition the commercial court validly for the opening of safeguard proceedings. The Cour de Cassation ruled out this conclusion, considering that it had been impossible to find a new hedging guarantor in October 2008.
The consequences of this decision are far-reaching. Many commentators are of the view that the opening of safeguard proceedings could be used in order to make up for the absence of the so-called 'théorie de l'imprévision' (the 'theory of foresight'). If a company is no longer able to perform its contractual obligations due to difficult economic circumstances, then safeguard proceedings could be an option.
The Cour de Cassation ordered the Coeur Défense case to be re-examined by the Versailles Court of Appeal. Windermere XII FCC will therefore have to prove that HOLD and Dame were not facing insurmountable difficulties at the time when they requested the opening of the insolvency proceedings.
For further information on this topic please contact Constantin Achillas at SNR Denton by telephone (+33 1 53 05 16 00), fax (+33 1 53 05 97 27) or email ([email protected]).