Extract taken from 'The Lending and Secured Finance Review' – edition 5

Credit support and subordination

This section describes current applicable French legal framework that could be modified pursuant to the draft bill described in Section VII.

i Security

Security interests over an asset must be granted in accordance with the specific set of rules applying to the category to which the asset belongs. Security packages are therefore most often documented through several separate security documents (although some law firms have recently started covering several unregistered security interests in one single security agreement).

Below is an overview of certain types of security interests that may be granted over assets located in France.

Registration always requires the payment of fees (the amount of which represents a percentage of the secured obligations for mortgages and security trusts while registration fees for other registered securities are nominal) and a renewal of the registration on occasion to maintain the effectiveness and ranking of the security interests.

All registered security interests must be drafted in French to allow registration with the relevant authorities for validity or perfection purposes and cover the relevant mandatory points required by law to be valid.

Security interests over real estateMortgages

Mortgages are granted over lands and buildings. To be valid, they must be executed before a public notary. To be perfected, they must be registered with the land registry, which will trigger the payment of various costs, including the real estate registration tax.

Security trusts

Security trusts require rights and assets (whether present or future) to be transferred to a trustee acting in favour of the secured creditor. The assets held by the trustee of the security trust are segregated from its own assets. They are generally used in restructuring transactions where the assets of the borrower consist of real estate.

To be valid, security trusts must be registered with the local tax authorities within one month of their execution.

Security interests over tangible movable propertyPledges over a business

Pledges over a business are granted over the business and cover at least the trade name, the leasehold rights where the business is operated and the goodwill of the business. If expressly provided and identified in the pledge agreement, the scope of the pledge may extend to fixed assets such as furniture, machinery, equipment and intellectual property (IP) rights attached to the business. The secured creditors may also decide to pledge machinery, equipment or IP rights under the specific regimes described below.

To be valid, they must be registered with the tax authorities and then with the registrar of the commercial court within 30 days of execution.

Registration requirements are described below, for situations where the IP rights are included within the scope of the pledges over a business.

Pledges over inventory

Pledges over inventory may be created in accordance with the French Civil Code (civil law pledges) or with the French Commercial Code (commercial law pledges).

To perfect a civil law pledge, it must be registered with the registrar of the relevant commercial court or the pledgor must effectively transfer possession and control of the pledged assets. The transfer is usually carried by a third-party service provider, which then undertakes certain obligations.

Since an order dated 29 January 2016, with respect to contracts entered into after 1 April 2016, the regime of the commercial law pledge has been simplified. However, the availability of a commercial law pledge is still limited, as the beneficiary of the pledge can only be the credit institution (see Section II) that has extended the financing secured by the security interest.

To be enforceable against third parties, the pledge must contain mandatory provisions and be registered with the registrar of the relevant commercial court.

Recent case law decided that the use of civil law pledges is only possible in instances where the conditions for creating commercial law pledges are not met. However, the above-mentioned order dated 29 January 2016 has expressly provided that parties can freely decide from 1 April 2016 whether to use a civil law pledge or a commercial law pledge.

Pledges over machinery and equipment

Pledges over machinery and equipment can only be granted to the seller, the credit institution financing the payment of the purchase price or the guarantor guaranteeing payment of the purchase price for the identified machinery and equipment over which the pledge is created to secure the payment. They must be directly granted in the sale agreement or the financing agreement.

To be valid, it must be granted within two months of delivery of the relevant machinery and equipment, and be registered with the tax authorities and then with the registrar of the commercial courts within 15 days of execution.

Security interests over shares and financial instruments (securities)Pledges over securities accounts

Pledges over securities accounts are governed by the MFC and are only relevant where the securities to be pledged are issued by a French limited liability company that is not a limited liability partnership. They apply to the securities account on which the securities and future securities held in the name of the pledgor are registered. The securities account is opened in either a paper format register held by the issuer of the securities or in an electronic format register by a regulated intermediary authorised by law to hold such accounts (the pledged securities account holder).

These pledges are created by the execution of a statement of pledge drafted in French, containing mandatory provisions and covering both the securities account where the securities held in the name of the pledgor are registered, and the special proceeds account opened in the name of the pledgor in the books of a bank or of the pledged securities account holder, where all dividends pertaining to the securities are transferred.

In practice, the security interest is registered in the securities transfer register and in the security holders' accounts of the French company.

Pledges over partnership interests

Pledges over partnership interests are governed by the French Civil Code and are applicable only to shares issued by limited or unlimited liability partnerships (which are not limited liability companies). As such partnerships are 'closed companies', granting such pledges requires the secured creditors to be approved by the shareholders as potential future shareholders.

To be perfected, they must be registered with the registrar of the commercial court.

Security interests over contractual rights, receivables and intangiblesPledges over receivables

Pledges over receivables (including pledges over a bank account) are governed by the French Civil Code and must properly identify the pledged receivables and the relevant debtor or debtors.

With respect to a pledge over a bank account, the pledged receivables will correspond to the amount of credit in the bank account at the time the pledge over the bank account is enforced, after taking into account debits and credits previously initiated but not yet completed.

As between the parties and towards third parties, the pledge is perfected as soon as it is executed, whereas a notification is required to perfect the pledge towards the debtor of the receivables.

Dailly assignments

'Dailly' assignments are security interests where a company makes an outright transfer of any claims it may have over identifiable receivables arising out of its professional activity. They are only available where the beneficiary of the assignment is a credit institution (see Section II) that has extended the financing secured by the security interest.

To be valid, a Dailly assignment must be drafted in French and contain mandatory provisions, and must be perfected on the date specified by the secured creditor in the Dailly assignment.

The debtor of the receivables must be notified if the secured party wants to receive all payments pertaining to the receivables.

Cash collateral

Cash collateral is created by transferring cash to the credit of a bank account belonging to the secured creditor.

Pledges over IP rights

Pledges may be granted over all kinds of IP rights such as patents, trademarks or designs. To be perfected, they must be registered with the French Trademark and Patent Office and published in the Official Bulletin of Industrial Property.

ii Guarantees and other forms of credit support

Guarantees are commonly used in France and granted by the parent company as well as significant subsidiaries of the group (see Section V, 'Corporate benefit and misuse of corporate assets' and 'Financial assistance'), whereas other forms of credit support are limited.

With respect to guarantees, as of 2006, guarantees have been governed by one chapter of the French Civil Code and may take three forms: joint and several guarantees, autonomous guarantees and letters of intent.

iii Priorities and subordination

As in other jurisdictions, financial indebtedness can be subordinated in two ways: through structural and contractual subordination.

Structural subordination, where senior debt is made directly available to operational companies, whereas mezzanine and junior debt is only made available to the acquisition vehicle, cannot be effected in respect of corporate lending for a single borrower and therefore is usually only seen in acquisition finance contexts.

Contractual subordination through subordination agreements is commonly used, and the effectiveness of these agreements has been recognised by Article L. 626-30-2 of the French Commercial Code in the context of safeguard proceedings. However, the effectiveness of contractual intercreditor arrangements is not free from doubt since there are no published decisions of any French courts on their validity or enforceability.