1. Background

The sauvegarde filing by Camaïeu’s holding company Modacin France SAS (Holdco) has been reported in the French press as one of the first cases where a safeguard proceeding has been opened by a company’s management in order to prevent its creditors from enforcing the fiducie previously granted to them over the shares of Holdco’s subsidiary as part of a court-approved restructuring proceeding (conciliation) of the group back in 2016.

The safeguard proceeding did not result in a safeguard plan. Instead, (i) an early agreement was reached between Holdco and its creditors pursuant to which the creditors acquired 100 per cent. control of the group in return for a debt write-off of €459 million and (ii) the tribunal de commerce de Lille withdrew the safeguard proceeding on 25 February 2019 as Holdco could not demonstrate it was facing insurmountable difficulties.

As the sauvegarde was withdrawn, the French court could not rule on the right of a debtor to use the sauvegarde procedure as a strategy to prevent the enforcement of the fiducie. We have expanded below on a few points to be considered by creditors where the security package includes a French fiducie, in the event of the opening of a safeguard, reorganisation or liquidation proceeding (an Insolvency Proceeding) by the management of the debtor.

The French fiducie as security

fiducie is the French equivalent of the English law trust. It is a contract pursuant to which a company (the Company) transfers ownership of specifically identified assets, rights or security interests (existing or future) belonging to the Company to a trustee (the Trustee). The Trustee holds these in a segregated estate created for the purpose of that fiducie until the discharge of obligations under the underlying financing agreement. The Trustee acts on behalf of one or more beneficiaries, which usually are, until a default, the Company and, after a default, the security agent on behalf of the lenders/bondholders.

Shares may be transferred into a fiducie. Typically the fiducie agreement will include provisions on how the fiducie may be enforced, including the transfer of such shares to the beneficiaries of the fiducie, e.g., the lenders/bondholders.

The main advantage of a fiducie is that it operates a transfer of ownership of and title to the shares so transferred, and that by being segregated from the estate of the Company, the fiducie creates an insolvency-remote structure. As ownership belongs with the Trustee, the shares transferred to the fiducie (before the Company enters into an Insolvency Proceeding) are excluded from the debtor’s insolvent estate.

Therefore, while in principle, under French law, security enforcement is frozen once the Company enters into an Insolvency Proceeding pursuant to article L.622-21 of the French Code de commerce, the fiducie is considered to be bankruptcy-remote and circumvent any Insolvency Proceedings.

However, in the Camaïeu case, Holdco used the opening of the safeguard proceeding as a strategy to prevent the enforcement of the fiducie on Holdco’s shares in its subsidiary.

2. The effectiveness of the fiducie during a safeguard proceeding

a) The enforcement of the fiducie frozen in certain circumstances

In principle, immediately after the opening of an Insolvency Proceeding, the creditors can request the transfer of title to (or sale of) the assets from the fiducie to any SPV owned by the creditors, as the assets transferred into a fiducie are segregated from the debtor’s insolvent estate.

However, if the fiducie agreement provides that the assets transferred to the fiducie remain in the Company’s possession (le constituant conserve l’usage et jouissance des biens transférés), these assets will be frozen and cannot be transferred to the creditors (i) if any payment default occurs before the opening of the Insolvency Proceeding; (ii) following the opening of the Insolvency Proceeding; or (iii) following the adoption of a safeguard plan by the French courts.

Nonetheless, the creditors will recover their rights if the safeguard plan is breached and the Insolvency Proceeding is converted from (a) a safeguard proceeding to a reorganisation proceeding or (b) a reorganisation proceeding to a liquidation proceeding. Upon conversion, the fiducie agreement becomes immediately enforceable and the assets can be transferred to the creditors or sold on an arm’s length basis (article L.631-14 of the French Code de commerce).

Furthermore, the creditors will also recover their rights in the event of a liquidation proceeding, where a sale plan is adopted by the court – when the debtor is contractually allowed to retain possession of the assets and use of them, the assets may only be transferred by the insolvency court to a purchaser if the beneficiaries of the fiducie consent to such transfer. In this case, however, ownership of and title to the assets may be returned to the creditor or the Trustee if a claim of ownership (action en revendication) is brought within three months from the publishing date of the opening judgment in the BODACC (Bulletin Officiel des Annonces Civiles et Commerciales) (or, if the contract itself has been published before the opening judgment, a claim for restitution (action en restitution) can be brought at any time by the creditor).

b) The concept of ‘possession’ (usage et jouissance) when assets transferred to the fiducie consist of shares

It is crucial for the creditors to set out in the fiducie agreement whether or not the assets transferred to the fiducie remain in the debtor’s possession, given the impact it may have in case of an Insolvency Proceeding opened against the debtor.

However, the question of how possession applies to shares has not been tested by French case law and French courts did not rule on this specific issue in the Camaïeu case.

French legal scholars have interpreted the concept of ‘possession’ of shares in fiducie arrangements by analogy with French case law with regards to the ownership of shares divided between usufructuaries and bare owners (démembrement de propriété).

In such case, the rights deriving from the ownership of shares are usually divided into (i) voting rights and (ii) financial rights resulting from the collection of dividends and the right to receive a portion of the company’s assets (liquidation payments, preferential subscription rights, etc.).

French scholars consider the right to receive dividends as the most important criterion to determine whether the Trustee or the Company would have possession of the shares. For the Trustee, possession could be achieved through collection of the dividends via a trust estate (patrimoine fiduciaire) or direct receipt by the beneficiaries.

According to French case law, where ownership rights to shares are divided between a usufructuary and bare owner (nu-propriétaire), the bare owner still acts in its capacity as shareholder even though it has granted in full the voting rights to the usufructuary, provided that it retains the right to participate in the shareholders’ assembly.

Therefore, if the Trustee has the right to participate in the shareholders’ assembly and receive dividends either through a trust estate or directly from the Company, the possession of the shares should be qualified and fall outside the scope of article L.622-23-1 of the French Code de commerce: enforcement of the fiducieand transfer of the assets therein will not be frozen on the occurrence of the events listed in paragraph a) above.