An October 11 2017 decision by the Commercial Division of the Supreme Court(1) has clarified how an assignment of business receivables, known as a 'Dailly assignment', operates.

Background

The assignment or pledge of business receivables, governed by Articles L 313-23 and following of the Monetary and Financial Code, is a mechanism whereby the assignor transfers or pledges one or more receivables held against one of its debtors (the assigned debtor) to a lender (the assignee) as part of a credit facility granted by the assignee to the assignor.

The assignment or pledge of business receivables allows the assignment or pledge of a set of receivables without any formalities, other than the issuing of a statement (bordereau) identifying the receivables. The assignment or pledge becomes effective and enforceable against third parties on the date specified on the statement when it is delivered to the assignee. The date must be inserted by the assignee on delivery of the statement.

The assignor may be a public or private legal entity. It may also be an individual, provided that the assigned or pledged receivables arise in the course of its business activity. The assignee is necessarily a lending institution.

The assignment of business receivables may be notified to the assigned debtor. If such notice is given, it is only by paying the assignee that the assigned debtor is discharged from its obligation to pay.

Decision

The decision relates to the performance of an agreement for discounting business receivables (escompte de créances professionnelles). SMLS assigned to a bank the receivables that it held against Air France under three invoices dated March 16 2009, in return for a credit facility from the bank. This was carried out through the Dailly statement mechanism. In accordance with Article L 313-28 of the Monetary and Financial Code, the bank notified this assignment to the assigned debtor, Air France.

Despite receiving notice of the assignment, Air France paid the invoices to the assignor, SMLS, and not the assignee bank, which immediately sued Air France for payment.

The airline claimed that the assignment was invalid and unenforceable against it, as it had been made in breach of the agreement with SMLS that had given rise to the receivables. The agreement provided that "any assignment of receivables to a bank or factoring company occurring and being presented without a minimum notice of one month shall be deemed null and void". In addition, Air France contended that notice of the assignment had not been served on it at the address specified for such purpose in its agreement with SMLS.

These arguments did not convince the first-instance court, which ordered Air France to pay the bank the total amount of the assigned receivables. Air France then appealed to the Supreme Court on the following grounds.

Notice not served Air France contended that it had not been served at its registered office, whereas the agreement with SMLS provided that "with respect to performance of this agreement, the parties elect domicile at their respective registered offices".

The Supreme Court considered the fact that the notice was not sent to the address specified by the assigned debtor for service of notices to be immaterial, as Air France had actual knowledge of the notification and could not have misunderstood the consequences of the notice.

Notice period Air France also argued that it should have been given at least one month's notice of the assignment of the receivables, pursuant to the agreement with the assignor. The Supreme Court rejected this argument on the basis of Article L 313-27 of the Monetary and Financial Code, which provides that an assignment or pledge takes effect between the parties and becomes enforceable against third parties on the date specified in the statement when it is delivered, without any other formalities being required.

Accordingly, the Supreme Court set aside the contractual provision, making the validity of the assignment conditional on the assigned debtor being given a minimum notice period. It held that giving effect to such a provision would amount to creating an additional condition for the validity of a Dailly assignment of business receivables, which the law had not provided for. The court held that an assignment of a business receivable takes effect and is enforceable against third parties and the assigned debtor on the terms and conditions provided for by law, and no additional conditions may arise from the agreement that generates the receivable.

Incorrect references As well as carrying the mandatory wording required by law, the assignment statement referred to Articles R 313-15 to R 313-18 of the Monetary and Financial Code (secondary legislation), which is not required by law.(2)

Air France argued that the lower courts were wrong to uphold the validity of the assignment despite the incorrect legislative references. The Supreme Court dismissed this reasoning and upheld the approach taken by the lower courts, ruling that making reference in the assignment statement to such secondary legislation, even though such legislation was no longer in force, did not affect the validity or the enforceability of the assignment.

Comment

The Supreme Court's approach is commendable. The assigned debtor could not have misunderstood the extent of its obligations, even though the assignment statement referred to this secondary legislation.

Through this decision, the Supreme Court has reinforced the effectiveness of the Dailly assignment mechanism by giving full effect to the assigned debtor's actual knowledge of the assignment and by giving no effect to contractual provisions that restrict assignment.

The highest civil court has shown itself to be pragmatic and receptive to the need for efficiency in business dealings, which is worthy of applause.

?For further information on this topic please contact Rhidian David or Agnes Braka-Calas at Hughes Hubbard & Reed by telephone (+33 1 44 05 80 00) or email (rhidian.david@hugheshubbard.com or agnes.braka-calas@hugheshubbard.com). The Hughes Hubbard & Reed website can be accessed at www.hugheshubbard.com).

Endnotes

(1) Case 15-18.372.

(2) Notably, pursuant to the Monetary and Financial Code, the assignment is not enforceable against the assigned debtor unless the assignment statement carries certain mandatory items of information, as listed in Article L 313-23 2°. These items are essentially the nature of the instrument, the fact that the instrument is subject to Articles L 313-23 to L 313-34 of the Monetary and Financial Code, the name of the lending institution, and a description of the receivables. Article L.313-23 2° refers to no other provisions – in particular, such as secondary legislation that applies to the Dailly assignment.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.