For years, the absence in the French civil law system of the concept of the trust hampered French lawyers involved in structuring complex secured financings and other transactions. Although common law trusts could be used in the context of off-shore transactions involving a French party, the device could not be used in a domestic French operation. In response, France enacted new legislation in 2007 introducing the concept of the fiducie.
Fiducie is defined as a “transaction by which one or more settlors (constituants) transfer assets, rights or security, either present or future, to one or more fiduciaries (fiduciaires) who, while maintaining those assets segregated from their own estate, act for a specific purpose for the benefit of one or more beneficiaries (bénéficiaires).” The fiducie creates a dedicated fiduciary estate (patrimoine fiduciaire) which is not subject to the claims of creditors of any party to the fiducie (including the fiduciary). The transfer of ownership of the fiduciary assets is temporary but the term can be as long as 99 years.
Only credit institutions, investment companies, insurance companies and members of the bar may be fiduciaries. The same party may act in several capacities in the context of a transaction. Thus the settler of the fiduciary estate or the fiduciary itself may be a beneficiary of the fiducie.
Intended Use of the Fiducie
The fiducie was designed to serve as a device by which a financial institution can take security over the assets of a borrower (security fiducie), as well as a vehicle for asset management (management fiducie). In the case of a security fiducie a debtor transfers assets to a lending bank that acts as a fiduciary on its own behalf. The fiduciary also signs a usage agreement with the debtor allowing the debtor to use the assets and requiring the debtor to take all risks with respect to the assets. At maturity of the loan, and provided that the debtor has fully performed its obligations, the assets are transferred back to the debtor. In case of default, the fiduciary can sell the assets in order to repay the financing. In the case of a management fiducie, a settlor entrusts assets to a fiduciary, either as a financial manager or simply as a stake-holder, to carry out a particular distribution arrangement (much like an escrow).
Accounting and Tax Treatment
In principle, the fiducie is neutral with regard to its accounting and tax treatment. The transfer of property to the fiducie does not give rise to capital gains (although, depending on the nature of the assets, there may be a transfer duty). The transfer does not necessarily diminish the value of the settlor’s assets since it may include as an asset a claim against the fiducie in the same amount as the assets transferred. The transfer of assets to the fiducie is made without consideration and therefore is not subject to value added tax (VAT).
Advantages of the Fiducie
Although the law has been in effect for five years, the fiducie has been slow to gain widespread acceptance among banks as a preferred structure for secured transactions. Nonetheless the fiducie is being used as an innovative means to respond to specific situations arising in the course of restructurings and acquisitions.
The fiducie affords a number of advantages:
- the parties to the fiducie have the right to determine the conditions of the fiducie operation including, most importantly, those relating to the transfer, management and return or sale of the fiduciary assets;
- in the case of a security fiducie, the settler can “recharge” the fiduciary assets from time to time throughout the term of the fiducie at little cost, thus allowing for optimization of the security afforded by such assets; and
- the assets in a fiduciary estate are “bankruptcy-proof” with respect to the bankruptcy of any party to the arrangement.
The Fiducie in Action
Although, as mentioned above, banks have been hesitant to use the fiducie as a means of secured lending, it has proven its usefulness in a variety of restructuring and acquisition transactions.
For example, the fiducie has been used in connection with a voluntary restructuring to provide assurance to third-party creditors, whose claims against a debtor were being litigated, that proceeds of the restructuring would be available to pay their claims in the event that the litigation would be resolved in their favor.
In an acquisition where the seller agreed to fund the payment of substantial employee claims against the acquired company arising from a pre-acquisition redundancy plan, a fiducie was created by the seller to hold the necessary funds in a bankruptcy proof structure, thus providing assurances to both the employees and the seller that claims would be paid even in the event of the subsequent bankruptcy of the acquired company.
The flexibility of the fiducie could make it useful in other contexts as well, for example:
- If governmental approval is required as a condition to close an acquisition, but it is unlikely that it will be issued quickly (e.g., approval from the competition law authorities), and the business must be transferred out of the seller’s group within a relatively short time frame, a fiducie could be set up to hold the business pending completion of the approval process.
- Given the current uncertainty as to the financial condition of certain financial institutions, the fiducie can be used in place of an escrow arrangement to retain a portion of the purchase price in an acquisition, since it is clear that assets held in a fiducie are immune from claims of the creditors of the fiduciary.