France embraces security trustee arrangements

Restructuring e-Newsletter - Global Insight

France's Sapin II Act was introduced last year to bring France into line with the highest international standards of transparency, in the fight against corruption and to guarantee more effective financing of the economy. A notable development for the finance world, is that the Act has empowered the government to take steps to clarify and modernize the status of the French security agent.

The concept of a security agent was introduced by the 2007 Act on Fiducie. Article 2328-1 of the French Civil Code provides that "any security may be created, registered, managed and enforced on behalf of the creditors of a secured obligation by a person appointed for this purpose in the agreement which creates the obligation". The appointment of such an agent, already well-established in a number of foreign legal systems where it is also referred to as "security trustee", aims to facilitate the management of a package of securities in the context of syndicated loans with a plurality of secured lenders.

However, almost ten years after this long-awaited provision was introduced into French Law, it is considered to be too vague and uncertain for practitioners to be prepared to rely upon it. As a result, secured lenders in syndicated loans have largely disregarded the provision, generally preferring to resort to more established and predictable devices to manage their securities, such as mandate, trust or parallel debt.

Article 117 of the French Sapin II Act which came into force on 9 December 2016 intends to address the flaws and uncertainties affecting the French security agent and has authorized the government to clarify and modernize its status with the stated ambition of making it a credible competitor to the Anglo-Saxon security trustee.

Scope extended to personal guarantees

Article 2328-1 of the French Civil Code only refers to securities and is silent on whether the security agent may create, manage and enforce personal guarantees. This omission is regrettable as it imposes an unjustified distinction between personal guarantees and other forms of security resulting in the need for more burdensome formalities in respect of personal guarantees despite their frequent use in financing arrangements.

Article 117 of Sapin II now helpfully extends the security agent's remit to the creation, management and enforcement of all forms of personal guarantees.

Security agent as direct holder of securities and guarantees

Article 117 of Sapin II also expressly provides that the security agent must directly hold securities in its own name, must ring-fence and keep them separate from its own estate, and will be entitled to receive the proceeds on enforcement of the securities.

The creation and recognition of a separate estate exclusively dedicated to the management of the securities and guarantees held by a security agent should bring greater certainty and comfort to secured creditors, especially in circumstances when insolvency proceeding are opened against the security agent. In this respect, the new provision authorizes the government to specify the consequences of the opening of an insolvency proceedings against the security agent, including measures related to the appointment of an interim security agent or the replacement of the security agent.

Permitting securities to be held in the name of the security agent should also bring new levels of flexibility, allowing, in particular, secured claims to be transferred to a new creditor without affecting the management of the securities by the security agent.

Security agent as representative of the secured creditors' interests

Article 2328-1 of the French Civil Code is also silent on whether the security agent is entitled to take legal action on behalf of secured lenders.

This flaw has been removed by Sapin II which empowers the government to specify the conditions under which the security agent can take a legal action to protect the secured creditors' interests, and (within the limitations of the powers granted to it by the secured creditors) to file a proof of claim in the event that the borrower enters some form of insolvency proceedings. .

Whilst we must wait to see how the French government decides to implement these measures in practice, it is nevertheless reasonable to predict that secured lenders will be receptive to the reform and more favourably attracted to this enhanced concept of the French security agent.