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10 October 2008
French insolvency law has traditionally been more favourable to debtors than to creditors. Consequently banks have been reluctant to grant loans to businesses, particularly small ones. French lawmakers, lenders and creditors alike realized that in order to improve access to credit for all businesses, effective security is essential to protect the lender if the debtor becomes insolvent.
The solution, the fiducie, was enacted into French law in February 2007, following a movement to modernize French securities laws which began in 2005. It can serve either as security or as an asset management tool. This update deals only with the fiducie as security.
The fiducie, inspired by the common law trust, is a transaction by which one or more settlors transfer existing or future assets, rights or security interests to one or more fiduciaries, which maintain those assets separately from their own property and act in the interest of one or more beneficiaries for a specific purpose.
The fiducie has one main advantage over other forms of security - if insolvency proceedings are commenced against the debtor, the beneficiary will not be subject to the legal restraints imposed on the other creditors.
No action against the debtor is allowed under French law from the date the insolvency proceedings are commenced until the date the court adopts a plan. The creditors recover their right to claim after the execution of the plan. In practice, once the unsecured creditors have recovered their right to claim, they are highly unlikely to obtain anything since all the debtor's assets are either given to secured creditors or sold in order to enable the business to pay super-privileged creditors, such as employees.
Moreover, even secured creditors (eg, those benefiting from a pledge or a mortgage) cannot be paid until the creditors benefiting from a legal privilege have been paid. Under French law, these privileged creditors are the court, if any judicial fees remain unpaid, the employees and the French Treasury.
The fiducie removes some of the debtor's assets from the debtor's ownership and places them in an estate held by the fiduciary, where they are protected from any claim of the settlor or the settlor's creditors.
The fiducie thus puts the beneficiary in a more favourable position than the debtor's other creditors because the beneficiary may be paid not only before the unsecured creditors, but also before the privileged creditors.
The fiducie, which certain commentators suggest is more effective than both the German Sicherungstreuhand and the UK or US floating charge, seems to be infrequently used at present. Only one fiducie transaction, involving the French Treasury as creditor, has been made public.
Indeed, the mechanism is somewhat restrictive. For instance, only specified entities can be settlors or fiduciaries, although a new ordinance is likely to enlarge the categories of persons to include individuals.
Moreover, the mechanism is new and creditors are worried that a fiducie might be cancelled in a safeguard proceeding, leaving them with an unsecured debt. The new ordinance is likely to reinforce the effectiveness of the fiducie in the framework of safeguard proceedings. The draft ordinance provides that if the debtor - the settlor in the fiducie contract - defaults under the safeguard plan, the fiduciary may proceed with the transfer or assignment of the fiduciary assets to the creditor. Moreover, under the draft ordinance, any decisions made by a specific group of creditors granting the debtor more time to pay its debts or even cancelling part of the debts cannot be imposed on the beneficiary of the fiducie. This means that the beneficiary will be able to negotiate directly with the debtor to find an acceptable solution.
For further information on this topic please contact Constantin Achillas at Denton Salès & Vincent by telephone (+33 1 53 05 16 00) or by fax (+33 1 53 05 97 27) or by email (firstname.lastname@example.org).
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