• • •  Archives  Changing the Colour of French Security Law

By Marie-Elodie ANCEL and Chuck EVANS
Professor at the University of Paris-Val de Marne / Partner in PricewaterhouseCoopers’-Paris

“When one travels only as a passer-by in a foreign country,
one may take violations of the law for the law of the land”
Voltaire : “Pensées Détachés”


French participants in the INSOL Europe conference in Prague in October last year bristled at a presentation of Professor Philip Wood’s paper on Security Interests in Europe. Accustomed to, and perhaps relatively comfortable with, a portrayal of France as being more “debtor friendly” than “creditor friendly”, they detected a judgemental tone in a number of charts which depicted French and Napoleonic security law (sic) in cautionary red or arid yellow and Anglo-Saxon and Common Law systems in oasis blues and greens!

After having vigorously defended in Prague the honour (and colours) of France and the efficiency of its banking system, the members of the “Groupe de Réflexion sur l’Insolvabilité et sa Prévention” (GRIP 21) gathered in November in Paris to discuss Professor Wood’s paper. They considered it simplistic to present in primary colours the various substantial, and numerous subtle, differences which exist in security interests across the world. Does the debate have to polarise between Napoleonic and Anglo-Saxon systems or can lessons been learned from systems such as that of Quebec, which takes its roots from both the French Civil Code and solutions adopted by its English speaking neighbours? In addition it was felt to be inevitably sensationalist to draw such sharp distinctions without summarising what securities are actually available in France. After its November meeting, GRIP 21 therefore requested us to write this article in response, with a view to providing the reader with a brief but tangible overview of security interests available in France and potential evolution of French law in this area.

Overview of Security Interests in France

The French system is founded on laws relating to ownership on the one hand and on laws relating to “security” (rights over non-owned assets) on the other.

Ownership

Retention of ownership by, or transfer of ownership to, a creditor as a form of security exists in many forms in France: Retention of title; finance leases (crédit–bail); or sale of commercial receivables (Dailly) and other debts. This latter category is efficient in protecting creditors’ interests even in the event of insolvency proceedings.

Security

Taking security over a debtor’s assets in France can be complex as there are numerous types of security, each with its own particular regime. In addition to classic forms of security such as mortgages over real property; pledges over shares or business goodwill, and charges requiring dispossession (for example charges over stocks), there are also a wide range of types of security adapted to specific industries (eg agricultural warrants; charges over motor vehicles and over financial instruments).

Whilst the scope for taking security in France is therefore wide, it is subject to a number of limitations. It is generally only possible to take security over assets that are already specifically identified and in respect of specific debt. This limits the ability to obtain security for varying funding requirements and also imposes administrative burdens (eg continuous reproduction and submission of lists of receivables or inventories may be required).

Realising security is also usually only possible by means of recourse to a court. In the event of disputes this can lead to long delays, high realisation costs and potentially impaired value for the creditor. Nevertheless, whilst it is true that different publicity requirements make it difficult to establish to what extent a debtor’s assets are encumbered, well-advised creditors are generally able to gage the security appropriate to the situation in hand.

Future Reforms

A wave of reforms is currently sweeping across France, which is to include rejuvenation of security law and the treatment of companies in difficulty. Encouraged by the President of the Republic, an examination of potential reforms to security law has been initiated by the French Ministry of Justice and a consultative paper thereon is expected to be published in the first half of 2005. Matters for consideration include:

• Enlargement of the field of application of security (for example to include “future” or “changing” assets);
• Relaxation of the principle that security is only available for pre-defined and non-revolving credits;
• Improvement and standardisation of publicity;
• Potential adoption of mortgages and charges on moveable assets without dispossession alongside the existing security-ownership;
• Facilitating the realisation of security and removal of requirement for judicial approval where the market value of assets can be objectively established.

In addition to security law, work-out and insolvency legislation in France has a significant impact on the real value to a creditor of its security, and reforms are under consideration in this domain. Existing (and likely future) French legislation favours preservation of the business and of employment over maximising recovery for creditors. From an Anglo-Saxon secured creditor’s perspective, this may justify colouring France as “red”. From a French corporate perspective the reverse may be true (either way a very simplistic analysis). The treatment of companies in difficulty is an area of complex interplay between conflicting public policy requirements. Judgemental analysis as to a county’s policy in this area is perhaps less helpful than information enabling lenders to establish the extent to which security in a given country reduces their risks.

In French work-out processes, new money does not currently obtain priority over existing lending. If the state of the company permits and additional security is available, then this may be granted for new money, but the provision of additional security for existing lending is actively discouraged. Priority for new money is an area of anticipated reform, and the new bill to be debated in Parliament in the forthcoming weeks is expected to introduce a legal priority for providers of new money.

French insolvency proceedings result in an automatic stay on creditor claims and on enforcement measures. If immediate liquidation is not warranted, the insolvency practitioner will trade on with a view to refinancing the business and rescheduling the debt in order to exit insolvency or for long enough to sell it as a going concern. In the event that the business is sold, then the court’s decision on which offer to accept will be based on both economic and social criteria. Value may not necessarily be maximised for the secured creditor, although in some case the debtor’s liability and security may pass to the purchaser of the related asset.

In the event of liquidation, the liquidator realises the assets (often at auction) in order to pay the creditors. Generally employee redundancy and other claims and French Government tax claims have priority over other secured creditors. However the appropriateness of preferential status for public bodies and state organizations is being increasingly contested.

Conclusions

Multi-coloured charts serve a purpose in drawing very quick comparisons between jurisdictions, but the underlying issues are so delicate that such charts can only be drawn up from a particular perspective. This risks creating prejudice instead of assisting people to do business in other jurisdictions. We hope that this short article serves to demonstrate that whilst by no means perfect, the French system of Security Interests is perhaps more developed than given credit for outside of France. The system is undergoing reform to make it simpler, more effective and more transparent so that lenders have a clearer view of the value of their security options.