Member Article

Contrary to Anglo-Saxon and Northern European countries, French financial institutions have not used asset based lending, both because French security law was perceived as debtor friendly in insolvency proceedings and because French banks usually lend against balance sheets.

In the context of credit restrictions, the French government was challenged to foster a reform aimed at facilitating the mobilisation of assets, in particularby SMEs, which have no credit rating. This was inspired by the German legal framework on asset-based lending. Two major types of collateral have been overhauled by way of government ordinance: the pledge over inventory and assignment of receivables, by Ordinance no 2016–56 of 29 January 2016 and Ordinance no 2016–131 dated of 10 February 2016 respectively, and applicable to agreements entered into after 1 April 2016 and 1 October 2016.

The reform gives the security more flexibility, with broader scope and easier enforcement.

Secured lending benefits from a favourable regulatory treatment for lenders. In particular, it is exempt from bail-in in the Bank Recovery and ResolutionDirective (BRRD) dated 15 May 2014, which grants resolution and recovery powers to the ECB and national resolution authorities in order to absorb the losses ofa failing EEA credit institution (inter alios). Secured loans to banks are not subject to write off of banks’ liabilities or conversion into equity claims.

THE REFORM OF THE PLEDGE OVER INVENTORYTwo legal regimes for non possessory pledges of inventory exist under French law:

• the civil law pledge over tangible movable property entailing self-enforcement in accordance with a forfeiture clause (pacte commissoire) by which if the borrower does not execute its obligations under the loan agreement, the lender will automatically become owner of the pledged inventory, without any court order. In the event of insolvency proceedings, self-enforcement is maintained but the secured lender is given a right of retention (droit de rétention) over the pledged inventory rather than automatic ownership. This allows the lender to retain the pledged inventory until the borrower has paid its secured obligations in full.
• the commercial pledge over inventory is only available to credit institutions. Until the Ordinance dated 29 January 2016 parties could neither provide for a forfeiture clause nor benefit from a right of retention. Lenders were denied the right to resort to the civil law regime under French Cour de cassationcaselaw of 19 February 2013, confirmed on 7 December 2015.

Under Ordinance of 29 January 2016:

• the parties may choose between the civil law and commercial law regimes;

• under both regimes, the non possessory lender holds a right of self-enforcement and in case of insolvency proceedings, a right of retention on the pledged assets;

• if the value of the pledged inventory falls below a threshold value equal to 10%of the total value of the total pledged inventory value, the pledge may require that the pledgor increases the value of the inventory to match its initial value, or reduces the amount of the secured obligations corresponding to the loss of inventory value. If the value of the pledged inventory falls below a threshold of 20% of the total pledged inventory value, the secured lender has the option to require that the pledgor increase the inventory value or acceleratethe secured obligations. The above can be waived and/or the thresholds modified as the parties agree.

THE REFORM OF THE LEGAL REGIME OF THE ASSIGNMENT OF RECEIVABLES

Receivables used to be transferable by way of security to only credit institutions under the so-called Dailly Act codified in the French Monetary and Financial Code, and where credit was provided to the assignor. The civil law provisions governing the assignment of receivables could not be used to assign receivables by way of security under French case law of 19 December 2006 1.

While the Dailly Act simplified forms of transfer, ensuring its enforceability by all parties upon its execution by the assignor and its dating by the assignee, its scope does not permit the assignment of receivables to other initial assignees other than credit institutions based in the EEA and French financing companies providing loans.

Ordinance no 2016-131 dated 10 February 2016, which will be applicable as of 1 October 2016, amends the French Civil Code Assignment of Receivables to:

• remove the requirement to state the assignment price in the deed of transfer; it permits the assignment of receivables by way of security to assignees such as authorised alternative lenders such as debt funds or intercompany lenders.

• the method of assignment is now modernised. The assignment no longer needs to be notified to the debtor by a bailiff or accepted by the debtor in a notarial deed in order to be enforceable vis-à-vis third parties. The transfer will be enforceable upon notice of the assignment deed in any agreed form.

FRENCH FINANCIAL MARKETSAUTHORITY RELEASES PUBLIC CONSULTATION CONCLUSIONS SUPPORTING FUNDS’ LENDINGACTIVITY

Although UCITS and certain AIFs benefit from a principled exemption from the French banking monopoly under statutory provisions at Art L. 511-6 of the Monetary and Financial Code (CMF), under French regulations at Arts R. 214–19 I and R. 214–32–28I of the same code they are not authorised to grant loans on the primary market, and can only purchase debt on the secondary market.

The entry into force on 9 December 2015 of the European Union regulation no 2015/760 of 29 April 2015 created the European long-term investment funds (ELTIF) that are expressly authorised to grant loans, fostering a reflection on the French market placeas to whether other funds should also be given the right to lend. The French Financial Market Authority (AMF) arranged a public consultation between 22 October 2015 and 4 December 2015 about the possibility for French investment funds to lend directly to businesses. The AMF suggested setting up specific credit related licensing criteria for asset management companies and funds that would undertake this activity.

On 1 April 2016, the AMF released a summary of the answers collected from the 26 participants in the consultation, mostly industry players and concluded that:

• the new rules should ensure that equivalent principles are applied among different lenders within a clarified legal framework, taking into account each operator’s economic model;

• only management companies wishing to grant loans should be licensed by the AMF in accordance with the AIFM Directive and have a program of operations that allows for the possibility of granting loans, it being specified that non-French management companies should demonstrate that they are authorised to grant loans by their home regulator;

• only specialised professional funds (FTI), securitisation schemes (OT) and professional private equity funds (FPCI) should be able to grant loans;

• additional constraints should be set up on funds’ leverage, use of derivatives and securities borrowing whenever lending is no longer an ancillary activity – ie,when loans granted represent more than 10% of a fund’s net assets;

• management companies should regularly report to the AMF and the French Central Bank on all loans granted, so that lending can be monitored over time.

It is expected that a Decree will be enacted in the near future to open loan activities to eligible AIFs and UCITS within the framework of an amending Finance Law 2015.

INTERCOMPANY LENDING BANKING MONOPOLY EXEMPTION EFFECTIVE UPON THRESHOLDS PUBLICATION

Under the Macron Law no 2015–990 of 6 August 2015, French companies are now permitted to grant loans to other companies despite the absence of direct or common control between the parties, provided that they have an economic relationship justifying the granting of such a loan. The law specifies that the loans cannot exceed a two-year maturity and can be granted only on an ancillary basis by limited companies or joint-stock companies whose financial statements have been duly certified by a statutory auditor in favour of small and medium sized companies.

Further detailed conditions were published by implementing decree, on 22 April 2016. The decree sets forth four supplemental conditions for the granting of intercompany loans:

• At the closing date of each of the last two accounting periods preceding the date of the grant, the lending company’s shareholder equity must be greater than the amount of the share capital and the gross operating surplus must be positive;

• The lending company’s net liquid assets as at the closing date of each of the last two accounting periods preceding the date of the grant must be positive;

• The aggregate principal amount of the loans granted under Art L. 511–6, 3 bis, of the CMF must not exceed a limit equal to the lesser of the following amounts:

• 50% of the lending company’s net liquid assets or 10% of that amount calculated on a consolidated basis at the ending company’s group level; or

• €10m, €50m or €100m of the loans granted respectively by a small or medium-sized company or an intermediate-sized company or a large-sized company;

• The aggregate principal amount of the loans granted by a company to another company in the course of an accounting period must not exceed the greater of the two following amounts:

• 5% of the limit defined in the bullet point above; or

• 25% of the limit defined in the bullet point above up to a maximum of €10,000.