The French Supreme Court rendered a very important decision for the international practice of syndicated financings by recognizing in the context of French insolvency proceedings certain effects of the trust and the mechanism of parallel debt, both governed by the laws of the State of New York. The company Belvedère issued a loan of $ 375 million in 2006 in the form of floating rate notes offered to the public and governed by the laws of the State of New York. The issuance contract appointed the Bank of New York Mellon as trustee, principal paying agent, account holder and transfer agent. In such capacity, the trustee held the debt loan for the benefit of bond holders in whose name it had authority to make some decisions. In addition, Natixis and Raiffeisen Bank Polska, as French and Polish subsidiaries of the issuing company which granted security interests to secure the repayment of these bonds,
have been appointed principal and secondary agents under a security interest sharing agreement also subject the laws of the State of New York.  For these purposes, these banks have been recognized as creditors of the bond issue, along with the debt holders of notes.

The parallel debt intended to allow security agents to conclude, manage and enforce security interests in their name but in the
interests of the holders and their guarantors. This mechanism, used in civil law countries, was created to overcome the then supposed lack of effect of the trust, as France has not ratified the Hague Convention on the law applicable to trusts and on their recognition, whilst at the same time avoiding the security agent from being considered as  agent and thus to avoid registration of security interests in the name of each bondholder, to avoid carrying out legal publicity for enforceability of security interests as against third parties in the event of the transfer of bonds, and finally to avoid having to obtain special mandate for claim registration or enforcement of security interests.

As a safeguard procedure has been opened against the issuing company and its subsidiaries, the two security agents and the trustee each registered a claim for the full amount of the loan in each insolvency proceedings. The company Belvedère then thought about challenging these claim registrations in order to reduce its liabilities from the bond debt amount.

The French Supreme Court upheld the joint admission of the claims registered by the trustee and the security agents. It recognizes in
this respect the effects of the Anglo-Saxon trust and the mechanism of parallel debt.

1. Recognition of the capacity of the trustee to register claims without special authorisation of bondholders

Claim registration in insolvency proceedings is treated as a statement of claim. As such, it is subject to the rules of French civil
procedure, including the need for any person registering the claim of a third party to provide proof of a special authorization, in accordance with Article 416 of the French Civil Procedure Code, and to identify the real party to the court proceedings, though it is represented.

The question posed was to know whether the capacity to register a claim was to be decided under French law as the law applicable to the opened insolvency proceedings, in which case a special authorisation of each bondholder was needed, or in accordance with laws of the State of New York , as the law governing the bonds issue, in which case the trustee had sole capacity.

The creditor status is determined by the law of the claim

In order to assess ownership of the claim, the French Supreme Court dismissed the application of French law for the benefit of the law governing the contract. It upheld the decision of  the court of appeal for having ruled, as part of its discretionary power, that the trustee was entitled to claim as creditor of bondholders, having the legal ownership of the claim under the provisions of
the contract, and this despite the ambiguous terms in the statements of the cover letter of the claim registrations issued by the trustee under which claims were registered "on behalf" of the holders of notes.

Recognition of the effects of the Anglo-Saxon trust by the French judge

The trust is considered as being valid by the French judge when it is set up under a law that recognises such institution. However,
such validity does not bring about the automatic recognition of trust and French case law ruled long ago that international public policy reasons might prevent the recognition of trusts in French law.

French case law has already upheld certain effects of the Anglo-Saxon trust in France. Until now, it was limited to certain effects
that may be obtained under existing concepts of French law, such as the mandate.

In the present circumstances, the French Supreme Court does not refer to any French law theory. On the contrary, it dismisses all
reference to the active joint and several liability (solidarité active), a mechanism according to which a debtor agrees
to owe the full amount of the debt to several creditors, each of which is entitled to receive the full amount of the debt, provided that the recipient agrees to allocate to each of the creditors the portion due to it. There is an essential difference between the trust and the solidarité active : unlike the creditor in solidarité active, the trustee is not required to have personally subscribed the bond
debt in its own name. It simply has the legal ownership of the whole bond debt by virtue of the trust agreement.

Since the introduction in French law of the fiducie (French trust) by the statute of 19 February 2007, the concept of fiduciary ownership is not unknown by French law. This is clearly likely to facilitate the recognition in France of the effects of trust. However, the French Supreme Court makes no reference to fiducie.

It may be assumed that the trust can now be successfully used as a mechanism for holding security interests in France, as
if the trustee validly holds the principal claim, it can register, manage and enforce in its name the security interests securing such claim. But the parties used a parallel debt rather than a trust in favour of the security agent.

2. Recognition of the parallel debt

As noted by the French Supreme Court, the parallel debt consists for the debtor in entering into "a non-ancillary contractual commitment, equivalent to that [it] is obliged to in its relation with [the creditor]" as regards the security agent.

concept near to but not tantamount to “consideration”), after noting that such theory does not relate to international public policy in all its aspects.

It was first alleged that the parallel debt, having the same cause as the principal debt, the debtor should have been able to raise against the security agent the same objections as those benefiting the principal creditor. The French Supreme Court noted that
it is sufficient that the provisions of the issuance contract avoid the risk for the debtor of double payment made on the one hand to bondholders, or to the trustee and, on the other hand, to security agents, through provisions of allocation and repayment.

In addition, the Belvedère group companies argued that the parallel debt had no consideration insofar as some companies had not
granted security interests to the security agent to whom they had nevertheless granted a parallel debt. According to the French Supreme Court, this does not constitute an obstacle to the admission of the parallel debt of the security agent to the debtor's bankruptcy proceedings "in the framework of an overall financing subject to foreign law".

3. Towards a multiplicity of security agent regimes under French law

By putting an end to the legal uncertainty of the validity of the parallel debt and by recognising the effects of the trust in
French law, the French Supreme Court opens up the Paris market place to foreign international financing techniques. This is the sign of a mature market, and is all the more justified as, in 2006, when the bond issue was structured by Belvedère, there did not exist under French law any specific regime of security agent, allowing an agent to manage and enforce security interest in its name, nor any
fiduciary regime.

In 2007, French law implementd a specific security agent regime provided for in article 2328-1 of the French Civil Code, allowing an
agent to register, manage and enforce security interests in its name and on behalf of creditors. This regime is more reliable than the parallel debt as its validity does not depend on the quality of contractual provisions and its legal nature prevents any risk of fictitiousness. However, some improvements would be helpful in order to make this regime fully competitive as regards the parallel debt that has now been approved, or the trust, especially the possibility to use the mechanism for holding personal security interests and the clear recognition of the capacity of the security agent to bring actions and to register claims without any special authorisation of creditors. Under certain conditions, the fiducie can also serve as legal framework for the security agent in France.

 This article is also published in the Butterworth Journal of International banking and Financial Law and International Law Office