Lending and taking security in France: overview

A Q&A guide to finance in France. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge clauses, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Finance Country Q&A tool.

This article is part of the global guide to finance. For a full list of jurisdictional Q&As visit www.practicallaw.com/finance-guide.

Contents

Overview of the lending market

1. What have been the main trends and important developments in the lending market in your jurisdiction in the last 12 months?

Over the last 12 months, the government re-opened discussions to allow new exceptions to the French banking monopoly rules (see Question 25), in particular with regards to business-to-business loans.

Disintermediation continues with accrued financing through capital markets and debt funds. Once the banking monopoly rules have been relaxed, this trend will continue through direct financing by debt funds.

 

Forms of security over assets

Real estate

2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected (that is, made valid and enforceable)?

Real estate

Property can be either movable or immovable (Article 516, French Civil Code). Land and buildings are considered as immovable properties by nature. Movable properties attached to an immovable property are also regarded as immovables (for example, pipes conducting water to an immovable property and fruit of trees).

Common forms of security

The most common forms of security granted over real estate are:

  • Mortgage (hypothèque). A mortgage is defined as a right over an immovable property allocated to the discharge of an obligation. A mortgage is by nature indivisible and subsists in its entirety on all the immovable property burdened. A mortgage follows the immovable in the case of any change of ownership (Article 2393, French Civil Code). A mortgage can be rechargeable to guarantee additional loans.

  • Lenders' lien (privilège du prêteur de denier). This is a security interest that grants to its beneficiary a preferential right over other creditors. It can only be granted to secure the purchase price of the underlying asset, and only over existing buildings (that is, not building works, VAT, and so on).

  • French trust (fiducie). Fiducie is relatively new in France and can be used as a security interest. In a fiducie, the settlor transfers the ownership of any asset (real estate, receivables, cash, and so on) to a trustee for the benefit of a beneficiary. Acting as a security (the ownership being transferred to the trustee), the assets transferred into fiducie are protected from insolvency procedures relating to the settlor. However, fiducies of real estate are still rare.

Formalities

The following formalities apply:

  • Mortgage. A mortgage must be created by a notarised deed. The mortgage is registered by the notary at the local land registry. Mortgages are ranked according to their registration date.

  • Lenders' lien. A lender's lien must be created by a notarised deed. The lien must be registered at the local land registry by the lien holder within two months of the signature of the notarised deed.

  • Fiducie. The fiducie is created by a private deed (acte sous seing privé) and can be registered with the fiducie registry. It is also recommended to register the deed with the tax authority (enregistrement) in order to establish a definite date (date certaine). Registration will ascertain the date of signature of the private deed.

Tangible movable property

3. What is considered tangible movable property in your jurisdiction? What are the most common forms of security granted over it? How are they created and perfected?

Tangible movable property

Property can be movable either:

  • By nature. Animals and things that can move from one place to another are movable by nature, whether they can move by themselves or only as a result of an extraneous power (Article 528, French Civil Code).

  • By operation of law. Shares, bonds, interest in financial, commercial or industrial concerns, perpetual or life annuities, among others, are movable by operation of law (Article 529, French Civil Code).

Common forms of security

A pledge (possessory or non-possessory) (gage avec ou sans dépossession) can be taken over stock, a going concern or any type of movable property. A pledge is an agreement under which the pledgor gives to a creditor the right to be paid in preference to other creditors out of a corporeal movable or a set of corporeal movables, present or future (Article 2333, French Civil Code).

Formalities

A pledge must:

  • Be in writing (except for commercial pledges).

  • State the amount of the secured obligations.

  • Specify the quantity and nature of the pledged assets.

A pledge is enforceable against third parties either by:

  • Registration with the relevant public registry (non-possessory pledge).

  • Delivery of the pledged assets to the beneficiary of the pledge or to any person appointed by the beneficiary of the pledge (possessory pledge).

Financial instruments

4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What are the most common forms of security granted over those instruments? How are they created and perfected?

Financial instruments

Financial instruments include (Article L. 211-1, French Monetary and Financial Code):

  • Financial securities. These include:

    • equity securities issued by joint stock companies;

    • debt securities (except bills of exchange and interest-bearing notes); and

    • units or shares in undertakings for collective investment.

  • Financial contracts. These are futures contracts that appear on a list established by decree.

Common forms of security

The most common forms of security over financial instruments are a:

  • Pledge over shares (nantissement de parts sociales).

  • Pledge over securities (nantissement de comptes-titres).

  • French trust (fiducie) (see Question 2).

Formalities

The following formalities apply:

  • Pledge over shares. This can be created by a notarised deed or a private deed. If the pledge is granted in a private deed, it is advisable to register the pledge in order to establish a definite date. There is no registry for commercial companies, therefore pledges over commercial companies' shares cannot be registered. A pledge over a civil company's shares must be registered on a specific registry at the relevant commercial court.

  • Pledge over securities. This is created through a written deed signed by the holder of the shares and the beneficiary of the pledge, a certificate issued by the holder of the shares, a certificate issued by the company whose shares are pledged and a certificate issued by the bank holding the special account. The pledge is then registered on the company's share transfer register.

Claims and receivables

5. What are the most common types of claims and receivables over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? How are they created and perfected?

Claims and receivables

Claims and receivables are broadly defined under French law as debts and rights arising under all contracts, such as warranties, invoices, and so on.

Common forms of security

The most common forms of security over claims and receivables are a:

  • Dailly assignment of receivables by way of security (cession de créances professionnelles à titre de garantie). The assignor assigns to the assignee (which can only be a licensed bank or a financial institution) its rights in a receivable. The debts assigned can be existing or future, and can cover any type of claims and receivables.

  • Pledge over receivables. A pledge over receivables can cover future receivables, which must be identifiable (see Question 8, Future assets).

Formalities

The following formalities apply:

  • Dailly assignment. An assignment is created by execution of a transfer deed (bordereau), which lists the claims that are assigned and contains several mandatory provisions (for example, references to the provisions of the French Monetary and Financial Code relating to Dailly assignments). A Dailly assignment is enforceable against third parties from the date of the transfer deed.

  • Pledge over receivables. A pledge must be in writing and is enforceable against the debtor on written notification. There is no registry for pledges over receivables.

Cash deposits

6. What are the most common forms of security over cash deposits? How are they created and perfected?

Common forms of security

The most common forms of security over cash deposit are a:

  • Cash collateral agreement (gage-espèce). The debtor transfers a secured amount of cash into an account created/opened in the name of the creditor. Therefore, the creditor has full ownership of the cash and can use it.

  • Pledge over bank account.

  • French trust (fiducie) (see Question 2).

Formalities

The following formalities apply:

  • Cash collateral agreement. There is no registry of cash collateral security and it is advised to register it with the tax authorities in order to establish a definite date of signature.

  • Pledge over bank account. The rules are the same as for a pledge over receivables (see Question 5, Formalities).

  • French trust. See Question 2, Formalities.

Intellectual property

7. What are the most common types of intellectual property over which security is granted in your jurisdiction? What are the most common forms of security granted over intellectual property? How are they created and perfected?

IP

French IP rights (IPRs) include:

  • Patents.

  • Trade marks.

  • Copyright.

  • Designs.

Common forms of security

The most common form of security over IPRs is a pledge.

Formalities

To be enforceable against third parties, pledges over IPRs must be registered with the relevant registry (that is, the National Trade Marks Authority (Institut National de la Propriété Industrielle) or the National Patent Registry (Registre National des Brevets)).

Problem assets

8. Are there types of assets over which security cannot be granted or can only be granted with difficulty? Which assets are difficult or problematic when security is granted over them?

Future assets

It is possible to pledge future assets (Article 2355, French Civil Code) provided that either:

  • The assets can be individualised.

  • The pledge agreement provides information regarding the debtor, the place of payment and the value of the assets (or an estimate).

Fungible assets

Pledges over fungible assets (gage de chose fongible) are permitted (Article 2341, French Civil Code). In the case of a possessory pledge, the pledgee must keep the assets separated from its own assets of the same type. Otherwise, the pledgee will need to refund the pledgor with the same type of assets (unless the pledge agreement provides otherwise). In the case of a non-possessory pledge, the pledgor can use and sell the pledged assets and replace them with assets of the same type, provided that the pledge agreement authorises the pledgor to do so.

Other assets

Pledge over a business as a going concern (nantissement de fonds de commerce). A pledge over a business as a going concern is a non-possessory pledge granting its beneficiary the right to be paid in preference to other creditors and to follow the collateral in whatever hands it may pass (Article L. 141-2, French Commercial Code). However, this type of pledge does not grant creditors the right to claim seizure of the collateral before the relevant court.

The pledge can either take the form of a notarial deed or a private agreement. It must be registered with the registry of the relevant commercial court within 15 days of the date of execution and, where applicable, with the National Trade Marks Authority (Institut National de la Propriété Intellectuelle).

This form of security is criticised because its value depends on the value of the going concern, and an event of default under a guaranteed loan is usually caused by a bad business performance. Therefore, this type of pledge tends to be used in addition to a pledge over each asset of the business, such as a pledge over stock, IP rights, receivables, and so on.

Pledge over stock (gage sur stock). This type of pledge is permitted under French law. At the choice of the parties, the pledge can be either:

  • Commercial (Article L. 527-1, French Commercial Code).

  • Civil (Article 2333, French Civil Code).

To be perfected, the pledge must be either:

  • Registered with the relevant stock registry (non-possessory pledge).

  • Delivered to the pledgee or a third party appointed by the pledgee (possessory pledge).

 

Release of security over assets

9. How are common forms of security released? Are any formalities required?

French security interests are released automatically on payment of the secured obligations.

There are no other formalities, except for updating the registry in which the security was registered (if applicable). The parties can also sign a release agreement to formalise the release of the security, but the registry will still need to be updated (if applicable).

 

Special purpose vehicles (SPVs) in secured lending

10. Is it common in your jurisdiction to take security over the shares of an SPV set up to hold certain of the borrower's assets, rather than to take direct security over those assets?

It is common to take as much security as possible, including over both the:

  • Shares of the SPV that owns the assets of the borrower.

  • Shares of the SPV's parent company.

However, the SPV can only grant direct security if it receives a loan from the secured creditor.

 

Quasi-security

11. What types of quasi-security structures are common in your jurisdiction? Is there a risk of such structures being recharacterised as a security interest?

Sale and leaseback

Sale and leaseback structures are common in France, but are not regulated. From a legal point of view, each operation must be considered on a case-by-case basis. The operation as a whole is not characterised as a security interest, but each operation taken separately can fall within the scope of a specific legal definition and be characterised as a security interest.

Factoring

Factoring is common in France and is subject to the banking monopoly rules. Therefore, factoring can only be granted by an authorised bank or credit institution. Factoring is not considered as a security interest, as it is specifically regulated (in particular with regards to the legal characterisation of the transfer of receivables, the date of transfer of ownership and liability, rights of recourse, and so on).

Hire purchase

In France, hire purchase is characterised as leasing (crédit-bail). Leasing activities (for movable and real estate properties) are regulated and can only be operated by a credit institution (or by a company on an occasional and accessory basis). Leasing is not considered as a security interest, as it is subject to specific mandatory rules.

Retention of title

Retention of title clauses (clause de réserve de propriété) are very common in France and are characterised as a security interest. A retention of title clause must be in writing. There are no other specific formalities.

Other structures

Delegation of payment arrangements. These are often used as a replacement for a pledge over receivables. The transferred debtor acknowledges the delegation of payment agreement and accepts in advance to directly pay the beneficiary of the delegation.

Transfer of receivables. In cross-border transactions, transfers of receivables often replicate "US-style" assignments. This type of assignment is not recognised by French law and will be recharacterised as a pledge, transfer of receivables or any other relevant mechanism by French courts. See also Question 16.

 

Guarantees

12. Are guarantees commonly used in your jurisdiction? How are they created?

The most commonly used guarantees are the:

  • Guarantee (cautionnement). The guarantor undertakes to pay the beneficiary the guaranteed debts if the debtor fails to do so. The guarantee can be:

    • several (that is, the beneficiary must have unsuccessfully enforced its claim against the debtor before requesting payment from the guarantor); or

    • joint and several (that is, the beneficiary can enforce the guarantee against either the guarantor or the debtor).

  • First demand guarantee (garantie à première demande). The guarantor grants a guarantee that is separate from the underlying obligation of the debtor, and agrees to pay on first request of the beneficiary.

Both types of guarantee must be created by written agreement. No other formalities apply for enforcement purposes.

 

Risk areas for lenders

13. Do any laws affect the validity of a loan, security or guarantee (or the terms on which they are made or agreed)?

Financial assistance

A company must not advance funds, grant loans or sureties to enable a third party to subscribe or purchase its own shares (Article L. 225-216, French Commercial Code). While this prohibition does not apply to all types of French companies, the rules relating to corporate benefit, which apply to all types of French companies, have the same effect (see below, Corporate benefit).

Corporate benefit

To enter into any agreement, arrangement or pursue any actions, a French company must derive a corporate benefit (intérêt social). Therefore, a company cannot grant a security for the benefit of the creditors of its parent company, or cannot lend money to its parent company, as these are deemed not to be for its corporate benefit. For the same reason, cross-guarantees among sister companies are also an issue.

Loans to directors

Loans to directors are prohibited under French law, subject to specific exceptions.

Usury

Usury rules only apply to:

  • Individuals borrowing for their personal need.

  • Legal entities that have no economic activity.

Others

Security interests granted during the hardening period (see Question 23) can be declared void by a French insolvency court. The hardening period can go back up to 18 months before the date of the insolvency filing.

 
14. Can a lender be liable under environmental laws for the actions of a borrower, security provider or guarantor?

There is no liability of the lender for environmental damages caused by the debtor. However, a lender can be held liable when financing an obvious illegal activity (including under environmental laws), if either:

  • It is the de facto manager of a company that is itself liable for environmental damages.

  • By enforcing a security interest, it is the owner of a company or an asset that causes environmental damages.

 

Structuring the priority of debts

15. What methods of subordination are there?

Some specific contractual arrangements are subordinated by nature as they are unsecured, such as:

  • Profit participating loans.

  • Shareholder's loans.

  • Mezzanine loans.

Contractual subordination

Contractual subordination is authorised in France and must be in writing.

Junior creditors (such as bondholders) can decide to be subordinated to senior creditors.

Subordination arrangements are recognised and upheld in insolvency proceedings (see Questions 21 to 24).

Structural subordination

Structural subordination is possible under French law and usually applied in cases of structured financing with several layers of ownership of the special purpose vehicle (SPV) (that is, the creditors of the "grand-mother" company of the SPV are structurally subordinated to the creditors of the "mother" company of the SPV, and of the SPV itself).

Inter-creditor arrangements

Inter-creditor agreements (such as subordination arrangements) are common and authorised in France. They usually contain, in addition to subordination arrangements, a ranking arrangement, waterfall provisions and specific events of default that apply to the whole structure (not to the SPV only).

 

Debt trading and transfer mechanisms

16. Is debt traded in your jurisdiction and what transfer mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt?

Debt can be traded in France through various mechanisms, including:

  • Subrogation.

  • Dailly assignment (which is different from a Dailly assignment of receivables by way of security (see Question 5)), under which the bank or financial institution benefiting from the Dailly assignment will purchase the receivables and be paid directly by the debtor.

  • Specific bordereau in securitisation schemes.

  • Under a foreign law mechanism.

To be perfected, an agreement for the transfer of receivables must be notified to the debtor by a bailiff, even when the transfer is subject to a foreign law (Article 1690, French Civil Code).

 

Agent and trust concepts

17. Is the agent concept (such as a facility agent under a syndicated loan) recognised in your jurisdiction?

The agent concept is recognised by French courts and agents are commonly used. Agency arrangements created under a foreign law are recognised (subject to the governing law and choice of jurisdiction clauses being upheld), entitling agents to enforce their rights.

However, in syndicated loans with foreign lenders, it is advisable to use a parallel debt scheme in the loan documents to facilitate the enforcement of the security interests on behalf of the syndicated group.

 
18. Is the trust concept recognised in your jurisdiction?

France has not ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985. Therefore, trusts recognised by the French courts (subject to the governing law and jurisdiction clauses being upheld) can be recharacterised as a French equivalent agreement (for example, mandate, agency agreement and so on). Some judges have also recognised foreign trusts as such (Cass. com., 13 September 2011 n°10-25.533: JurisData n° 2011-018623).

Additionally, French law has introduced the concept of fiducie in 2008, which replicates certain aspects of trust law (see Question 2).

 

Enforcement of security interests and borrower insolvency

19. What are the circumstances in which a lender can enforce its loan, guarantee or security interest? What requirements must the lender comply with?

A lender can enforce its security interest if the underlying secured obligation is due and payable (that is, the loan has been accelerated or has matured).

The lender must comply with the requirements set out in the security agreement and must summon the debtor to pay within eight days (commandement de payer or mise en demeure), even if the security documents do not require prior notification.

Methods of enforcement

20. How are the main types of security interest usually enforced? What requirements must a lender comply with?

The main types of security interests and guarantees are enforced as follows:

  • Guarantees and first demand guarantees. The lender must send a summons to pay to the guarantor. If the guarantor does not pay, the lender must start proceedings before the relevant court.

  • Mortgages. The lender must send a summons to pay to the mortgagee. If the mortgagee does not pay, the lender must start proceedings for the seizure of real estate before the relevant court.

  • Pledges. All types of pledges can be enforced through:

    • public sale (vente publique);

    • judicial attribution of the secured assets (attribution judiciaire); or

    • contractual attribution of the secured assets (pacte compromissoire), which is not available for pledges over fungible assets and pledges over a business as a going concern. However, contractual attribution is the most common method of enforcement of pledges.

Rescue, reorganisation and insolvency

21. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? How do they affect a lender's rights to enforce its loan, guarantee or security?

Rescue and reorganisation procedures

Ad hoc proceedings (mandat ad hoc). These are voluntary proceedings available for French companies that experience difficulties, but can still pay their debts with their available assets (that is, companies that are not in a state of cessation of payments (état de cessation des paiements)). These proceedings are strictly confidential.

The purpose of ad hoc proceedings is to request from the President of the relevant commercial court the appointment of a special commissioner (mandataire ad hoc), who will negotiate with the creditors of the company under an ad hoc mandate an extension of payments or payoff of the company's debts. Since it is a voluntary procedure, the creditors of the company can refuse to enter into negotiations.

There is no time limit for ad hoc proceedings.

Conciliation proceedings. Conciliation proceedings are opened by the President of the relevant commercial court for companies that carry out commercial activities, and which:

  • Encounter actual or foreseeable legal, economic or financial difficulties.

  • Have not been in a state of cessation of payments for more than 45 days.

The court appoints a special conciliator whose duty is to promote the conclusion of an amicable agreement between the debtor and its main creditors, which is intended to put an end to the difficulties of the company. The conciliator can also make any proposal for the safeguarding of the company, the continuation of its economic activity and the maintenance of employment.

Since an Order dated 12 March 2014, the conciliator can organise the partial or total sale of the assets of the debtor which can be completed during an insolvency procedure (the French "pre-pack").

The conciliation procedure cannot exceed four months, but can be extended by up to one month.

In contrast with ad hoc proceedings, the debtor can request the commercial court's approval (homologation) of the agreement entered into by the company and its creditors. Approval is required if new money is injected during the conciliation, which will rank above existing loans and securities on insolvency (see Question 24).

Conciliation proceedings are confidential until the court's approval.

Safeguard proceedings. Safeguard proceedings are opened to French companies that are not in a state of cessation of payments, but experience difficulties that they are unable to overcome. The purpose of these proceedings is to facilitate the reorganisation of the business in order to ensure the:

  • Continuation of the company's economic activity.

  • Maintenance of employment.

  • Payment of liabilities.

The judgment opening safeguard proceedings also opens an observation period that can last up to 18 months.

Safeguard proceedings lead to a safeguard plan (plan de sauvegarde) presented by the company to its creditors. The plan must define the terms and conditions for settlement of the company's liabilities, including secured liabilities (for example, ten-year term-out, payoff or conversion into equity).

In large companies, the plan must be approved by the:

  • Creditors' committee for financial institutions (including the entities that concluded a loan agreement with the debtor).

  • Trade creditors' committee.

  • Bondholders' committees.

The plan must be adopted by the court.

An Order of 12 March 2014 introduces a new safeguard procedure called accelerated safeguard procedure (which includes the accelerated financial safeguard procedure created in 2010). This procedure allows a debtor that has negotiated a safeguard plan supported by at least two thirds of the creditors (in the case of an accelerated financial safeguard procedure, this only covers financial creditors) during a conciliation procedure, to finalise this plan with the creditors and have it approved by the court within a three-month period following approval of the plan by creditors.

Effect on lenders' rights

Contracts cannot be terminated (or loans accelerated) following the opening of ad hoc, conciliation, safeguard or insolvency proceedings, regardless of any contractual terms or conditions to the contrary (in particular in loan agreements).

Ad hoc and conciliation proceedings. These proceedings do not affect lenders' rights to enforce their loan, guarantee or security (French Commercial Code).

However, in practice, the mandataire ad hoc or conciliator will ask the creditors to suspend and waive their rights during the proceedings (including rights to enforce loans, guarantees or security interests).

A debtor that has been given formal notice or that has been prosecuted by a creditor can request the judge who opened the proceedings to defer or reschedule the payment of its debts for up to two years (Order dated 12 March 2014). The judge can decide that:

  • Any rescheduled or deferred payments will bear interest at a lower rate.

  • Any payments will first be allocated to the repayment of the principal rather than interest.

The judge's decision will stay any execution proceedings launched by the creditors.

Safeguard proceedings. During the observation period, all proceedings against the debtor are automatically stayed (moratorium) and no payment of claims arising prior to this judgment can be made. However, legal actions against third parties/guarantors are possible, provided that these are legal entities.

This also applies in the case of accelerated safeguard proceedings.

 
22. How does the start of insolvency procedures affect a lender's rights to enforce its loan, guarantee or security?

The start of insolvency proceedings affects lenders' rights as follows:

  • Legal redress proceedings (redressement judiciaire). Lenders cannot enforce their loans or security interests during legal redress proceedings.

  • Liquidation proceedings (liquidation judiciaire). All claims and liabilities, even those that were not due or payable, become due and payable on the opening of liquidation proceedings. Secured creditors can enforce their security if the liquidator has not realised secured assets within three months from the opening of the proceedings.

 
23. What transactions involving loans, guarantees, or security interests can be made void if the borrower, guarantor or security provider becomes insolvent?

The following operations must be declared null and void if they occurred during the hardening period (période suspecte), that is, between the date of cessation of payments fixed by the court and the date of the judgment opening legal redress or liquidation proceedings (up to 18 months back) (this does not apply to ad hoc, conciliation and safeguard proceedings) (Article L.632-1, French Commercial Code):

  • Any acts transferring movable or immovable property for no consideration.

  • Any agreement under which the debtor's obligations significantly exceed those of the other party.

  • Any payment, regardless of the method, for debts not due on the date of payment.

  • Any payment for debts due, through any means other than cash, commercial bills, bank transfer, assignment slips referred to in Act No. 81 of 2 January 1981 Facilitating Credit to Companies or any other payment means commonly accepted in business relations.

  • Any deposit and any payments of sums made in application of Article 2350 of the French Civil Code, except under a court decision that has become final.

  • Any mortgage by agreement, judicial mortgage or spouses legal mortgage and any pledge over the debtor's assets for existing debts.

  • Any protective measures taken by creditors, unless the registration or seizure deed was made before the date of cessation of payment.

  • Any authorisation and exercise of share options defined in Articles 225-177 et seq. of the French Commercial Code.

  • Any transfer of assets or rights to a fiduciary estate, unless the transfer is used as collateral for a debt contracted at the same time.

  • Any amendment to a fiduciary agreement assigning the rights or assets already in a fiduciary estate as collateral for debts contracted before the amendment.

The suspect period cannot exceed 18 months. However, the court can declare null and void any acts mentioned in the first bullet above made within six months before the date of cessation of payments.

Additionally (Article L. 632-2, French Commercial Code):

  • Payments for debts due made from the date of cessation of payments and acts for valuable consideration made from that same date can be cancelled if the other party had prior knowledge of the cessation of payments.

  • Any third party holder notice, seizure, allocation or objection can also be cancelled if they were delivered or exercised by a creditor from the date of cessation of payments and in knowledge of such cessation.

 
24. In what order are creditors paid on the borrower's insolvency?

Claims are paid in the following order:

  • Claims arising after the judgment opening the insolvency proceedings for the needs of the proceedings or for the continuation of the entity's activity must be paid on due date.

  • If the claims above are not paid on due date, they must be paid (in accordance with their ranking) after payment of the following:

    • super privilege employees' claims (that is, claims incurred in the last 60 working days);

    • legal expenses relating to the insolvency procedure;

    • claims relating to new money contributed by a creditor in the framework of a conciliation procedure;

    • claims guaranteed by security over immovable properties;

    • other employees' claims not covered by insurance;

    • credits and claims granted during the observation period and for which the creditors agreed on a deferred payment.

This applies without prejudice to retention rights enforceable during insolvency proceedings.

  • Unpaid claims (other than those listed above) arising before the judgment opening the insolvency proceedings are paid according to their ranking, in the following order:

    • secured claims;

    • unsecured claims;

    • subordinated claims.

If several creditors hold the same security interest over the same asset, the order of priority is determined by the date of execution of the security or the date of registration of the security interest (if registration is required).

If a security interest has not been validly perfected, the creditor will rank as an unsecured creditor on the borrower's insolvency.

 

Cross-border issues on loans

25. Are there restrictions on the making of loans by foreign lenders or granting security (over all forms of property) or guarantees to foreign lenders?

Under the French banking monopoly rules, only regulated banks and financial institutions can grant loans to French persons, subject to specific exceptions (for example, intra-group loans, cash pooling arrangements, and so on). Therefore, a foreign regulated bank or credit institution cannot lend money in France if it is not specifically authorised to do so. The subscription of bonds is not covered by the French banking monopoly rules.

Additionally, the beneficiary of a Dailly assignment of receivables (see Question 5) can only be a bank authorised to carry on business in France.

There is no restriction on granting security or guarantees to foreign lenders, provided that the foreign lender complies with the French banking monopoly rules.

 
26. Are there exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

There are no exchange controls in France.

 

Taxes and fees on loans, guarantees and security interests

27. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security interest?

The granting of security interests is tax neutral under French law, and only minor fees must be paid.

However, the enforcement of security interests can give rise to certain taxes. For example, the enforcement of a pledge can occasion a transfer of shares, and therefore be taxed accordingly under French law. A comprehensive review of the fees and taxes indirectly arising from the granting and enforcement of a loan, guarantee or security would go beyond the scope of this Q&A. The information below examines the registration and notaries' fees associated with the granting of a mortgage and a lender's lien.

Documentary taxes

There are no stamp duties on credit and security agreements under French law.

Registration fees

Registration fees are due as follows:

  • Mortgage. Mortgages must be registered with the administrative services in charge of land publicity (Article 2426, French Civil Code). A fee amounting to 0.715% of the secured amount must be paid to the land publicity services (Article 844, French General Tax Code), with an additional 0.05% payable to the relevant land registry (Articles 880, French General Tax Code and Article 293, Annex III, French General Tax Code). The debtor is responsible for paying registration fees, subject to any provision to the contrary (Article 2438, French Civil Code).

  • Lender's lien. Only the land registry fee must be paid (that is, 0.05% of the secured amount).

  • All credit and security agreements. There is a fixed fee of EUR125 for registration with the tax authorities to give a definite date to an agreement.

Notaries' fees

Mortgages and lenders' liens are subject to notaries' fees (a percentage of the registered amount), as determined in Ministerial Decree dated 26 February 2016.

 
28. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security interest?

There are no known strategies to minimise the costs of lending and taking security under French law, although parties can seek to reach a balance between the desired level of security and the costs related to the payment of registration and notaries' fees.

French tax authorities are increasingly stringent and tend to characterise tax optimisation strategies as tax avoidance schemes, leading to the application of full tax rates.

 

Reform

29. Are there any proposals for reform?

An Order dated 10 February 2016, which could come into force by 1 October 2016, amends the French Civil Code to codify several rules and principles set out by case law. This Order is aimed at enhancing the attractiveness, competitiveness and predictability of French law.

The following notable amendments to French contract law can be highlighted:

  • Consensual contracts are defined as formed by the mere exchange of consent (new Article 1109, French Civil Code). Credit and loan agreements are among those contracts.

  • The duty to act in good faith does not only apply during the contractual performance phase, but also during the negotiation, formation and termination phases of a contract (new Article 1104, French Civil Code).

  • The duty to provide an appropriate level of information to the other party in negotiating a contract is now codified under Article 1112-1 of the French Civil Code.

  • If a debtor does not perform its obligations, a creditor can:

    • suspend the performance of its own obligations under the principle of reciprocity (new Articles 1219 and 1220, French Civil Code);

    • seek specific performance of the obligations, unless performance is impossible or costs are disproportionate (new Articles 1221 and 1222, French Civil Code);

    • seek a price reduction (new Article 1223, French Civil Code);

    • terminate the contract, under a termination clause or in the case of serious non-performance (Articles 1224 et seq., French Civil Code); and/or

    • seek damages, after giving formal notice to the debtor only if performance can no longer be obtained (new Articles 1231 et seq., French Civil Code).

  • If a change of circumstances, unforeseeable when the contract was formed, makes performance excessively onerous for one party, that party can seek to renegotiate the contract or, if renegotiation fails, seek revision or termination of the contract through the courts (new Article 1195, French Civil Code). This possibility can be excluded by an express contractual provision.

 

Online resources

Légifrance

W www.legifrance.gouv.fr

Description. This is the official website publishing legal texts. It gives access to the laws and decrees published in France, and to important case law and international treaties to which France is a party. This website provides access to translations of some French laws, decrees and case law (www.legifrance.gouv.fr/Traductions/en-English). These translations, although regularly updated, may not reflect the latest amendments and therefore should not be relied on independently.



Contributor profiles

Aude Manzo-Keszler, Counsel

Brown Rudnick LLP

T +33 1 85 56 8238
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Professional qualifications. Paris Bar, Avocat; New York, Counsellor at law

Areas of practice. Banking and finance; real estate financing; aircraft financing; debt refinancing in insolvency.

Charles Moulette, Counsel

Brown Rudnick LLP

T +33 1 85 56 8239
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Professional qualifications. Paris Bar, Avocat

Areas of practice. Insolvency and corporate restructuring; corporate; mergers and acquisitions.

Grégoire Hansen, Trainee

Brown Rudnick LLP

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Professional qualifications. French Bar Exam

Areas of practice. Banking and finance; insolvency and corporate restructuring; debt refinancing in insolvency.


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