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Coronavirus – Fiducie – Facilitating the obtaining of secured financing and the disposal of distressed assets – France

  • France
  • Corporate
  • Corporate finance

15-04-2020

When the economic situation deteriorates, when the financial situation becomes strained, when the granting of credit becomes more difficult, being able to provide effective collateral in order to obtain cash from lenders is more important than ever before, especially for companies in particular need of liquidity.

Due to the coronavirus outbreak, in the space of just a few weeks, we have moved from a world where abundant liquidity generated very strong competition between lenders, who were therefore generally not in a position to impose overly burdensome conditions on borrowers. We now face a world where uncertainty about the seriousness of the situation brought on by COVID-19 could seriously reduce the access to credit for many businesses, despite governmental measures to reduce this risk.

Similarly, many companies will certainly have to consider the disposal of non-strategic assets for financial considerations. However, the hazards associated with the sudden severity of the current economic environment will certainly make it more difficult to carry out certain change of control operations, even if they are sometimes necessary for the survival of the companies concerned.

In order to overcome some of these difficulties, it is likely that practitioners will make greater use going forward of a form of security trust which is called “fiducie” under French law. Fiducie was introduced into French law in 2007 and its legal regime has subsequently been improved on several occasions.

1. Facilitating the obtaining of secured financing

Fiducie is defined as a transaction whereby one or more grantors transfer property, rights or securities, present or future, to a trustee who, holding them separate from its own assets, acts for a specific purpose for the benefit of one or more beneficiaries. Typically, a trustee holds the assets or rights transferred as collateral to secure the repayment of money borrowed by the grantor from the beneficiary. Moreover, fiducie may be more than just a "security" instrument. The trustee may be entrusted with the role of managing the assets or rights transferred.

From a tax point of view, fiducie is characterised by a system of neutrality, with the legislator pursuing the dual objective of not hindering the development of fiducie and not generating tax advantages through its use, whether they are set up as security and/or for management purposes.

Originally used confidentially, fiducie has gradually developed and has allowed the realisation of various transactions for which the provision of financing or the granting of guarantees could not likely have materialised without the use of this instrument.

Nevertheless, the cost of setting up a fiducie is generally higher than the use of traditional security interests (pledges, mortgage, etc.), because of the remuneration of the trustee and the drafting of the fiducie agreement which may be more sophisticated than standard security interests’ agreements. Fiducie, in the old world of abundant liquidity, was, hence, often limited to the most complex transactions.

The new environment should be a game changer and significantly increase the use of fiducie.

Indeed, despite its higher costs, one of the greatest interests of fiducie when compared to traditional security interests resides in the transfer of ownership of the assets (or rights) held as collateral by the trustee, which allows the latter (and hence the beneficiary) to be granted an exclusive and absolute right to such property during the accomplishment of the trustee’s mandate. Another benefit of fiducie is that it provides complete immunity against any Court-ordered disposal, potentially at a significant discount, of the grantor’s (pledged or unfettered) assets in the event the grantor becomes insolvent. Fiducie thereby shields the beneficiary against other creditors claiming any right whatsoever over the grantor’s assets.

The beneficiary is also excluded from the creditors' committees. As a result, waivers of claims or payment deferrals agreed by such committees will not be imposed on the beneficiary.

Moreover, the beneficiary of fiducie will not suffer the consequences of the commencement of collective proceedings against the grantor whereas, in principle, the commencement of collective proceedings bars the enforcement of traditional security interests on the grounds that the payment of debts dating prior to the insolvency judgement or the continuation of individual lawsuits is prohibited.

However, the interest of the grantor in "bankruptcy" has not been neglected either. The objective of preserving the quality of the legal protection attached to fiducie has been reconciled with the one of safeguarding the interest of the company in difficulty.

French law introduced an exception to the principle of absolute exclusivity benefiting the trustee and, hence, the beneficiary. This exception comes into play in the presence of an agreement between the trustee and the grantor providing for the use by the grantor of the assets held as collateral by the trustee. The grantor's most valuable assets generally include industrial or technological assets that the grantor is to keep using for the purposes of its business. In such a case, no assignment or transfer of these assets held in collateral by the trustee can be made on account of insolvency proceedings being brought or a failure to pay a claim arising prior to the opening judgment.

As long as the grantor complies with its commitments, whether in terms of payment for the use of the assets held in collateral by the trustee or of any sums due to the creditors in accordance with the provisions of the safeguard or continuation plan, the enforcement of the fiducie mechanism will be frozen to preserve the possibility of a turnaround of the distressed company.

However, if the grantor definitively defaults and goes into liquidation, the exclusive right of the beneficiary over the assets of the grantor held in collateral by the trustee will then become fully exercisable.

Fiducie thus enables a win-win compromise between the interests of the creditors and the debtors’, allowing companies in need of liquidity to raise debt more successfully than by way of traditional security interests, which are less protective of lenders’ interests.

2. Facilitating the disposal of distressed assets

Again, in a world where sellers could impose their terms on buyers relatively easily, the use of fiducie for share or asset transfers was relatively limited. But in a world where certainty of payment or the quality of coverage of certain risks will become increasingly important to the parties, the use of fiducie is likely to increase.

The following are a few examples to illustrate this.

a. Interest for the purchaser or the seller

First of all, one of the parties may agree to make the assignment only if it can obtain security from the other party free of any risk relating to its performance.

The transfer of property or rights in a fiducie may constitute an essential advantage for the proper performance of certain obligations.

Thus, in the case of a share or asset transfer, it is usual for the transferor to enter into various commitments in favour of the transferee, including, in particular, warranties and indemnities.

However, in practice, the implementation of warranties and indemnities may sometimes prove difficult. A good example of this is the obligations relating to the assumption by the assignor of the costs of cleaning up industrial sites following a change of control of a company. Carrying out the necessary analysis, choosing between several remediation options with very different financial implications, approving estimates from contractors for carrying out the remediation work, monitoring the proper execution of the work and paying service providers are all sources of potential conflict between the parties, thereby weakening the protection of the assignee.

The intervention of a trustee for guarantees of this nature makes it possible to make the management of the process independent of the will of the parties, thus ensuring the real effectiveness of the corresponding guarantee.

Fiducie may also prove useful when, for instance, the assignee is able neither to obtain the release of parent company guarantees granted by the assignor in respect of the obligations subscribed by the assigned company, nor to provide equivalent bank counter-guarantees.

In such a case, in order to secure, at least partially, the indemnification obligation entered into by the assignee for the benefit of the transferor in the event of the enforcement of such parent company guarantees, readily realisable assets may be placed by the assignee in fiducie. In the event that the assignee fails to perform its indemnification obligation, the trustee will then be responsible for transferring such assets to the assignor or for realising these assets and paying the corresponding amount to the assignor.

As above-mentioned, one of the greatest advantages of fiducie is that bringing insolvency proceedings against the grantor will not hinder the trustee's mandate, as long as the grantor has not been contractually allowed to use the assets held as collateral for the purposes of its business. It is noteworthy that, even the pledge of a bank account opened in the name of the debtor does not provide the creditor with such a level of protection. As French case law has recently confirmed, the creditor is not in a position to assert any right of retention over the funds in a pledged bank account where no claim has become due prior to the date of commencement of insolvency proceedings (Cass. com., 22 January 2020, n°18-21.647).

Other alternative or cumulative forms of recourse to fiducie to secure the performance of an obligation have also been put in place in certain cases. Thus, the collection of future receivables can be centralised in the hands of the trustee, who will distribute the amounts collected according to the terms and conditions specified in the fiducie agreement. In the event of default by the debtor, these sums will be added to the creditor's guarantee.

b. Interest for the disposed company

In some circumstances, it is key to ensure that the disposed company will effectively receive a certain amount of cash after the change of control, especially when such company faces financial difficulties.

For instance, the recourse to a fiducie ensures that a redundancy plan will be financed, independently of any future change of control of the company concerned, through the exclusive allocation of the amounts paid to the trustee in this respect.

This security provided to the employees of the transferred company may facilitate the completion of its change of control. It also enables the transferor to protect itself against the risk, illustrated by case law, of a potential recourse against it if the new majority shareholder does not fulfil its obligations to the employees of the transferred company.

In conclusion, in certain cases, the use of fiducie makes it possible, in the interest of all stakeholders, to facilitate transactions that might not materialise, or might be more difficult, in the absence of this tool. Its use obviously generates a cost that will have to be taken into account in the discussion, but this cost will sometimes have to be weighed against the consequences of either not being able of carrying out the transaction at all or the occurrence of a risk insufficiently covered.