Banking & Finance 2023 Comparisons

A challenging interest rate environment in the last 12 months, inflation and energy costs have led to financial stress and several debt restructurings. Private equity funds and corporates may have been faced with squeezed liquidity, higher costs of fund and domestic banks tightening their standards, in a burdensome or sometimes unsustainable way for business plans already impacted by rising interest rates and high inflation. This situation has led to complex refinancings (including a mix of senior/junior/PIK/preferred equity structuring), numerous amend-and-extend requests on less favourable terms (notably when a pay-down is required) and, finally, debt restructurings. For this reason, cov-lite structures tend to evaporate, including for most established sponsors.

The war in Ukraine, in addition to wider geopolitical and economic volatility, has increased the uncertainty on the debt market and may have created turmoil for lenders and their ability to execute and perform their obligations. Arrangers and underwriters have tried anticipating those market challenges such as the potential escalation in the Ukrainian conflict, by including more systematically market-related material adverse change provisions in their commitment papers, thus affecting certain funds provisions. In addition, the conflict has also led to longer due diligence process because of heavier sanctions checks.

There has been some inertia in the high-yield market in France.

Alternative lenders are entrenched in the debt market alongside the banks, and have continued to step in to fill the gap in 2023; especially for mid-market financings that currently dominate, whilst mega-market deals have remained scarce. In an environment where loan maturities face funding gaps amidst higher interest rates, PE funds and corporates are turning to private credit solutions that may offer one-stop solutions providing debt and follow-on capital, including through preferred equity structures.

There is now a convergence between private debt documentation and the more restrictive banking documentation, likely as a result of portfolio management issues faced by alternative lenders, as well as to rationalise their expositions.

Banking and finance techniques have materially evolved to integrate ESG and sustainability considerations, including related reporting. In addition, and considering the combination of interest rate hikes, market conditions (tighter loan standards imposed by the banks) and lenders’ appetite, other structures such as preferred equity structuring have continued to be a suitable alternative for borrowers.

New companies have issued their first sustainability-linked bonds (SLBs). These SLBs are often linked to commitments to reduce greenhouse gas (GHG) emissions, including Scope 3 (Air-France KLM – EUR1 billion; Orange – EUR500 million; Carrefour – EUR500 million). To encourage the development of SLB, the ICMA has published a new version of its guidelines on SLB Principles. The AMF reiterated the benefits of these products while specifying that it would be vigilant about greenwashing. Banking loans linked to sustainability criteria are also developing steadily. In 2023, after publishing an update of its “sustainability-linked loan principles”, the LMA published a model documentation for these sustainability-linked loans. Entry into force of the CSRD directive and its ESRS in 2024 should increase the availability of more reliable and comprehensive ESG data.

As regards the impact on financial conditions, lenders increasingly reward success with margin reduction and more recently penalise failure through malus. Beyond usual commercial discussion on the KPIs and the magnitude of the margin reduction, the consequences of failure need to be agreed with a concern for fair treatment and short or medium-term remediation options, so as not to penalise the borrower on a long-term basis.

Under French law, only licensed French and EU passported credit institutions and finance companies (sociétés de financement) are authorised to enter into credit transactions for consideration and on a regular basis on the French territory, it being specified that credit transactions include lending activities, the purchase of non-matured receivables, financial leases when the lessee is granted an option to buy the leased asset, as well as the issuance of personal guarantees. Certain other entities or funds (including organismes de financement and securitisation organisations) may also carry out lending activities under conditions.

However, French law provides various exceptions to the requirement to hold a banking licence, such as payment delays, loans granted within a group, cash collateral in the context of a securities lending operation, and purchase of non-matured receivables by foreign entities whose corporate purpose or activities are similar to those of the regulated entities which are authorised to lend in France under the French banking regulations (such as foreign banks). Bonds issuance also falls beyond the scope of the French banking monopoly.

In order to obtain a credit institution licence from the ECB (or a finance company licence from the ACPR), numerous and strict conditions must be satisfied, notably, minimum capital requirements, the activity must be effectively run by at least two people, whose knowledge, experience and appropriateness must be demonstrated, as must their availability, the operation programme must detail the various types of activities contemplated, the technical and financial means must be put into place to implement such programme, and the robustness of shareholders and other equity providers or guarantors must be demonstrated.

Foreign lenders shall comply with French banking monopoly rules described in 2.1 Providing Financing to a Company. Subject to conditions defined by EU law, an entity authorised to carry out banking activities in a European Economic Area (EEA) member state is entitled, if it chooses, to carry out the same permitted activities in any other EEA member state by either exercising the right of establishment (through a branch or agents) or providing cross-border services. An exception to the banking monopoly was introduced in 2017 allowing the transfer of unmatured receivables by a duly licensed French lender to assignee(s) not licensed in France subject to three conditions: the transferred receivables shall arise from credit operations granted by regulated entities, the transferee must have in its own country a similar activity and the debtor shall not be an individual acting for a non-professional purpose.

There is no specific restriction under French law on the granting of security or guarantees to foreign lenders, it being however specified that the benefit of assignment of professional receivables by way of security (Dailly assignment pursuant to L.313-23 to L.313-34 of the French Monetary and Financial Code), is reserved to duly licensed or passported lenders in France or otherwise authorised funds.

There are no exchange controls regarding foreign currency exchange in France.

Loan documentation generally provides for specific representations, warranties and further assurance provisions (usually not subject to remediation) from the relevant obligor that the loans/debt securities are subscribed for its own account, and it shall comply with sanctions and all applicable anti-bribery and anti-money laundering regulations.

The agent role in French-law governed credit documentation was routinely based on a civil law power of attorney (Article 1984 and seq. of the French Civil Code). In addition, a special security agent regime (Article 2284 and seq. of the French Civil Code) provides that a security agent may be appointed to be the direct holder of the security and guarantees created for the benefit of the creditors of the secured obligations, and such security agent may also file any claim in any bankruptcy proceedings. The security and guarantees are segregated from the security agent’s own assets, together with any proceeds received by the security agent in that respect (management or enforcement).

Since a decision dated 13 September 2011, the French Supreme Court recognises parallel debt structures in foreign-law governed financings subject to French international public policy rules.

A loan transfer may be affected (in writing) by way of (i) assignment of rights (cession de créances), (ii) novation, (iii) assignment/transfer of agreement (cession de contrat) and (iv) assignment/transfer of debt (cession de dette).

The consent of (and notification to) the borrower in the loan transfer is required if such loan transfer is made under a transfer agreement (cession de contrat), transfer of debt (cession de dette) or novation. However, it is not necessary when a loan transfer by way of assignment of rights (cession de créances) occurs, although such assignment shall be raised to the borrower by mere notification.

Debt buy-back is generally permitted and based on LMA market standard provisions in syndicated loans/leverage financing; for private debt financing it is less common, but sponsors may still approach their lenders to repurchase debt at a discount.

Before launching a public takeover bid, financing must be secured and the initiator of the offer must select a presenting bank, which will file the offer with the AMF on its behalf. The filing must include a guarantee of the tenor and irrevocable nature of the commitments and must be accompanied by the draft offer document drawn up by the offeror that shall mention, among other things, the terms of financing for the transaction.

By law, the guaranteeing bank undertakes to settle the purchase price of the securities tendered as part of the offer (whether voluntarily or due to any mandatory squeeze-out mechanism). Consequently, guaranteeing banks rigorously ensure that the facility agreement (which does not need to be publicly disclosed or filed) does not grant lenders any “out” options during the certain funds period (except for very limited circumstances such as insolvency proceedings, change of control or payment default). It is standard for the guaranteeing bank to benefit from an autonomous first demand guarantee, be party to the facility agreement and be entitled thereunder to request utilisations (without any condition precedent applicable) on behalf of the initiator during a certain funds period to cover the undertakings of the initiator under the offer.

Integration of ESG and sustainability considerations in bank and bond financing has slightly amended the legal documentation. Please see 1.6 ESG/Sustainability-Linked Lending.

French law provides usury rules applying to loans granted to consumers, therefore individuals acting for their professional needs or legal entities engaged in a professional activity fall beyond the scope of usury law. However, the prohibition of usury is extended to (i) account overdrafts, including those granted to legal persons engaged in a professional activity, (ii) contractual interest-bearing loans and (iii) other transactions similar to money lending (eg, instalment sales, credit facilities).

Any contractual loan granted at an overall effective rate which, at the time it is granted, exceeds by more than one-third the overall effective rate charged during the previous quarter by credit institutions and finance companies for transactions of the same nature involving similar risks, constitutes a usurious loan. The maximum legal rate is published periodically by the French central bank and differs according to the type of loan concerned.

From a civil law perspective, French law sanctions usury by reducing the interest received to the maximum authorised rate. The overpayment is then automatically deducted from the normal interest and, subsidiarily, from the principal of the debt. From a criminal law perspective, any person who grants or participates directly or indirectly in a usurious loan may be punished by two years’ imprisonment and a fine of EUR300,000 (this does not apply to usurious account overdrafts).

There is no general rule under French law requiring the disclosure of loan agreements to an authority or client, and French law further provides a banking secrecy obligation prohibiting credit institutions from disclosing any information pertaining to a client obtained within the context of its professional activity and which is of a confidential nature. By way of exception, information subject to banking secrecy must or may be disclosed in certain situations.

Credit institutions owe a duty of information on various aspects (including overall global rate) and are required to make disclosure pursuant to Regulation (EU) 2019/2088 (SFDR) for investment products with regards to ESG considerations. According to the Taxonomy Regulation, banking institutions now have to publish their Green Asset Ratio (assets aligned with the European Taxonomy/total assets covered by the balance sheet).

Payments of principal made by French borrowers/issuers to lenders/bondholders are not subject to withholding tax. No French withholding tax applies to interest paid by a French borrower/issuer unless such payment is made onto an account opened with a financial institution situated in a country or territory which is deemed non-co-operative within the meaning of Article 238-0 A of the French Tax Code (NCCT). If payment is made into an NCCT, French withholding tax must be levied at the rate of 75%, unless otherwise provided in the relevant tax treaty or unless the borrower benefits from an “escape” provision by demonstrating that the main purpose and effect of the transactions in respect of which the interest is paid is not to allow the location of such interest in an NCCT.

French borrowers/issuers cannot deduct from their taxable income interest (i) paid or accrued to beneficiaries domiciled or established in an NCCT or (ii) paid onto an account opened with a financial institution situated in an NCCT. Non-deductible interest could then be reclassified as a deemed dividend in respect of which a withholding tax obligation could arise.

In addition, fee payments made to non-French beneficiaries are subject under French law to a 25% French withholding tax unless the beneficiary of the payment can benefit from the tax treaty protection (since most of the tax treaties prevent France from applying such withholding tax).

Most financial transactions are exempt from VAT in France. However, lenders may opt for VAT and send a written registration to the relevant tax office, which takes effect on the first day of the month following its submission until it is revoked (which is only possible from January 1st of the fifth year following the year in which the option is exercised). From 1 January 2022, a lender may decide to apply the VAT option only to eligible transactions of its choice (previously, the option was global).

French banks may be subject to bank levies by reference to their assets or liabilities, including the French taxe pour le financement du fonds de soutien aux collectivités territoriales (Article 235 ter ZE bis of the French Tax Code).

There are generally no stamp duties applicable to financing activities save for voluntary registration of the documentation or in relation to certain guarantees.

As a result of the NCCT legislation, it is now common for French borrowers/issuers to seek to include provisions that exclude gross-up obligations in circumstances where French withholding tax is due as a result of payments being made onto a bank account in a jurisdiction which, as a result of a change in the list of NCCTs, finds itself in an NCCT.

Financing agreements involving a French borrower/issuer also generally provide for a right of repayment and cancellation for the borrower/issuer and a mitigation obligation for the lender in case interest becomes non-tax deductible as a result of being paid or accrued to the benefit of lenders domiciled or established in an NCCT or paid onto an account opened with a financial institution situated in an NCCT. Restrictions on transfers to lenders domiciled or acting through an NCCT and countries of location of the agent are also common.

It is increasingly common for French borrowers/issuers to seek to negotiate exclusions to the gross-up provisions on fee payments and to request the lenders to provide them with tax residency certificates before any fee payment.

Security interests over assets located in France generally required for standard collateral packages are as follows:

• pledge of securities account – security over securities which encompasses the cash proceeds attached to such securities (unless otherwise agreed); such pledge is created under a pledge statement (déclaration de nantissement) that includes mandatory provisions for validity purposes and is registered in the share transfer registry and in the pledged securities account;
• pledge over partnership interests – security over shares issued by limited or unlimited liability partnerships that requires an approval of the secured creditors by the shareholders; it must be registered with the registrar of the commercial court and be renewed after five years;
• pledge of receivables – security over receivables (present and/or future) that must properly identify the pledged receivables and pledged debtor(s);
• assignment of receivables by way of guarantee: either (i) the Dailly law assignment that can only be granted by a borrower acting in the course of its professional activity (ie, not as a guarantor/security grantor) to the benefit of the lender which extended the facilities then secured (ie, credit institution or other financial institution/funds otherwise licensed to carry out activities in France or authorised to benefit of such assignment), or (ii) the civil law assignment by way of guarantee (cession civile à titre de garantie) whose conditions are less restrictive than the Dailly law assignment, notification must be made to the debtor to receive payment;
• pledge over bank account – security over the positive balance of a bank account in the form of a pledge; the bank account holder must be notified of the pledge for enforceability purposes;
• pledge over business concern – security over trade name, the leasehold rights, goodwill and may be extended to fixed assets such as furniture, machinery, equipment and IP rights attached to the business under a pledge; registration is required for enforceability purposes and is made on a registry called the registre des valeurs mobilières common to all movable security interests and be renewed after ten years;
• cash collateral – security by way of an assignment of monies whose regime is aligned with the civil law regime relating to assignments of receivables and, unless otherwise agreed, the beneficiary may freely dispose of such funds; and
• mortgages – can only be created pursuant a notarial deed with the assistance of a French notary and which will be further registered with the relevant land registry.

As regards the trust (fiducie), such security requires the transfer of the concerned rights and assets to the trustee (fiduciaire) acting in favour of the secured creditor. The assets held by the trustee of the security trust are segregated. To be valid, a trust agreement must be registered with the local tax authorities within one month of its signing.

Registration always requires the payment of fees or taxes and a renewal on occasion to maintain the effectiveness and ranking of the security interests. All registered security interests must be drafted in French for validity or perfection purposes and shall address all the relevant (mandatory) information required by law to be validly received by the relevant registrar. They can however be signed electronically pursuant to Articles 1366 and seq. of the French Civil Code, it being recalled that under French law, agreements may not be executed by counterparts.

French law does not provide for floating charge, which means that all the security interest corresponding to the debtor’s available assets must be combined in order to achieve the effects of the floating charge as far as possible.

Under French corporate law, a company has a corporate interest distinct from that of its shareholders or affiliates even in the case of a wholly owned subsidiary. If the contemplated transactions, such as the granting of security or guarantees, are detrimental to the guarantor’s corporate interest, it may be characterised as a misuse of credit or misappropriation of company assets pursuant to paragraph 3 of Article L. 242-6 of the French Commercial Code. The president, the general managers or the directors at fault may be subject to criminal sanctions. Lenders may also be potentially exposed to the risk of being held liable as accomplices under those violations (same article).

Under prevailing French case law, security interests or guarantees granted by a subsidiary in order to guarantee the obligations of its parent company or another company within the same group do not constitute a misuse of credit or misappropriation of company assets if the following conditions are satisfied:

• the guarantor and the company or companies whose undertakings are being guaranteed must belong to the same group of companies that must be a coherent economic entity with actual commercial and economic relations (as opposed to a mere conglomerate);
• the delivery of the guarantee must be in the common interest of the group and result in overall benefits (different than the aggregate benefits of its members), be granted in accordance with a policy defined for the group as a whole and not be in the sole interest of the dominant company or its majority shareholders; and
• the issue of the guarantee or the granting of security interest by the subsidiary should not be contrary to the corporate interest of such subsidiary.

When enforcing these principles, the courts will always consider the circumstances of each particular transaction and tend to have a very strict approach.

Lastly, in case of opening of bankruptcy proceedings against a given debtor, if a creditor is held liable by a French court for damages resulting from the credit facilities granted to such debtor, the security and/or the guarantees guaranteeing such credit facilities will be null and void. French law provides that the creditors could be held liable by a French court only in case of fraud, interference (immixion) of the creditor in the management of the debtor or in the situation where the security interest and/or the guarantees obtained in consideration of the credit facilities are disproportionate to the credit facilities (see Article L. 650-1 of the French Commercial Code).

As regards a target granting guarantees or security, French law prohibits the use by a French limited liability company of its assets or credit to finance the purchase or the subscription of the company’s own shares. This applies to the granting of security by a company to secure the acquisition or the subscription of its own shares and gives rise to criminal sanctions (see Article L. 225-216 of the French Commercial Code). According to most legal scholars, this law should be interpreted restrictively as its violation gives rise to criminal sanctions. However, a minority of scholars adopt a broad interpretation and consider that the prohibition of financial assistance may still apply to the indirect acquisition of shares of a company acting as guarantor under the acquisition financing, for instance.

Financial assistance shall also be considered when merging the borrower and the target, or when implementing debt pushdowns financed by external indebtedness subscribed by the target to refinance the acquisition debt at the end.

It is generally admitted that in case of financial assistance, the guarantees granted by the guarantor can be voided by the French court.

A certain number of transactions/acts, such as security and guarantee, can be challenged by the judicial administrator, the creditors’ representative or the liquidator or the Public Prosecutor (Ministère Public), if they have been granted during the hardening period.

No consent is required with respect to the creation of security unless foreign investment control regulation applies to the relevant assets over which security is created, or except for the prior consultation of the works council of a company (if any) when the granting of the relevant security involves any question on the organisation, management or general conduct of the company.

The contractualisation of a deed of release generally applies to the parties when external debt repayment has occurred, and related security shall be released. Such release agreement pertaining to French law security may be governed by the same foreign law governing the underlying credit documentation even though it remains necessary to draw up a specific release agreement, drafted and governed by French law, when the release must be filed with a specific French register.

Beyond contractual priority arrangements provided by the intercreditor agreement for governing various groups of secured creditors, the priority of competing security is dealt with by the security itself and its perfection or registration, depending on the nature of the security. If the security is subject to registration, the ranking of the security interest is determined by the date of registration. Otherwise, the ranking of the security is determined by the date on which the relevant perfection of that security is completed.

There are essentially two ways of implementing subordination, either structural subordination through dedicated capital structures to spread the senior/junior/PIK debts at different levels with separate covenants and collaterals; or contractual subordination through subordination/intercreditor agreement.

As regards contractual subordination, Articles L 626-30 and L 631-19 of the French Commercial Code provide, in the context of safeguard, accelerated safeguard and rehabilitation proceedings, that when classes of affected parties must be summoned, the formation of the classes must comply with intercreditor/subordination agreements entered into by the affected parties before the commencement of the proceedings. The affected parties shall notify the existence of such agreements within ten days. Otherwise, they will not be unenforceable in the context of the proceedings. To date there is at least one precedent where senior and subordinated lenders voted in separate classes based on an intercreditor/subordination agreement.

As matter of principle, a security which is duly enforceable against third parties will not be primed by other security arising by operation of law except as follows:

• employees’ general privilege, which guarantees payment of remuneration (wages and certain allowances) owed to employees for the last six months. This privilege applies to the employer’s movable (third rank) and immovable (second rank) property; and
• by the effect of specific payment waterfall in the framework of insolvency proceedings, as detailed in 7.2 Waterfall of Payments.

Under French law, enforcing collateral requires unpaid sums – ie, payment default when principal or interest are due and payable or a notified acceleration; it being specified that security arrangements such as trusts (fiducie-sûreté or fiducie gestion) or golden share arrangements may however contractually provide for specific rights for the beneficiaries anticipating the payment default.

As regards means of enforcement, creditors have the choice between appropriating the collateral and/or disposing of it, either by way of judicial proceedings (judicial foreclosure or public auction) or, depending on the type of security, by way of private appropriation as a result of contractual enforcement provisions (pacte commissoire) in the relevant security agreement. Enforcement under judicial proceedings may take some time while contractual enforcement may be swift, provided that the relevant security provider does not benefit from an automatic stay resulting from insolvency proceedings.

Foreign Law

As regards contracts concluded in civil and commercial matters, the effectiveness of a clause on governing law, according to the Rome I Regulation, depends on whether it forms part of a domestic or international contract. In accordance with the Rome 1 Regulation:

• where the contract is domestic – ie, its main characteristics (nationality of the parties, place of performance, etc) are located within the same State, the clause is valid, but cannot derogate from the mandatory rules of the law of that state (Article 3.3); and
• where the contract is international – ie, there is a foreign element, the choice of law is valid and may derogate from the mandatory rules of French law. However, public policy of the forum (Article 21) and overriding mandatory provisions (Article 9), may occasionally render the will of the parties ineffective,

it being specified that certain matters are excluded from the scope of the regulation (Rome I Regulation, Article 1.2).

Foreign Jurisdiction

Cases of international disputes before French courts are as follows:

• if the clause designates a French court, Article 25 of the Brussels I recast Regulation regulates the form and substantive validity of the jurisdiction clause – ie, it is subject to the law of the state to which it confers jurisdiction, and French law requires that the parties have validly agreed to the jurisdiction clause;
• if the clause designates the jurisdiction of an EU member state, but French courts are nevertheless seized of the dispute, they will uphold the jurisdiction clause if it complies with the Brussels I recast Regulation requirements; and
• if the clause designates a jurisdiction of a non-EU member state, but French courts are nevertheless seized of the dispute, rules of French private international law apply and provide that jurisdiction clauses are, in principle, lawful in international disputes.

Finally, the clause may be asymmetrical by allowing one of the parties the right to bring proceedings either before the court or courts designated in the clause, or before any other competent court or the courts of another state. Such a clause is valid only if it specifies the objective elements on which this alternative jurisdiction is based and must not be contrary to the objective of foreseeability and legal certainty. It should be highlighted that a decision of the EUCJ is expected shortly as to whether the validity of asymmetrical jurisdiction clauses shall be subject to EU member domestic laws or to EU Law.

Waiver of Immunity

The waiver of immunity may concern immunity from jurisdiction or immunity from enforcement. On one hand, immunity from jurisdiction allows a state not to be judged by anyone other than its courts. This waiver is valid under certain conditions. The French Supreme Court has held that if a state may waive its immunity from jurisdiction in a dispute, this waiver must be certain, express and unequivocal (Cour de Cassation, 9 March 2011, No 09-14.743). On the other hand, immunity from enforcement enables a state to protect its assets from measures of execution, such as seizures. The “Sapin II Act” (9 December 2016) codified the conditions under which a state may effectively waive this immunity. The waiver must essentially be express and, for diplomatic assets, special (French Civil Enforcement Proceedings Code, Article L. 111-1-2). Also, enforcement proceedings may only be implemented on property belonging to a foreign state with the prior authorisation of the judge (French Civil Enforcement Proceedings Code, Article L. 111-1-1).

A foreign judgment or arbitral award will not require a retrial of the merits of the case to be enforceable in France. The rules on the enforcement of a foreign judgment depend on whether the judgment is issued by a member state of the EU (Brussels I recast Regulation will apply) or by another foreign jurisdiction (French Civil Procedure Code will apply). In any case, the foreign decision or the award must comply with French international public policy.

There is no specific matter that might impact a foreign lender’s ability to enforce its rights except when the enforcement of a security interest would result in the crossing of a certain threshold of share capital and/or voting rights or the acquisition of the control of a French company carrying out “sensitive activities” (such as activities likely to affect the interests of national defence, involved in the exercise of public authority) by a foreign investor where a prior approval of the French Minister of the Economy may be required.

French law provides for two types of restructuring proceedings. Firstly, pre-insolvency proceedings which are flexible, voluntary and confidential proceedings and secondly, insolvency proceedings which are formal and public proceedings.

Effects of Restructuring Proceedings on Acceleration

The opening of pre-insolvency and insolvency proceedings (other than liquidation) shall not be a valid cause of acceleration. Notwithstanding any contractual provisions, creditors are prohibited from accelerating a loan by the sole reason of the opening of such proceedings (or of any filing for that purpose). More generally, any contractual provision increasing the debtor’s obligations (or reducing its rights) by that sole same reason is also null and void. However, in theory (it has been recently refused by some jurisdictions) a lender can accelerate for other types of events of default. It should, however be remembered that acceleration will have no impact on the general prohibition to pay pre-filing claims.

In liquidation, all claims become immediately payable when proceedings are opened (unless business activities are expressly continued by the court on a temporary basis to ensure the preparation of a sale plan – in this case, claims become immediately payable when the court approves the sale plan or when the temporary continuation of business ceases).

Effects of Restructuring Proceedings on Enforcement

On one hand, the commencement of pre-insolvency proceedings does not trigger any stay of payment nor enforcement actions. Yet, the debtor can apply for a moratorium (for a maximum of two years) if any creditor attempts to enforce its rights while proceedings are pending or, in conciliation only, if such creditor refuses to grant a standstill for the duration of the proceedings (maximum five months). On the other hand, the commencement of an insolvency proceeding triggers an automatic stay on (i) enforcement of payment obligations incurred prior to the opening of the proceeding and (ii) enforcement on related security over the assets of the debtor (including security interests granted over in guarantee of a third-party’s debt). In addition, any increase in the scope of security interests or retention right is strictly prohibited. In other words, the debtor is prohibited from paying its pre-filing creditors, which are prohibited from enforcing the rights. Nonetheless, there are limited exceptions including the right to set off applicable to:

• reciprocal debts with the insolvent debtor, limited to related debts (créances connexes) subject to conditions;
• financial obligations arising under certain financial contracts (notably derivatives); and
• some security interests may allow creditors to recover their pre-petition claims during the observation period, such as claims secured by a security conferring a retention right, claims assigned by of Dailly assignment or claims secured by a trust (fiducie).

Statutory Ranking

The distribution of the company’s value follows a predetermined rank order, but the exact recoveries are rather unpredictable ex ante due to the high number of context-sensitive privileges. Nonetheless, the following basic principles apply.

• In safeguard or rehabilitation proceedings – the ranking has limited application as creditors are usually paid pursuant to safeguard/reorganisation plans that are not based on the disposal of the debtors’ assets. It is however relevant where disposals of secured assets are implemented during the observation period or under the plan. In these limited circumstances, the ranking would usually be in the following order (ranking may slightly differ for immovable assets and assuming employees’ pre-filing claims will be repaid pursuant to the plan): (i) employees’ super-privilege (wages and all other forms of remuneration owed to employees (or former employees) for the last 60 days of effective work prior to the opening of proceedings), (ii) post-petition court costs which arose for the purpose of the proceedings, (iii) pre-petition claims benefiting from the “New Money” privilege, (iv) post-petition claims (in a nutshell in the following order: post-petition wages, post-petition new money facilities benefiting from the “Post Money” privilege, other post-petition claims for the purpose of funding the observation period or consideration in a business transaction), (v) pre-petition secured claims, (vi) pre-petition unsecured claims and (vii) shareholders claims; and
• in liquidation proceedings – the priority rules of claims are the same, save for pre-petition claims secured by a mortgage that rank ahead of the post-petition claims benefitting from the statutory “Post Money” privilege,

it being specified that security with a retention right allows the beneficiary to benefit from an exclusive right over the proceeds of the isolated sale of the affected assets. Similar exceptions apply to Dailly assignments and trusts (fiducies).

Contractual Ranking

Contractual Ranking contemplates two situations:

• pre-insolvency proceedings must comply with all contractual provisions, including those creating contractual priorities amongst creditors, unless otherwise agreed by all parties; and
• in safeguard (including accelerated safeguard) and rehabilitation proceedings, contractual ranking is considered to a different extent depending on the set-up or the absence of classes of affected parties. On one hand, set-up of classes of affected parties must comply with intercreditor/subordination agreements entered into prior to the opening judgment and notified to the administrator. This rule may be departed from if this is deemed necessary and does not excessively prejudice the rights of affected parties. On the other hand, when creditors are consulted on an individual basis, contractual ranking is not expressly dealt with by the French Commercial Code. Practitioners mainly consider that the draft plan may provide for a differential treatment amongst creditors if it is duly justified by different situations, however, this issue has not been definitively ruled by French courts and remains debated. The court can also impose on dissenting creditors a ten-year maximum term-out, with the same instalments for all dissenting creditors, and as such the uniformity of a term-out scenario appears as contrary to any form of subordination between creditors. In any case, it is usually considered that so-called “turnover” clauses shall remain applicable, since they only bind creditors between themselves.

Any restructuring process can be divided in two distinct phases as follows:

• the restructuring proceeding itself – each proceeding has its own rules regarding length. For ad hoc proceedings there is no statutory time limit, but the process usually lasts from one month to one year; for conciliation proceedings, the length is up to four months maximum (extension is possible but the total duration cannot exceed five months); for safeguard proceedings, the length is 12 months maximum; for rehabilitation proceedings, 18 months maximum; and for liquidation proceedings there is no statutory time limit (as long as necessary to liquidate all assets); and
• the implementation of the restructuring plan approved further to restructuring proceedings – the duration of the implementation phase depends on the content of the restructuring transaction and the framework in which it was approved. As regards debts write-off of debt-to-equity swaps, the implementation phase is by nature very short. As regards debts, rescheduling extension of maturity is usually shorter in pre-insolvency proceedings (usually one to five years, with a repayment sometimes based on refinancing prospects) than in insolvency proceedings (usually five to ten years, it being specified that the court has the option, in certain circumstances, to impose a ten-year term-out plan to dissenting creditors).

Prospects of recovery for creditors depend on the nature and outcome of the restructuring proceedings:

• pre-insolvency proceedings usually lead to the signature of a restructuring agreement, which sets out the debt repayment terms based on the company’s repayment capacity (more than its value); as consensual processes, the prospects of recovery will depend on what creditors have accepted in this context (write-off, rescheduling, etc); and
• insolvency proceedings have two main possible outcomes:
1. adoption of a restructuring plan (safeguard and rehabilitation proceedings) and for companies of a certain size, classes of affected parties are consulted and the agreement between some creditors may allow for the cram-down of other affected parties (subject to multiple conditions) whilst for other companies (or, in rehabilitation when the consultation of classes of creditors has failed), the court can impose a ten-year term-out plan upon dissenting creditors; or
2. the sale of business and assets of the debtors if the adoption of a restructuring plan is impossible, with the creditors being repaid out of the proceeds in accordance with the statutory waterfall.

French insolvency law offers pre-insolvency proceedings (ad hoc and conciliation proceedings) which are flexible, voluntary and confidential proceedings that aim to facilitate workouts between a distressed company and all or part of its major creditors under the supervision of a court-agent. They are frequently used as a first step to engage financial restructurings. Their attractiveness is also due to their confidentiality.

Ad hoc and conciliation proceedings are very similar and share the following key characteristics:

• voluntary processes that do not trigger any automatic stay of payment nor enforcement action. Yet, the debtor can apply for a moratorium (for a maximum of two years) if any creditor attempts to enforce its rights while proceedings are pending or, in conciliation only, if such creditor refuses to grant a standstill for the duration of the proceedings;
• their opening does not affect the normal performance of contracts; it being recalled that under French law, ipso facto provisions increasing the debtor’s obligations (or reducing its rights) are deemed null and void; this does not offer any protection in case of cross-default provisions and such protection is not recognised outside of France and thus only applies to French assets; and
• the workout agreement accepted by some creditors cannot be imposed onto other dissenting or silent creditors because the process is fully consensual. In practice, majority rules provided for in the existing credit documentation apply.

Three main risks for lenders if the borrower, security provider or guarantor were to become insolvent are (i) the risk of clawback and hardening period, (ii) the risk of liability and (ii) the risk of shadow directorship.

• In the framework of rehabilitation or liquidation proceedings, the court determines the date on which the debtor is deemed to have become insolvent within the 18 months preceding the date of the judgment opening the proceedings. This marks the beginning of the so-called hardening period. Certain transactions entered into by the debtor during the hardening period are automatically void, whereas some are voidable by the court. Void transactions are those that constitute voluntary and unjustified preference for the benefit of some creditors to the detriment of other creditors.
• Indemnification actions may be launched against the lender of a distressed company, to obtain the indemnification of a damage suffered, should it be construed as a direct result of the lender’s tort. In a nutshell, liability in tort could arise on two main bases – the lender’s wrongful financial support and/or its wrongful termination of ongoing financing agreements.
• Under certain circumstances, lenders may be considered as a de facto director because of their influence on the company’s management, exposing themselves to the risks attached to the quality of a director of a distressed company. In a nutshell, de jure and de facto directors can be held personally liable to pay all or part of the company’s net debts (ie, debts left unsatisfied after the liquidation proceeds have been distributed to creditors) if they are held liable for mismanagement.

Despite a slight slowdown in activity at the beginning of 2023 due, in particular, to rising interest rates and high inflation, the French project finance market has remained active, driven in particular by the environmental transition, mobility and transport sectors. In addition to the consistently large number of projects in France to finance photovoltaic plants and wind farms (onshore or offshore), the last couple of years have witnessed the emergence of new assets supported by project finance, such as battery manufacturing plants for electric vehicles, charging stations for electric vehicles, hydrogen production sites, etc.

Two types of public-private partnership are mainly used in France. Firstly, the concession agreement, which is an administrative contract pursuant to which the public entity entrusts to a private partner the execution of works and/or the operation of a service in exchange for the right to operate the works or service.

Secondly, the partnership contract, which is an administrative contract pursuant to which the public entity entrusts to a private partner the global mission of construction, transformation, renovation, dismantling or destruction of works, equipment or intangible assets required for a public service or the exercise of a mission of general interest and, as the case may be, the operation and maintenance of the public infrastructure.

The main difference is that under a concession agreement, the compensation of the concessionaire will mainly arise from payments made by users of the service (meaning that the private partner bears an operating risk, which is the main characteristic of a concession agreement under French law) whilst under a partnership contract, the public entity will pay a rent to the private partner in exchange of the performance of the mission. In particular, under a partnership contract, the public entity pays to the private partner an investment rent in exchange for the completion of the investments.

The legal framework for partnership contracts requires the public entity to carry out a prior assessment and a study of budgetary sustainability before using a partnership contract. For this reason, most of the public-private partnership transactions are now structured in the form of a concession agreement.

Under French law, there is no restriction on the project documents being governed by a law other than the French law. The choice of the law applicable to the contract is governed by a principle of freedom for the parties. Gradually accepted and then clarified by French case law, this principle was enshrined in Rome I Regulation but remains subject to mandatory provisions and policy rules under French law.

Furthermore, under French law there is no restriction on the parties to the project documents (assuming that these contracts are entered into in the course of their professional activity) to submit the settlement of disputes arising from the performance of the contract to the courts of a country other than France to international arbitration.

Under French Law, foreign investment control regulation applies when the following three conditions are met (unless specific exceptions apply): (i) the carrying out of an investment transaction (ii) by a foreign investor, (iii) in a sensitive activity. Any investment that falls within the scope of the French foreign investment regulation is subject to the prior authorisation of the French Ministry of Economy.

For instance, activities considered as sensitive will be those likely to affect the interests of national defence, involved in the exercise of public authority or likely to affect public order and public safety, when they relate to infrastructure, goods or services essential to guarantee the integrity, security or continuity of water supply.

One of the main features of project finance is that the project is carried out by a dedicated vehicle which raises external financing to (partially) fund the design, construction and operation of the project without any recourse against the sponsors (above their equity commitments), the lenders being repaid by the income generated by the project.

The first issue to be considered by the sponsors is the choice of the legal form of the project company. The sponsors can choose to enter into a joint venture or consortium (unincorporated association), a partnership, a limited partnership, or an incorporated entity such as a simplified joint stock company (société par actions simplifiée), that is the most commonly used given the limited liability (up to the equity contributions) of the shareholders and the flexibility of operation and management of this type of company under French law. The second issue to be considered by sponsors relates to their respective roles in the project (including in the funding), in the management bodies of the project company and the conditions pursuant to which a sponsor will be able to transfer its participation in the share capital of the project company.

Due to the absence of recourse against the shareholders, the main issue to be considered by the lenders when structuring the deal is the risk allocation between the project parties (EPC contractor, operator, offtaker, etc) and the residual risks remaining at the project company’s level. The structuring of the security package is also key for the bankability of the project, enabling lenders, in a worst case scenario, to have access to the project assets (mortgage, pledge over movable assets, pledge over receivables, etc) and to the shares of the project company, it being specified that the structuring of the security package will depend on the level on which the external financing is raised. Typically, the structuring of the security package will differ depending on whether the external financing is raised directly by the assetco or by a holdco (the incorporation of a holdco to raise the external financing could be the case for instance in case of financing a portfolio of projects).

From the outset and irrespective of the nature of the external financing raised by the project company, the debt providers usually require the sponsor a minimum level of equity, to a greater or lesser extent depending on the nature of the project and the risks identified.

In addition to equity financing, the main financing source used in France for project financing remains bank financing within the form of loans. Bonds are not commonly used, as such financing is more complex to implement where the funds are made available as the work progresses and as the rules governing the bondholders’ representation and voting rights are less flexible (even if Ordinance No 2017-970 of 10 May 2017 has simplified the rules for bonds issuances reserved for qualified investors). Bond financing mainly concerns projects where sponsors have to broaden the pool of debt providers to entities which, as a result of the banking monopoly, are not allowed to make available funds in the form of loan. In this respect, it should however be noted that the rules governing the banking monopoly have recently been relaxed (Ordinance No 2017-1432 of 4 October 2017, modernising the legal framework for asset management and debt financing), allowing certain investment funds to grant financing in the form of loans (direct lending). Depending on the nature of the project, the sponsors may also obtain financing from institutional lenders such as for instance, EIB, Bpifrance, CDC or AFD or obtain subsidies from public institutions or territorial entities.

Bridge financings made available by certain investment funds are used more often, allowing sponsors to raise external financing during the project development phase (such bridge financing being refinanced by a traditional long-term bank financing raised once the project has reached the ready-to-build phase). This is particularly the case for renewable energy projects, for which the availability of bank financing is usually contingent upon delivery of the required administrative authorisations and securing land rights, thus preventing the project company from raising external financing during the development phase of the project.

This is not an area covered by the authors. 

French environmental law aims to prevent industrial risks, manage waste, water and polluted soil, prevent adverse environmental impacts and protect biodiversity. Depending on the nature of the project, prior authorisation must be delivered by the state services to build and/or operate the project in accordance with the environmental laws. These projects mainly concern installations, activities, works or projects likely to present inconveniences or dangers for health and the various interests protected by the French Environmental Code.

In order to simplify administrative procedures and improve visibility for project developers, a single environmental authorisation was created by Ordinance No 2017-80 of 26 January 2017, bringing together the various procedures and decisions required for installations classified for environmental protection (ICPE) and installations, works, and activities subject to water law (IOTA), subject to authorisation.

Installations subject to environmental authorisation are also subject to inspection and monitoring by the state services in charge of environmental protection (Direction régionale de l’environnement, de l’aménagement et du logement - DREAL). Depending on breaches of environmental law that may have been observed, the DREAL may impose additional requirements, apply financial penalties or even withdraw the environmental authorisation.

French labour law contains several rules designed to protect the health and safety of employees. On construction sites in particular, inspections are carried out by the state services of the Ministry of Labour to ensure that construction companies comply with labour law and health and safety regulations applicable to their employees and to their subcontractors.