2024 saw an improvement in the debt market in France compared to 2023. After a sluggish first half of the year, there was an uptick in activity during the second half, driven in particular by the reduction of interest rates that began early in the second semester. Interestingly, banks also made something of a return to the mid-market segment, an area that in recent years had largely been dominated by debt funds. This shift is also linked to a moderation in valuation multiples, as evidenced by the renewed momentum in secondary and tertiary LBOs.

Local banks are mainly relationship banks for company directors and are mainly present in the small-cap segment. International banks are mainly present in the large-cap segment, where they are involved in club deals or syndicated pools. Mid-cap is the preferred area for private debt funds and alternative lenders.

Beyond these general statements, we are seeing more and more private debt funds setting up club deals to compete with international banks in the large-cap segment. Similarly, these players are investing more and more in the bullet term loans reserved for them in syndicated loans. We are also seeing more and more international banks complementing private debt funds’ offerings with super senior credit lines or by investing directly in unitranche debt alongside the private debt funds. We are also witnessing a strong push by banks into the mid-cap market, as they try to regain market shares lost in recent years to debt funds (that used to be more flexible) in a segment of the market that remains the most dynamic in France.

The geopolitical context of the war in Ukraine and the conflict in the Middle East, with all their inherent uncertainties, alongside anticipation surrounding the US presidential election, has blurred the economic visibility of players, but has also made it more difficult to raise significant amounts of debt. Tighter monetary policies and rising interest rates have had a negative impact on available liquidity. The state-guaranteed loans made available during the COVID-19 pandemic as a response to companies’ liquidity needs went slightly beyond what was strictly necessary and led to a substitution of other bank loans. Companies that took out such loans have reduced their borrowing capacities and, in the context of a stronger rise in interest rates, the cost of refinancing state-guaranteed loans which have fixed interest rates may lead to an increase in costs and a reduction in the banks’ margin. In this context, a flight to quality has become the prevailing trend. While the best projects are always attracting interest, those with a few rough edges are finding it difficult to secure financing, to the point where some have seen their projects delayed or aborted. Lenders are more cautious than they used to be. Processes have become longer, with more extensive due diligence requirements than before. The relatively small fall in interest rates since the second half of 2024 combined with uncertainties linked to the anti-European policies of the Trump administration and the outcome of the war in Ukraine, are not likely to revitalise the market. We are seeing the European market fall behind the US market.

The main types of debt finance transactions in France are set out below.

• Acquisition/Leverage Financing: this type of debt finance transaction refers to the funding mechanism to complete the acquisition of a company. It focuses on the value and future cash flows of the target company. Acquisition financing involves a combination of debt financing and equity financing. This type of debt finance transaction is very common in France.
• Corporate/Business Financing: This is the traditional form of debt finance. It is used to finance the business growth (eg, working capital, purchase of equipment). Generally provided by banks, this type of financing takes the form of revolving credit facility, overdraft and term loans.
• Asset-Based Lending: This financing is based on the value of certain types of the borrower’ assets (such as trade receivables, inventory, plant and machinery, real estate and intellectual property rights) and such assets are used as collateral. Asset-based lending is not as widely used in France compared to other European jurisdictions.
• Securitisation: This is a financial mechanism pursuant to which illiquid assets (eg, loans, mortgages, commercial receivables) are transformed into tradable securities. It constitutes asset-based finance but unlike asset-based lending, the securitisation provides the company with immediate cash flow. 
• Net Asset Value (NAV) Financing: This has emerged in France as another key source of financing for investment funds seeking to unlock liquidity and support their growth strategies. NAV finance provides a fund with borrowing based on the NAV of the fund’s investment portfolio. 
• Project Finance: This is a specific way to finance long-term infrastructure and industrial projects (such as power plants, wind farms or toll roads). This type of funding relies on the projected cash flow generated by the project (rather than the creditworthiness of sponsors in the case of acquisition financing). Project financing generally involves a consortium of banks and institutional investors.

Bank loan facilities usually take the form of senior secured loans comprising amortising term facilities and a revolving credit facility. Depending on the nature of the transaction and the type of borrower, senior loans can be the only financing made available for the transaction or can be set up alongside junior debt, such as mezzanine financing. 

In recent years, bond issues have emerged as an alternative to bank loan facilities, particularly for acquisition financing. Bond issues are generally subscribed to by debt funds, which are not authorised to grant loans in France as a result of the French banking monopoly rules. 

Due to their financial capacity, debt funds are generally able to act as sole lender, so the company has a single point of contact in the negotiation of finance documents, any amendments and waivers. Banks can be constrained to structure the financing on a club-deal basis, slowing down the approval process and negotiation, or to syndicate the financing. 

Debt funds are generally more flexible than banks due to their understanding of the debtor’s business. 

Generally, debt funds request the appointment of an observer on the board of the issuer. The observer will attend all of the issuer’s board meetings. Issuers can be reluctant to appoint a board observer because they will have access to strategic information.   

Bonds are repaid on the maturity date, while senior loans are generally amortising.

Interest rates applicable to senior debt are lower than those applicable to bond issues. Interest applicable to the bonds is generally a mix of cash and capitalised interest. Sometimes, warrants are attached to the bonds.

The types of investors who can participate in bond financings are more varied than those participating in bank loan financings. This is mainly because of the French banking monopoly rules, pursuant to which loans may only be granted by licensed entities or entities otherwise permitted to carry out banking business in France. While loans are mainly granted by banks, bond financing can be put in place by debt funds, mezzanine funds, hedge funds, etc.

Loan financing documentation takes the form of a facilities agreement, which is frequently based on the standards provided by the Loan Market Association. Finance documents are often drafted in English. 

The documentation relating to bond issues takes the form of a subscription agreement to which the terms and conditions of the bonds are attached. 

In accordance with the rules of the French banking monopoly, any lender that is not a “passported” credit institution is prohibited from making loans available to a French borrower. Such “non-passported” institutions would not be allowed to acquire commitments in a French-governed facilities agreement (because such commitments would result in the “non-passported” lenders making loans available to the borrower).

As a result, and in order to comply with the rules of the French banking monopoly, “non-passported” lenders will acquire sub-participation in drawn loans or subscribe to bond issues.

Another feature of the French banking system is the abundance of term loan bullet lines in financing documentation to attract institutional investors (eg, CDO/CLO and alternative lenders) that cannot invest in amortised debt.

• TEG:       In respect of facilities to a French borrower, French law requires that the loan agreement contains an indication of the overall effective rate (TEG – taux effectif global). The omission of or error in providing the TEG may result in a reduction of the contractual interest in an amount determined by the judge (in particular, with regards to the borrower’s prejudice).
• Parallel Debt: Under French law, due to the accessory nature of security interests, security interests must be granted to the creditor whose claim is secured. In the context of a financing that is not governed by French law but involves French law security interests and a security trust structure, a parallel debt mechanism is usually put in place in cross-border transactions to allow the finance parties to benefit from the secured claims. The parallel debt mechanism is a structure where all French obligors agree to owe the security trustee an amount equal to that which they owe the finance parties, the security trustee being the creditor of the parallel debt. The French Supreme Court recognised the enforceability of a security agent benefitting from a parallel debt but this decision should not be considered to be a general recognition of the enforceability in France of the rights of a parallel debt creditor.
• Cross-Stream and Upstream Guarantees: Any guarantee granted by a French guarantor must be consistent with its corporate interest. The concept of corporate interest is not defined under French law; it is a question of fact. However, French case law sets out three cumulative conditions:
1. The French guarantor and the guaranteed debtor must belong to a genuine group operating under a common strategy aimed at a common objective. 
2. The risk assumed by the French guarantor must be proportionate to the benefit received by that French guarantor.
3. The financial support provided by the French guarantor shall not exceed its financial capabilities.

Any act made in breach of the corporate interest of a French limited liability company could be considered as a misappropriation or misuse of corporate assets or misuse of credit, which could give rise to management liability.

While corporate benefit can usually be assumed where a parent grants security interests to secure the debt of its direct and indirect subsidiaries, the test is much more difficult with respect to upstream and cross-stream guarantees. In that respect, finance documents will usually include guarantee limitation language, pursuant to which upstream and cross-stream guarantees are limited to the amounts made available to the French guarantors directly as borrowers under the loan agreement or indirectly through intercompany downstream loans from the proceeds of the financing.

The security documentation will mostly depend on (i) the deal size; (ii) the specifics of the financing; and (iii) the borrower’s risk assessment carried out by the lenders.

Acquisition Finance

On the French leveraged transactions market, it is standard practice to set up a comprehensive and substantial security package, including direct and indirect security interest.

Direct security interests

Pledge over the target’s shares

The main security interest in the context of a leveraged buyout is a pledge over the target’s shares. In France, the documentation for this security interest will depend on the nature of the pledge equity.

If the target is incorporated as a stock company (société par actions), the borrower shall grant a pledge over the financial securities account (nantissement de compte de titres financiers) on which the targets’ shares are registered, in accordance with Article L211-20 of the French Monetary and Financial Code.

This pledge is created by the signature of the pledgor on a statement of pledge (déclaration de nantissement). Article D211-20 of the French Monetary and Financial Code provides a list of mandatory items that shall be included in the statement of pledge (eg, the amount of the secured liabilities, identity of the beneficiaries).

The statement of pledge by itself is sufficient to create the security interest, however, normally a pledge agreement is executed between the pledgor and the lenders (or a security agent).

The pledge will be granted over the financial securities account and the fruits and proceeds relating to the pledged equity (including dividends) can be pledged as well if this is specified in the pledge agreement and in the statement of pledge. In this case, a special bank account shall be opened by the pledgor and the fruits and proceeds shall be paid to such account.

While it is not a perfection requirement per se, the usual practice is that the pledge shall be registered on the pledged company’s shareholders’ registers (registres de mouvements de titres) and shareholders’ accounts (comptes d’actionnaires) as such documents are used to trace and establish property of the pledged company’s securities.

There have been recent developments in French law relating to the pledge over financial securities, as set out below.

• Granting lower-ranking pledges over financial securities accounts is now allowed in relevant law. Lower-ranking pledges over financial securities accounts are common as the amount of the secured liabilities and the identity of the beneficiaries has to be indicated in the statement of pledge; as a result, any creditor that cannot be identified on the statement of pledge signature date as a hedging bank will benefit from a lower ranking pledge securing the amounts due to it under the hedging agreements.
• It is now possible to open the fruits and proceeds special account after the date of perfection of the pledge.

Alternatively, if the target is incorporated as a société civile or société à responsabilité limitée (relatively uncommon in leveraged financing), the borrower shall grant a pledge over the target’s shares (nantissement de parts sociales). Such security interest will have to be registered with the competent French trade registrar to be perfected.

Security interest over the borrower’s assets

Common security interest granted in the context of a leveraged buyout is the following.

Pledge over all the bank account(s) of the borrower

The borrower will grant a pledge over its bank account balances. The security interest will need to be notified to each bank account holder to be perfected.

It is common practice for the pledge agreement to allow the borrower to operate its bank accounts as long as no event of default has occurred under the main finance documents. The security agent/lenders will be entitled to freeze the bank accounts (by notifying the bank account holders) if an event of default (or major event of default, depending on the negotiation of the pledge agreement) has occurred and continues.

A new pledge shall be granted each time a new bank account is opened by the borrower.

Pledge over the receivables/assignment of receivables

Such pledge can be granted over existing or future receivables as long as the pledge agreement allows for such receivables to be sufficiently determinable.

If the pledged debtors are not party to the pledge agreement, the pledge will need to be notified to them to be perfected. 

Alternatively, the borrower’s receivables can be assigned to the lenders. Depending on the lender’s nature, such assignment can take the following forms:

• a Dailly assignment of receivables, as governed by Articles L313-23 et seq of the French Monetary and Financial Code; to benefit from such security interest, the beneficiary shall be a passported bank and a specific bordereau shall be executed by the borrower (numerous mandatory items necessary to identify the assigned receivables will need to be indicated on such bordereau); or 
• an assignment of receivables for security purposes pursuant to the rules of the French Civil Code, governed by Articles 1321 et seq and 2373-1 et seq of the French Civil Code.

The main benefit of the assignment of receivables is that the related receivables are being moved out of the borrower’s estate and, as a result, are no longer in the scope of an insolvency process. However, the property of the receivables is transferred to the beneficiaries, and the borrower can no longer grant lower-ranking security interest on such assets.

Other categories of pledges

• Pledge Over On-Going Business (Nantissement de Fonds de Dommerce): Such pledge will cover the leasehold interest, the goodwill, the stocks, the intellectual property and the insurance rights of a company. The perfection requirement is the registration of the pledge with the relevant competent French trade registrar.
• Pledge Over Intellectual Property Rights (Nantissement de Droits de Propriété Intellectuelle): A detailed list of the pledged intellectual property rights shall be appended to the pledge. The perfection requirement is the registration of the pledge with the relevant French IP-IT registrar (Institut National de la Propriété Intellectuelle).

The above categories are not the most common security instruments in leveraged buyouts.

Delegation of payment

This mechanism, governed by Article 1366 et seq of the French Civil Code can be used as a guarantee. 

It is possible to include imperfect delegation provisions in the finance documents, indicating that the borrower will delegate third parties (ie, insurance companies, vendors in connection with the warranties provided for in the acquisition documents) to pay the lenders. This will generally be included in finance documents when such documents contain an undertaking that the borrower will enter into key man insurance agreements. If the lenders are not designated as sole accepting beneficiaries in the insurance documents, then the borrower will have to enter into a delegation agreement.

Fiduciary trust (specific perfection requirements)

The fiduciary trust for security purposes is governed by Articles 2372 et seq of the French Civil Code. 

A fiduciary agreement is a contract pursuant to which the borrower will transfer assets, rights and securities to a fiduciary trustee who will retain such assets in a special-purpose estate, as a guarantee for the repayment of the sums due under the finance documents.

The perfection requirement is the registration of the pledge with the relevant competent French trade registrar.

The transferred assets are moved out of the borrower’s estate and, as a result, are no longer in the scope for an insolvency process.

In practice, if shares of the borrower’s subsidiaries are brought to such special fiduciary estate, the fiduciary agreement shall contain rules pursuant to which the fiduciary trustee will exercise the voting rights in accordance with the borrower’s instructions as long as no default has occurred under the financing.

When the secured liabilities are repaid, the fiduciary trustee shall return the transferred assets to the borrower.

Indirect security interests

Depending on the specifics of an operation, the lenders may wish to request security interests from the borrower’s shareholders, and/or “defensive” security interest.

Pledge over the borrower’s equity

Such pledge shall be granted by the borrower’s shareholders, and can take the form of pledges over financial securities accounts or pledges over the borrower’s shares (depending on the borrower’s nature).

This category of security interest has two drawbacks that a lender will need to take into account:

• It does not allow for a single point of enforcement of the security package as each pledge will need to be enforced separately.
• The lender has to indicate in writing to each pledgor before 31 March of each year the secured amount (calculated as at 31 December of the previous year) and the end of the secured period.

Pledge over a target’s equity when the acquisition is carried out by a subsidiary of the borrower

The security interest is standard when the financing documents contain capital expenditure lines, allowing the borrower to push down debt to allow its subsidiaries to carry out permitted acquisitions.

In this situation, the finance documents may request that:

• the borrower shall downstream debt through a framework intragroup loan agreement to the related subsidiary; and
• such subsidiary will grant a pledge over the eligible target’s equity to secure repayment by the subsidiary of the intragroup loan to the lender.

The receivables arising from the intragroup loan shall be covered by a pledge over receivables granted by the borrower to the benefit of the lenders under the senior financing (and referred to in the master framework intragroup loan agreement).

This security interest has a mostly “defensive” purpose, as its main goal is to lock the value in the financing perimeter – the borrower cannot sell pledged equity without the lender’s consent.

Joint and several guarantees granted by shareholders/managers of the borrower

The lender has to indicate in writing to each guarantor before 31 March of each year the secured amount (calculated as at 31 December of the previous year) and the end of the secured period.

Asset Finance

The most frequent security interest in the context of an asset financing are the following in France.

Notarised mortgage

The borrower will grant a notarised mortgage (hypothèque) over the financed asset (real estate, aircraft, ship).

Such security interest involves high costs and shall be registered with the competent French registrar to be perfected.

No Counterparts

Counterpart execution is not valid under French law. The parties shall execute a number of originals corresponding to the number of parties to the agreement.

Corporate Authorisations

Such authorisations are necessary for certain categories of French companies to grant a security interest (otherwise such security interest would be void). This mostly concerns public limited liability companies (sociétés anonymes).

Prohibition of Financial Assistance

Under Article L.225-216 of the French Commercial Code, joint stock companies (sociétés par actions) cannot grant a loan, guarantee or security interest of any financial assistance to secure the acquisition of its own shares by a third party. Any breach of this prohibition would result in criminal penalties (fine and prison term). However, this restriction does not apply to transactions carried out by credit institutions in the ordinary course of their business, nor does it apply to share acquisitions by the company’s employees, which are exempt from the financial assistance prohibition.

Prohibition of Upstream Loans/Guarantees

Under French law, the acts carried out by a company must comply with its corporate purpose. Any act that would contravene such corporate purpose could constitute a misuse of the company’s assets (abus de biens sociaux) resulting in criminal penalties for the company’s directors (fine and prison term).

French court precedents have established that upstream loans/guarantees granted by a subsidiary to its benefits/to the benefit of its parent company usually conflict with the subsidiary’s corporate purpose.

Security agent (agent des sûretés)

Before the security agent was introduced in French law, there was no mechanism specially adapted for the provision and management of security interests where there are several creditors. It was necessary for other techniques such as the mandate or the active solidarity between creditors in which only the creditors remained the security holders. In relation to the mandate, the agent acts as the creditor’s representative and on their behalf. With the active solidarity, one of the creditors is able to manage the security interests for and on behalf of the entire pool.

Inspired by the security trustee, the security agent used under OHADA law, and the roman law trust (la fiducie), the security agent was initially introduced in the French Civil Code with only one article. As this was too vague, it was only with the subsequent introduction of Articles 2488-6 et seq in the French Civil Code that this legal status could be fully used. 

These articles have established a new regime of French security agent. Such agent is entitled to benefit from security interest in its own name for the benefit of the lenders. The security agent will hold the security interest in a separate estate allowing for such assets to be protected against an insolvency of the security agent. However, the security agent will have to manage separate accountability and difficulty can arise in connection with prudential ratios computation when a credit institution acts as a security agent.

For these reasons, a lot of finance documents in France still rely on the mechanism of mandate to establish the security agent.

Parallel debt

A French law security interest can only secure a payment obligation, contrary to security interest under UK law. Furthermore, French law does not allow the trust concept per se (even if advancements have been made through the recognition of (i) the new security agent regime and (ii) the fiduciary trust in the French Civil Code).

In order to address these concerns in the context of a financing when (i) a French borrower is involved; (ii) the senior documents are governed by a law other than French law; and (iii) a security trustee is appointed by the finance documents, a system has been developed where a payment undertaking of the borrower towards the security trustee is created to mirror its obligation towards the lenders under the main finance documents. This mechanism allows and facilitates security interest management by the security trustee. The finance documents usually contain contractual amenities (pro tanto clauses) to address the risk of double payment by the borrower.

French courts have approved the parallel debt mechanism in the Belvedere precedent, establishing that the appointment of a trustee and the parallel debt are not contrary to French public order.

However, the parallel debt mechanism does not protect against a security trustee default.

Hardening period

If a company is subject to an insolvency process, a list of transactions and acts (including security agreements) can be challenged by courts if they have been entered into during the hardening period (up to 18 months before the date of the opening judgment of the insolvency process).

Intercreditor agreements are commonly used for French finance transactions. The purpose of intercreditor agreements is to describe respective rights and obligations of lenders with respect to the borrower and its assets and to set out the contractually organised payments and claim priorities between the different creditors of the same debtor. In broad terms, shareholders’ debt will be subordinated to junior debt (such as mezzanine debt), which will be subordinated to senior debt.

Intercreditor agreements generally contain the following provisions:

• contractual subordination/payment priorities – the order in which payments should be made to different creditors;
• shared securities – all security proceeds (irrespective of the ranking of the security interest – first or lower ranking) are shared in accordance with the contractual ranking;
• prohibition of certain payments – restrictions on payments (including dividends) to the shareholders and other equity holders;
• claw-back clauses;
• enforcement process – determining standstill provisions giving senior lenders control over the enforcement process; and 
• appointment of the security agent, its duties and obligations.

In accordance with Article L.626-30 of the French Commercial Code, French courts have to apply provisions of intercreditor agreements for the determination of the categories of affected parties (classes de parties affectées) in the context of an insolvency process.

Depending on the nature of the security interest, its ranking will be determined by its signing date or, if perfection or registration are required, on the date on which the relevant perfection requirements are completed or on its registration date. As indicated in 6.1 Role of Intercreditor Arrangements, the intercreditor agreement will contain provisions to ensure that the legal ranking of security interests will not affect the ranking between the lenders.

Structural subordination arises where financings are made available to the operating companies (in which assets are held) and to the holding companies. As creditors of the holding company, they will effectively be subordinated to the creditors of the operating companies. If the holding company and its operating subsidiaries become insolvent, creditors of the operating companies (senior creditors) will be paid out before any distribution to the holding company and therefore to the creditors of the holding company (junior creditors).

Security interest duly enforceable against third parties can be primed by other security arising by operation of law such as the employees’ general privilege.

A French security interest can only be enforced following a default of payment from the borrower. The definition of “enforcement event” in security agreements governed by French law shall be drafted accordingly.

Following the occurrence of a default, lenders that wish to enforce a security package will accelerate the senior financing to create a non-payment allowing them to enforce the security.

The purpose of the enforcement is to allow the lender to become the owner of the pledged assets and to sell such assets to discharge the secured liabilities under the senior financing. French law provides the following tools for the enforcement of security interest:

• foreclosure of the pledged assets;
• public auction; and
• appropriation (pacte commissoire).

However, a borrower who encounters financial difficulties will file for the opening of a pre-insolvency process (conciliation with the lenders)/an insolvency process before any enforcement of security interest can be completed. The three main types of insolvency under French law are:

• safeguard proceedings (can be opened when the borrower is not insolvent yet but encounters difficulties that they are not able to overcome);
• rehabilitation proceedings (available to an insolvent borrower within 45 days of the date on which he/she became insolvent); and
• judicial liquidation (for an insolvent borrower when recovery is manifestly impossible). 

After the enforcement of a security package, the lenders could be held liable for their management of the foreclosed assets. Several solutions could be considered, including the appointment of a security agent, the incorporation of a newco to hold the foreclosed assets, and the valuation by an expert.

In accordance with Regulation (EU) No 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (“Recast Brussels Regulation”), judgments rendered in civil and commercial matters within a member state benefit from automatic recognition and enforceability in France without any specific formality provided that the party seeking enforcement obtained a certificate of enforceability issued by the court of origin. Recognition (and enforcement) of a European judgment can be refused on one of the grounds referred to in the Recast Brussels Regulation.

France is also party to (i) the Lugano Convention of 30 October 2007, the Hague Convention of 30 June 2005 on choice of Courts Agreement and the Convention of 2 July 2019 on the recognition and enforcement of foreign judgments in Civil or Commercial matters, and (ii) bilateral and multilateral treaties with a large number of countries governing the enforcement of foreign judgments. 

In the absence of any applicable treaty or convention for the reciprocal recognition and enforcement of judgments, foreign judgments would not be automatically recognised or enforceable in France. The party seeking enforcement has to initiate exequatur proceedings. Three cumulative conditions have to be fulfilled:

• the foreign judgment was rendered by a court having jurisdiction over the claim;
• the foreign judgment and its effects do not breach French international public policy; and
• the choice of the foreign court is not fraudulent.

Exequatur proceedings are carried out exclusively before the French civil court.

Under French law, there are two out-of-court proceedings: mandat ad hoc and conciliation proceedings. The mandat ad hoc and conciliation proceedings are confidential. A court-appointed officer will assist a solvent debtor (in the case of mandat ad hoc) or a debtor that is solvent or has been insolvent for no more than 45 days (in the case of conciliation) with a view to facilitating negotiations with its creditors under the aegis of the court. The court-appointed officer cannot force the creditors to accept an agreement.

The opening of a mandat ad hoc does not trigger an automatic stay of payment and enforcement actions. In practice, creditors accepting to participate in such proceedings agree to grant standstill.

The opening of a conciliation does not trigger an automatic stay of payment and enforcement actions but, unlike the mandat ad hoc, if creditors do not grant a standstill requested by the court, the court can reschedule claims for a maximum of two years and stay any enforcement actions.

Such proceedings do not provide for a cram-down system and the consent of every creditor is required.

The opening of sauvegarde or redressement proceedings triggers an automatic stay on creditors’ payment and enforcement actions. However, a creditor benefiting from a Dailly assignment entered into before the opening of such proceedings is entitled to recover the relevant receivables. In addition, any fiducie agreement entered into without the possibility for the grantor to use the relevant assets remains effective, despite the opening of sauvegarde or redressement proceedings. Even if the creditors are not entitled to enforce the security interests, they benefit from retention rights over the pledged assets, which ensure that the creditors have an exclusive right over the value of the assets.

In the event of judicial liquidation proceedings, secured creditors are not allowed to obtain ownership of the assets without a court order (pacte commissoire). However, they could request a court-ordered appropriation. 

Certain payments made, or transactions entered into, by the debtor during the period beginning on the date on which the company effectively became insolvent (which may be a maximum of 18 months before the opening judgment) and the opening of insolvency proceedings can be (i) automatically considered as null and void or (ii) deemed null and void by the court. The transactions automatically considered to be null and void are listed in Article L.632-1 of the French Commercial Code.

There is no equity subordination principle under French law.

A predetermined order of payment is set out in Articles L.641-13 and L.643-8 of the French Commercial Code. It should be noted that the creditors benefitting from a property-based security interest (retention of title, fiducie and Dailly assignment) are not included in such order of payment.

Firstly, it should be noted that, pursuant to the French Tax Code (FTC), no withholding tax on interest paid by a French company to non-resident lenders applies.

However, notwithstanding the above, a 75% withholding tax applies to interest paid to a bank account opened in the name of the lenders in a financial institution that is located in a non-co-operative state or territory (unless the French borrowing company demonstrates that the main purpose and effect of the transactions to which these payments relate was not that of allowing payments to be made in a non-co-operative state or territory). 

Moreover, it is worth noting that a withholding tax could also apply in the case of interest non-deductible from the taxable result of the borrowing company and treated as deemed dividends (see below).

Consequently, the main tax considerations relating to debt financings in France concern the corporate income tax treatment of interest expenses accrued or paid by the French borrower. From the perspective of a corporate lender incorporated in France, such interest income is fully taxable at the standard corporate income tax rate, unless the lender is incorporated under a tax-transparent vehicle.

As a general rule, under Article 39 1-1° of the FTC, interest expenses incurred by a French taxpayer are deductible for tax purposes provided that such expenses:

• are incurred in the direct business interest of the tax payer; 
• correspond to actual and justified expenses; 
• are booked in the FY during which they were incurred; and 
• are not excluded by a special provision of applicable tax law (see below).

In addition to this general principle, the FTC provides several limitations specifically applicable to the deduction of financial expenses borne by a French borrowing company.

• The limitation provided for in Article 39, 1-3° of the FTC, under which the deductibility of interest paid or accrued to a direct shareholder that does not qualify as a “related party” to the borrower, is limited to the rate equal to the annual average rate of floating rate loans granted by financial establishments for a minimum term of two years, as published yearly by the French tax authorities (the “Official Tax Rate”). If interests are paid to a direct shareholder qualifying as a “related party”, the deductibility of such interest paid is not limited to the Official Tax Rate provided that the borrower is able to evidence that the interest rate applied by the financing is an arm’s length rate. If interest is disallowed under this rule, such interest is treated as deemed dividends and thus could potentially be subject to French withholding taxes depending on the qualifying status of the lender based on the applicable tax treaty (if any).
• Under the limitation provided for in Article 212 bis, I of the FTC, the net financial charges of a borrowing company (or the tax-consolidated group if any) are deductible from its taxable result up to the higher of EUR3 million and 30% of the borrowing company’s EBITDA, as adjusted for tax purposes (“Tax EBITDA”). It should also be noted that a company belonging to a consolidated group is entitled to an additional deduction and may deduct an amount equal to 75% of the net financial expenses eventually disallowed pursuant to the above-mentioned rule if it meets a specific safe harbour test. 
• Under the thin capitalisation limitation provided for in Article 212 bis, V of the FTC, the different applicable above-mentioned caps are reduced respectively to EUR1 million and 10% of the borrowing company’s Tax EBITDA in the event that such borrowing company (or the tax-consolidated group) is thinly capitalised (ie, when the average amount of its debt towards related parties over a fiscal year exceeds 1.5 times the amount of its accounting net equity).
• The anti-hybrid rule provided for in Article 205 B and subseq, under which the deductibility of interests paid to associated enterprises may be limited in the presence of double deductions, deductions without inclusions situations and imported mismatches. It should be specified that any interest disallowed under the French anti-hybrid rule would be treated as a deemed dividend and thus could potentially be subject to French withholding taxes at the time such interest is effectively paid depending on the qualifying status of the lender based on the applicable tax treaty (if any).
• The “Charasse Limitation” is a specific anti-abuse limitation provided for in Article 223 B, al. 6 of the FTC, applicable when a French tax-consolidated company has acquired a shareholding from a related party and under which a portion of the interest paid annually by a tax-consolidated group is considered as non-deductible from the overall tax-consolidated group result.

It should be noted that on 11 May 2022, the European Commission issued its proposal for a Directive on a debt-equity balance reduction allowance (DEBRA). The rules would apply to taxpayers that are subject to corporate income tax in an EU member state and would provide for an allowance in respect of equity increases in a given tax year. In addition, the Directive proposed the introduction of a new limitation on interest deductibility. To date, this Directive has not yet been transposed into French law but could have a significant impact on the rules mentioned above.

French Banking Monopoly Rules

These rules can be found in Articles L511-5 et seq of the French Monetary and Financial Code. These Articles prevent any entity that is not a passported credit institution (licensed in France or in the European Economic Area) from carrying out a credit operation in France. As a result, only the “passported” credit institutions are allowed to provide loans to a borrower in France. Any breach of the rules of the French banking monopoly would result in criminal penalties (fine and prison term).

To address this concern, financing made available by lenders that are not “passported” is structured as bonds. The borrower will issue bonds that will be subscribed to by the lenders’ vehicles. The financing documentation will need to contain specific provisions relating to the nature of the debt instrument – ie, the fungible nature of the bonds, bondholders’ representation (a “wholesale” regime allows for a lot of contractual amenities as long as the nominal value of the bonds is at least EUR100,000).

Article L511-7 provides for several exemptions to the banking monopoly (including transactions carried out between companies belonging to the same group – eg, cashpooling operations).

Calculation of the Effective Global Rate of a Loan

The failure to calculate and notify the effective global rate of any loan to a borrower when the agreement is entered into or from time to time as required by law may lead to the interest rate being challenged and is technically a criminal offence.

Signing Process

As mentioned in 5.2 Key Considerations for Security and Guarantees, French law does not acknowledge counterpart signatures. Any finance document will have to be executed in the same number of originals as there are parties to such document.

Electronic signature is valid in France (including through Docusign) as long as certain requirements are met (the electronic platform should be able to guarantee the identification of the signatory, that the signatory accessed the related document and the document’s integrity).

There is no restriction on the use of proceeds as long as the borrower does not use the financing’s proceeds for an illegal purpose.

Works Council (CSE)

A French company that has more than 50 employees shall set up a works council.

Consultation and prior approval of the target’s works council will be necessary before the acquisition of a target can be completed. 

The setting up of a financing or the granting of a security interest does not qualify as a decision that would require prior approval of the works council; however, should the security interest be granted over a significant portion of the company’s equity (and enforcement of the security interest could result in a change of control), the approval of the works council might be required. The negative opinion of a works council does not prevent the setting up of a financing/granting of a security interest.