Clarifications on the scope of the principle of non-liability of creditors by reason of the facilities granted applicable in French insolvency proceedings

The French Supreme Court, by several judgments rendered in 2018, clarified the scope of the principle of non-liability of creditors by reason of the facilities granted applicable where French insolvency proceedings are opened.
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Introduced by the safeguard law dated 26 July 2005 for the purpose of avoiding the termination of facilities granted to distressed companies by creditors fearing liability for abusive lending, article L. 650-1 of the French commercial code provides for a principle of non-liability of creditors by reason of the facilities granted where safeguard, reorganisation or liquidation proceedings are opened.

Creditors may only be held liable in three circumstances:

  • fraud
  • clear interference in the management (immixtion caractérisée dans la gestion), and/or
  • if the security interest securing the facilities are disproportionate ; those security interests can, where the creditor’s liability is established, be annulled or reduced by the judge.

The French Supreme Court, by several judgments rendered in 2018, clarified the scope of this rule.

The French Supreme Court traditionally has an extensive construction of this principle of non-liability.

1. The « facilities » can be not only bank facilities, but also « payment terms » granted by a supplier1.

2. The three exceptions allowing pursuit of the creditors’ liability are construed narrowly by French case law. As such:

a) the fraud cannot be established by the mere fact of acting for the purpose of preserving its interests « failing any manœuvres, deception or violation of law or regulations2

b) clear interference in the management requires positive management acts: the fact that a bank does not to take into account, by an in-depth analysis of the operating results of a company under a reorganisation plan, of the fragility of its industrial and commercial performance before granting two substantial facilities, shall not constitute wrongful interference3; similarly, the mere control of the use of the borrowed funds shall not -constitute an interference in the management4

c) the ground of disproportionate security interest, which aims at sanctioning excessive protection of the creditor, by an accumulation of security interests or by a single security interest, is rarely established:

    • the ancillary nature of a guarantee (cautionnement), irrespective of its limit, excludes any disproportion (French Sup. Court, 18 May 2017, n°15-12338)
    • the accumulation of two guarantees and a pledge over the business is not necessarily disproportionate as the real effectiveness of the security interests in case of enforcement must be taken into account (French Sup. Court, 13 January 2015, n° 13-25360), and
    • the accumulation of a guarantee and a mortgage over an asset valued at a value exceeding the loan amount was however ruled disproportionate and both security interests were annulled (Metz Court of Appel, 1re ch., 15 June 2011 n°09/00850).

3. The principle of non-liability set out by article L. 650-1 of the French Commercial Code is applicable irrespective of the point at which the creditor granted the facility.

Thus, the fact that the loan has been granted during the claw-back period (période suspecte) does not allow the application of this rule to be set aside (French Sup. Court, 9 May 2018, n°17-10965). It is on the ground of claw back rules that the facility could be challenged, notably if the contract is considered as imbalanced or if the creditor was aware of the insolvency situation.5

Similarly, the loan can be granted to the debtor for the purpose of financing the creation or acquisition of its business.6

Finally, the rule applies regardless of whether the creditor who granted7 the facility did or did not file a proof of claim (French Sup. Court, 19 September 2018, n°17-12596, for an overdraft facility).

4. The liability of the creditor additionally requires proof that the facility has been wrongfully granted , damage, and a causal link. Traditionally, the facility is wrongful if it constitutes abusive lending (soutien abusif) (granting or maintaining a facility to a company which the creditor is aware is in an irremediably compromised situation8) or a ruinous facility (where its importance and cost make the collapse of the company inevitable, failing any prospect of development or recovery9).

We are only aware as of today of one case admitting the liability of a creditor on the ground of article L. 650-1 of the French Commercial Code, finding liability for a ruinous facility by a supplier who granted payment terms and converted its outstanding claims into several interest bearing loans secured by in rem security interests. Finding, on one hand, a wrongful interference in the client’s management10 and, on the other hand, a ruinous facility (credit ruineux), the Court noted that « the annual repayment burden, in capital and interest, exceeded the payment ability of the debtor in light of its operating results, which the supplier was aware of as it was provided with the company’s accounts» (French Sup. Court, 10 January 2018, n°16-10824).

This judgement specifies that the creditor so liable for the wrongful facilities is only required to compensate the additional shortfall of assets to which it contributed.

The Commercial Chamber of the French Supreme Court has, however, recently recalled the limits of the principle of non-liability, which shall not apply:

  • to a financial guarantee, failing any granting of a facility (French Sup. Court, 24 May 2018, F-P+B, n°16-26387 relating to the mandatory financial guarantee of real estate agents as set out in law n°70-9 of 2 January 1979) ;

  • to a duty to warn (obligation de mise en garde) of the beneficiary of the facility where the creditors are subject to it (French Sup. Court, 20 June 2018, F+P+B, n°16-27693). In the same vein, the French Supreme Court had already ruled out the application of the legal provision to the claim for liability by a guarantor on the ground of the breach of duty to warn against the risks of indebtedness resulting from the granting of the guaranteed loan11.

The borrower would thus be able to pursue the creditor’s liability for abusive credit termination or breach of duty to warn12, without having first to establish fraud, clear interference in the management or the taking of disproportionate security interests.

Similarly, article L. 650-1 only relates to the civil liability of the creditor and does not protect from a potential claim for criminal liability13 or nullity. As regards nullities, the facility could be cancelled if granted during the claw back period (see above). Certain authors have considered that the facility could also be cancelled on the ground of defects in consent (vices du consentement) for economic duress (violence économique), a ground introduced by order n°2016-131 dated 10 February 2016 reforming the law of obligations14. However, the legal provision as drafted further to the validation law dated 20 April 2018 requires the borrower to establish that the creditor has abused « the state of dependence in which his co-contracting party was towards him » with a view to« [obtaining] from him an undertaking he would not have granted in the absence of such a coercion and to [obtaining] a manifestly excessive benefit ».

If the non-liability principle provided by article L.650-1 of the French Commercial Code allows the risk of civil liability for creditors to be limited considerably, a number of actions remain available. Yet claims for liability or nullity of agreements initiated against creditors in the context of insolvency proceedings will defer their repayment, which is subject to the final admission of their claim, which would typically depend on a decision of a court ruling on the merits (after a stay of the proceedings or a declaration of lack of jurisdiction by the supervising judge).15

1 French Sup. Court, 16 October 2012, n°11-22993 ; French Sup. Court, 10 January 2018, n°16-10824.
2 French Sup. Court, 08 March 2017, no 15-20288 : « if, by granting the facility […], together with the creation of a security interest, the [bank] sought to preserve its own interests, this sole fact was not sufficient to establish the fraud raised by the liquidator […], the granting of a facility in consideration for a security interest being a lawful process » ; the fraud « means, in civil or commercial matters, an act carried out while using unfair means aimed at obtaining a consent, obtaining an undue material or moral benefit, or carried out with the intent of avoiding the application of a mandatory or prohibitory law » (French Sup. Court, 13 December 2017, n°16-21498).}
3 French Sup. Court, 22 March 2017, n° 15-13290.
4 French Sup. Court, 30 October 2007 n°06-12677.
5 French Sup. Court, 14 June 2017, n° 15-25698, P+B+I.
6 French Sup. Court, 3 November 2015, no 14-10274 et 14-18433.
7 French Sup. Court, 27 March 2012, n°10-20077 ; Cass. com. 19 June 2012, n°11-18940.
8 French Sup. Court, 16 October 2001 n°98-18301.
9 French Sup. Court, 22 May 2001, n°99-10437.
10 Trial judges identified this interference by observing that the provisions of the loan agreements provided a mandatory prepayment in case of total, partial or temporary disruption of exclusive supplies by the debtor with the supplier so that the debtor could not choose its contractual partners or control its financial costs.
11 French Sup. Court, 12 July 2017, n°16-10793, the claim aiming to obtain, not the compensation of damage suffered « by reason of the loan granted », which is not necessarily wrongful, but the compensation of damage consisting of the loss of opportunity not to enter into the guarantee.
12 The duty to warn was established by French case law to the benefit of non-informed borrowers and by law for consumers (whether or not informed) for real estate financing (article L. 313-12 of the French Consumer Code), where the facility agreement can bear particular risks for the borrower, given its financial situation, notably a risk of payment default.
13 Ruinous credit can also be sanctioned on the ground of criminal law for complicity of bankruptcy by provision of ruinous means (article L.654-2 of the French Commercial Code).
14 Article 1143 of the French Civil Code ; Boccara, E. Jouffin et M. Roussille, Réforme du droit des contrats et du régime des obligations - Quelle incidence pour les banques ? Banque et droit 2016, n° 52, p. 52 ; Jérôme Lasserre Capdeville, Conséquences de la réforme du droit des obligations sur le droit bancaire - Étude prospective, La Semaine Juridique Entreprise et Affaires n° 29, 21 July 2016, 1434
15 Challenged claims cannot be excluded from the plan, which must provide for the repayment of all claims for which proof of claim has been filed (French Sup. Court, 15 November 2016, n°14-22785, F-D). The corresponding amounts to be allocated to challenged claims are only paid after their final admission. However, the court seized can decide that the creditor can receive a provisional payment, in all or part, before its final admission (article L.626-21 of the French Commercial Code).

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