Paris Banking Newsletter

Receivables may be assigned by using the simplified method of transfer set out in the so-called "loi Dailly" (articles L.313-23 et seq. of the French monetary and financial code), provided that the transaction falls under the scope of the law.¹ This month, we look at recent case law affecting those assignments of receivables.

Dailly assignments of receivables

Dailly assignments of receivables may be absolute or by way of security, either method effecting legal title transfer. Assignments by way of security of rental/income receivables are key to real estate and PPP/PFI financings. Security assignments of customer receivables are commonly used to secure corporate financings and RCFs in LBO transactions. Also, they can be a link in a securitisation chain. Overcollateralisation (whereby the amount of receivables exceeds the amount of secured obligations) is a commonly seen feature.

Why do it?
A Dailly assignment is straightforward (subject to the time necessary to identify the receivables to be assigned) and inexpensive. The assignment of any receivable is valid and enforceable against third parties as at the date on which the assignee dates the assignment form (bordereau Dailly) remitted by the assignor.

As from the date of assignment, the lender/assignee is vested in ownership rights on the receivable. This is the key benefit of the Dailly law, in particular if the borrower/assignor enters into insolvency proceedings.

Notice to debtors and commingling risk
At any time, the lender/assignee may give notice of the assignment to the underlying debtor or request acceptance by it, the latter case being rare except in PPP/PFI transactions.² Upon receipt of proper notice or acceptance, the underlying debtor is under the obligation to discharge its debt in the hands of the lender/assignee. The fact that the assignor goes bust will not preclude the assignee's right to serve notice.

So long as no notice has been served to the debtor (or no acceptance of the assignment has been made by it), payment of the assigned receivable is validly made to the borrower/assignor. In that case, the lender/assignee has no ownership rights on cash proceeds received by the assignor. The French supreme court in civil law matters, the Cour de cassation, has made this clear. The assignee only holds an unsecured claim against the assignor for the transfer back of cash proceeds received by it (Cass. com., 19 May 2015, no. 13-25312). The commingling risk pushes the lender/assignee into keeping the right to serve notice to debtors regardless of whether a default has occurred or not.

Case law strengthening creditor's rights
Does the assignee's right extends to that part of the assigned receivable which exceeds the secured obligation?
Yes, according to the latest decision of the Cour de cassation on the topic (Cass. com., 18 November 2014, no. 13-13336 bull.). The court held that the assignee is the sole owner of the assigned receivable until the secured obligation is discharged in full (or until the assignee waives its right to all or part of the assigned receivable) and is the only one entitled to collect the assigned receivable, even though the amount of the assigned receivable exceeds the amount of the secured obligation. This decision strengthens the creditor's position and the market practice of overcollateralisation that had been weakened by previous case law.³

Is the assignee entitled to withhold the cash proceeds when the secured obligation is not yet due?
The issue is not dealt with by the Dailly law. By comparison, article 2364 of the French Civil Code (which relates to pledges of receivables) expressly provides that the pledgee is entitled to keep the proceeds as collateral if the secured obligation is not yet due at the time of cash receipt. Two decisions from the Cour de cassation have upheld the right of the assignee to withhold cash proceeds:

• In 2005, the court highlighted that the assignment by way of security: (i) implies the return of the assigned asset once the secured obligation is paid; and (ii) operates a temporary transfer of ownership of the asset, the potential return of the asset to the assignor being subject to the exhaustion of the purpose of the security. The court then decided that in a situation where the secured obligations were not discharged, the bank was entitled to retain the cash proceeds (Cass. com., 22 November 2005, no. 03-15669, bull.).
• In 2015, the Cour de cassation made it clear that when the assignment of receivables is made by way of security, payments made by the debtor to the assignee before the opening of the insolvency proceedings of the assignor may be withheld by the assignee as long as the secured obligations are not paid, the excess cash being due for re-transfer to the assignor once they are paid (Cass. com., 30 June 2015, no. 14-13784, bull.). Note, however, that the assignee's right to the proceeds was not in dispute in this decision.

In practice, stakeholders may take different views on the need to create a proper security interest on the cash proceeds held by the assignee. Any arrangement on cash proceeds will need to take into account the particulars of the transaction and the general principle under French law that agreements must be performed in good faith notwithstanding their express terms. In the "Heart of La Défense" saga, a decision illustrates the balance of interest made by the court of appeal of Versailles between the right of the assignee and the need for the assignor (the SPV owning the building) to meet operating expenditures (28 February 2013, no. 12/06573).

Recent case law – do's and don'ts
The assignment of receivables and the cash proceeds arising therefrom should not be used to repay a secured debt which is not yet due. If made during the hardening period (the period of 18 months or less between the date of the judgment opening the insolvency proceedings and the earlier date on which the debtor was in a state of cessation of payments), such an assignment/payment will be automatically void, even though the assignment was provided in a master agreement entered into prior to the hardening period (Cass. com., 19 May 2015, no. 14-11215, bull.).

In case of opening of insolvency proceedings against the borrower/assignor, the filing of proof by the lender/assignee shall be limited to the secured debt. It shall not extend to the obligations, provided by law, by which the assignor is jointly liable for the payment of the receivables assigned by way of security. The entire secured debt must be filed, without any deduction for payments made by the assigned debtors to the assignee prior to the opening of the insolvency proceedings of the assignor (Cass. com., 30 June 2015, no. 14-13784, bull.).

What's next?

Our next newsletter will provide an update on the eviction of shareholders in case of reorganisation proceedings.

_Notes

_{¹ In a nutshell: (i) the beneficiary of the assignment must be an institution duly licensed to carry banking transactions in France (including through the use of the EEA banking passport); (ii) the secured obligations must consist in "borrowings" (crédit) owed to the lender, hence excluding payment obligations under guarantee undertakings or owed to finance parties other than the lender (e.g. hedge counterparties, the facility or security agent, etc.); and (iii) the receivables must have arisen in the business activity of both the assignor and the assigned debtor.
² Bearing in mind that the borrower/assignor may be reluctant to let the lender/assignee serve notice to its customers in the absence of default.
³ Cass. com., 9 February 2010, no. 09-10119 and Cass. com., 3 November 2010, no. 09-69870: in both cases, the court limited the rights of the assignee in respect of the relevant assigned receivable to the amount of the secured obligations. However, the November 2010 decision already seemed to have softened that position.}