Between banking pragmatism and legal theories, syndicated loans and sub-participation transactions navigate a grey area. Their classification remains a headache for the courts and legal writers. We take a look at the debates and recent developments.
1. Syndicated credit: an elusive qualification
A wide range of banks, difficulty in qualifying
Le syndicated loan brings together several banks to finance the same borrower. Each bank lends a fraction of the total amount, in accordance with a joint agreement.
Article 1134 of the French Civil Code governs these complex contractual relationships. But which legal category should this arrangement fall into?
Joint venture: an inappropriate classification
Case law has hesitated for a long time. A number of rulings have attempted to equate a syndicated loan with a joint venture.
This classification poses a problem. Article 1871-1 of the French Civil Code would imply that each member of the syndicate is indefinitely and jointly and severally liable for the company's debts. However, as the Court of Cassation pointed out in its ruling of 24 October 2000 :
"In the absence of a clause to the contrary, the syndicated loan is divisible.
Furthermore, banks generally exclude any solidarity between themselves. The Versailles Court of Appeal confirmed this on 11 December 1997, stating that "While it was undoubtedly desirable for each member of the pool to act in concert with the other [...], in the absence of a clause to the contrary, nothing obliged [a bank] to seek the agreement of its co-lender in order to establish the borrower's default".
Convention sui generis: the pragmatic solution
The courts now prefer to use this term. This unnamed agreement reflects the specific features of banking practice.
As Jean Terray states, the banking syndicate is characterised by "A simple voluntary contractual adhesion of the banks to a collective organisation for the granting of individual loans granted on the same conditions to one and the same borrower.
This flexible classification allows the legal regime to be adapted according to the intentions of the parties.
2. Sub-participation: a contract with many faces
An occult operation difficult to qualify
La sub-participation allows the lead manager to transfer the risk of a loan to other banks. This operation is generally unknown to the borrower.
As the Paris Court of Appeal ruled on 5 July 2002:
"The hidden nature of a sub-participation agreement has the direct effect that no legal relationship is created between the sub-participating bank and third parties, including borrowers, to whom the agreement cannot be enforced.
A sample of the qualifications on offer
Legal doctrine and jurisprudence have proposed various qualifications:
- Reinsurance
- Credit transaction
- Refinancing
- Concealed assignment of receivables
- Bond
- Joint venture
- Mandate of common interest
- Dealer agreement
Each captures an aspect of this operation, but none captures its complexity.
A sui generis contract governed by case law
The Versailles Court of Appeal ruled on 18 September 1997:
"The agreement can only be analysed as participation in a banking pool [...] A sui generis agreement used by banks enabling two or more of them, usually without the customer's knowledge, to share in the profit and risk of the same transaction.
This sui generis nature means that articles 1134 et seq. of the French Civil Code, supplemented by banking practices, can be applied.
3. Recent legal innovations
The French security agent: a long-awaited reform
Order 2017-748 of 4 May 2017 modernised the security agent regime. This essential aspect of syndicated credit suffered from an inadequate legal framework.
The new security agent now has a special-purpose asset (articles 2488-6 to 2488-12 of the Civil Code). This innovation is a major step forward for the competitiveness of French law.
As Dominique Robine notes:
"Replacing the elliptical article 2328-1 of the Civil Code with more precise texts that reflect judicious choices is a step in the right direction.
Parallel debt validated: the Belvédère ruling
In its ruling of 13 September 2011 (no. 10-25.533), the French Supreme Court (Cour de cassation) enshrined the Anglo-Saxon parallel debt mechanism. This decision reinforces the legal security of international credits.
The Court states that :
"The law of the State of New York applicable to syndicated loans, insofar as it recognises the principle of a parallel debt to the security agents, is not contrary to the French concept of international public policy.
This recognition allows the use of trust-inspired arrangements without forced recharacterisation.
The growing influence of Anglo-American law
The standard contracts drawn up by the Loan Market Association (LMA) now provide a structure for the practice. A French version was adapted by the AFB and the AEDBF in 2002.
This standardisation promotes legal certainty, but raises the question of how to standardise international banking law.
4. Future prospects
A practice in search of legislative recognition
The French legislator does little in this area. Only the ministerial decree of 18 February 1987 defines the tours de table, without specifying their legal status.
This situation contrasts with the codification efforts undertaken by professional associations (LMA, LSTA, APLMA).
Persistent uncertainties
Despite advances in case law, some grey areas remain:
- What recourse does a sub-participant have in the event of collective proceedings against the lead partner?
- How can transfers of security interests in shareholdings be secured?
- What is the agent's liability in the event of default?
Contractual clauses must anticipate these risks, with the help of experienced legal counsel.
Towards European harmonisation?
European law could play a unifying role. At present, the UNCITRAL Convention on the Assignment of Receivables and the Rome I Regulation provide partial solutions.
More structured intervention would enhance legal certainty.
The Order of 4 May 2017 on the security agent is a step towards harmonisation with foreign law. Other measures could follow to maintain the attractiveness of French law.
The legal classification of syndicated loans and sub-participations therefore remains a fluid area. To avoid the pitfalls of this legal complexity, personalised support is often essential. The considerable financial stakes involved in these transactions justify an in-depth examination of the contractual structures by specialists in banking and finance law.
Our firm regularly assists banks and borrowers in structuring their complex financing transactions. Don't hesitate to contact us to secure your next transactions.
Sources
- Fasc. 505: syndicated loans. - Syndication directe, JurisClasseur Droit bancaire et financier, First publication: 15 September 2003, Last update: 1 February 2019, Emmanuelle Bouretz.
- Fasc. 506: UNION CREDITS. - Sub-participation, JurisClasseur Droit bancaire et financier, First publication: 30 September 2003, Last update: 27 November 2016, Emmanuelle Bouretz.
- Cass. com. 24 October 2000, no. 98-11.562.
- Cass. com. 13 September 2011, no. 10-25.533 (Belvédère ruling).
- Order no. 2017-748 of 4 May 2017 on security agents.
- CA Versailles, 12th ch., 11 December 1997, Centrale de banque c/ SA Delom, Juris-Data no. 1997-210146.
- Jean Terray, "L'octroi conjoint de crédit - syndicat et sous-participation", JCP E 2002, No. 12, p. 510.
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