Syndicated loans are an essential tool for financing large-scale projects. This technique makes it possible to spread the risk between several banking establishments while guaranteeing the same level of security. harmonised credit management. The effectiveness of this mechanism depends on rigorous organisation and a clear definition of roles.
1. Centralised credit administration
Role and legal nature of bank agents
At the heart of the system is the banking agent. The legal status of the agent has given rise to debate. Contrary to appearances, the agent is not always the representative of the participating banks.
The Paris Court of Appeal ruled that "the obligations of the lead manager of a banking pool can only be those of an agent if the existence of an agreement entrusting it with such a task is demonstrated". (CA Paris, 3rd ch., sect. B, 21 Nov. 1990, Republic National Bank of New York v Crédit Industriel et Commercial de France).
The agent occupies a hybrid position. He acts as an intermediary in the movement of funds and as a channel for transmitting information between the parties. Their responsibility is often limited to day-to-day management.
Mission and scope of powers
The agent's duties vary according to the contractual provisions. They generally include:
- Centralising financial flows
- Transmission of notices and notifications
- Receipt of contractual documents
- Coordination of insolvency proceedings
The Court of Cassation ruling of 24 October 2000 (SA Monte Paschi Banque c/ CRCAM Sud Alliance) illustrates the potential scope of the agent's powers. In this case, the Court ruled that the agent could legitimately initiate property seizure proceedings without first consulting the other banks, provided that no contractual restrictions were in place.
Contractual limits on powers
Contracts often set limits on the agent's powers. Certain acts require the prior agreement of the participants or a majority of them. These restrictions typically concern:
- Substantial changes to credit
- Waivers of rights
- Maturity deferrals
- Debt write-offs
Jurisprudence sanctions the exceeding of powers. For example, the Court of Cassation has ruled that a lead manager cannot unilaterally decide to waive a debt (Cass. com., 27 March 2001, Bull. civ. IV, no. 66).
2. The decision-making process within the union
Qualified majority: mechanisms and thresholds
The syndicated loan agreements establish various majority rules for collective decision-making. The usual threshold varies between 66.67% and 75% of commitments.
The majority is generally calculated on the basis of the value of the shareholdings and not on a per capita basis. This mechanism can lead to a concentration of power between a few institutions.
The case of the freezing of Iranian assets in the 1970s illustrates the difficulties inherent in this system. In this dispute, the divergent interests of American and European banks led to major blockages in decision-making.
Voting rules and enforceability of decisions
Where a majority clause applies, minority banks are bound by decisions taken in accordance with the contract. The Paris Court of Appeal has confirmed that "a bank may not make a claim for payment under a guarantee securing a loan where the implementation of the guarantee is subject to a decision taken by a majority of the banks". (Banque Worms v Banque Nationale du Canada, confirmed by Cass. com., 29 Apr. 2003).
Minority banks must comply with the procedural rules of the trade union. Their individual autonomy is thus limited in the collective interest.
Resolving disputes between banks
Dispute resolution mechanisms within the union are based primarily on contractual provisions. In the event of a dispute, the courts will examine the matter:
- Compliance of decisions with contractual stipulations
- Compliance with the obligation of good faith in the performance of the contract
- Proportionality of measures taken
The Paris Commercial Court has already ruled on a case of deadlock in ordering the dissolution of a trade union and the appointment of an amicable liquidator (Paris Commercial Court, 1st ch., 18 Oct. 1999, Société Dijon Finance et autres).
3. Agent and bank liability
Liability to the borrower
The agent's relationship with the borrower is limited to that of co-lender. His liability to the borrower is therefore that of any lender.
With regard to other banks, case law considers that "the decision to grant credit is taken individually, even when the transaction is syndicated". (CA Montpellier, 13 Oct. 1983, Giraud ès qual. c/ BCT et autres). Each bank therefore retains its own liability.
Liability to union members
The agent must "a general duty of loyalty, prudence and information". to union members (CA Paris, 15th ch., sect. B, 13 March 1998).
As a paid agent, he must carry out his duties diligently. His liability will be assessed in the light of the extent of his contractual obligations.
However, this liability is limited by:
- Disclaimers of liability (valid except in the case of fraud or gross negligence)
- The duty of care incumbent on each member of the syndicate
Liability to third parties
Third parties who are the victims of abusive lending can seek to hold the syndicate's member banks liable. The Angers Court of Appeal ruled that "in matters relating to tort, the victim is entitled to claim the full amount of his loss from any of the persons whose liability is sought". (CA Angers, 3rd ch., 6 March 1990).
However, the Paris Court of Appeal has adopted a more nuanced position, ruling that the agent can only be held liable in proportion to his participation in the loan (CA Paris, 3rd ch., sect. C, 28 Feb. 1997).
4. Security interests in syndicated loans
Creation of security interests on joint account
In practice, it is preferable for an asset given as security to be liable for the full amount of the loan for the benefit of all the members of the syndicate who rank equally.
Order no. 2017-748 of 4 May 2017 modernised the system ofsecurity agent under French law. This new legal framework, now codified in articles 2488-6 to 2488-12 of the Civil Code, offers a credible alternative to the English law trust.
The Court of Cassation validated the "parallel debt" mechanism in its Belvédère ruling of 13 September 2011, thereby strengthening the legal certainty of international arrangements.
Enforcement of security interests
The realisation of securities by the agent requires a special written mandate to take legal action. The Cour de cassation has recalled that"a banking pool does not have legal personality; proof of the mandate given to the lead manager to take legal action to recover sums due to other creditors cannot, in the absence of a written mandate, be based solely on the practices of the profession". (Cass. com., 21 March 2000, SA BNP c/ Bissonet).
This authority cannot be presumed and must be established in writing, in accordance with procedural requirements.
The trust mechanism and its alternatives
The use of English law trusts remains a popular solution for managing security interests in international financing. This mechanism makes it possible to:
- Centralising the management of collateral
- Facilitating changes in the composition of the union
- Protect the rights of lenders in the event of the agent's insolvency
French law now offers a viable alternative with the new security agent. As one author has pointed out, this reform has given "French law needs an effective security agent capable of competing with foreign techniques"..
Practice shows that the choice between these mechanisms depends largely on the law applicable to the contract and the preferences of the parties involved.
In this complex context, the support of specialist lawyers is crucial, particularly to secure the contractual drafting and to anticipate potential difficulties linked to the administration of the credit. Our firm can help you to develop a strategy tailored to your situation and negotiate contractual provisions that protect your interests.
Sources
- Civil Code, articles 2488-6 to 2488-12
- Order no. 2017-748 of 4 May 2017 on security agents
- CA Paris, 3rd ch. B, 21 Nov 1990, Republic National Bank of New York v Crédit Industriel et Commercial de France
- Cass. com. 24 October 2000, SA Monte Paschi Banque c/ CRCAM Sud Alliance
- Cass. com. 27 March 2001, Bull. civ. IV, no. 66
- Cass. com. 29 April 2003, Banque Worms v Banque Nationale du Canada
- CA Montpellier, 13 October 1983, Giraud ès qual. c/ BCT et autres
- CA Paris, 15th ch. B, 13 March 1998, Banque Intercontinentale Arabe v Banque Intercontinentale de Commerce
- CA Angers, 3rd ch. 6 March 1990, BNP, CEPME et a. c/ Sté SART et CCME
- Cass. com. 21 March 2000, SA BNP c/ Bissonet
- Cass. com. 13 September 2011, no. 10-25.533, FS-P+B (Belvédère ruling)
- T. com. Paris, 1st ch. 18 Oct. 1999, Société Dijon Finance et autres
- E. Bouretz, "Les crédits syndiqués - Syndication directe", JurisClasseur Droit bancaire et financier, Fasc. 505, 2019
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