The life of a receivable does not end with its transfer. When a company transfers a portfolio of receivables to a financing organisation as part of a securitisationIn this case, the key question is: who is legally entitled to claim payment from the debtor? The answer, far from simple, has been the subject of numerous legislative changes and debates in case law. Understanding the rules governing standing to sue for recovery is therefore a major issue for the legal certainty of all parties involved, from the assignor to the debtor to the investors.
General principles for the recovery of securitised receivables
The basic rule, set out in article L. 214-172 of the French Monetary and Financial Code, is that of continuity. In principle, securitised receivables continue to be collected by the transferor, i.e. the entity that originally sold the receivables. This solution has obvious practical advantages. The assignor, often a bank or large company, retains its commercial relationship with the debtor, which can facilitate exchanges and preserve the customer relationship. In addition, the transferor has in-depth knowledge of the receivables portfolio and the internal collection procedures already in place.
The transferor's right to continue collection is governed by a management or collection agreement with the securitisation vehicle's management company. This agreement defines the tasks, powers and remuneration of the debt collector. However, this principle is not absolute and the legislator has provided for alternatives to entrust this task to other players.
Legislative changes concerning standing to sue for recovery of debts
The legal framework for the recovery of securitised receivables has been gradually liberalised. Initially, the 1988 law that introduced securitisation in France was very restrictive. Collection could only be entrusted to a third party under very strict conditions, requiring the written agreement of the debtor.
The first step towards greater flexibility came with the 1993 law, which allowed debt collection to be transferred to another credit institution simply by informing the debtor, provided that a clause in the initial contract so provided. The 2013 Ordinance then extended this possibility to "any other entity designated for this purpose", marking a new opening but also creating an area of uncertainty as to the need for a formal designation for the organisation's management company itself to be able to act.
The real clarification came with the Order of 4 October 2017, supplemented by the PACTE Act of 22 May 2019. These texts radically overhauled the rules and modernised the legal framework for securitisation vehicles. They put an end to a long-running dispute by explicitly recognising that the portfolio management company (PMC) has legal standing to sue for recovery.
The portfolio management company (PMC) as a direct player in debt collection
The 2017 reform represents a turning point. Article L. 214-172 of the French Monetary and Financial Code now states that the management company, as the legal representative of the fund, may directly recover debts. It no longer needs a specific mandate or formal designation to do so; its standing to act derives directly from the law. This clarification positions SGP as a central player, whose role is coordinated with that of the other players. participants in the securitisation transaction.
As a result, the debtor is no longer required to be informed before the SGP can take action. The obligation to inform remains only in the event of a subsequent change, i.e. if the SGP decides to entrust collection to another entity, such as a specialist company. In this case, the debtor must be informed of this new change "by any means", including by the judicial act initiating proceedings against him.
Conflicts of laws over time and case law
The entry into force of the 2017 Order raised the question of its application to legal proceedings initiated before its implementation, under the more restrictive 2013 Act. What is the impact on recovery actions already underway?
After a period of hesitation, the Cour de cassation has made a significant change in its case law. In several rulings handed down in 2020, it ruled that the new provisions of article L. 214-172 applied immediately to ongoing proceedings. The high court based its ruling on article 126 of the Code of Civil Procedure, which allows a claim to be dismissed if its cause has disappeared by the time the court gives its ruling.
In practical terms, even if the management company did not formally have standing when it initiated the proceedings, the entry into force of the 2017 Act in the course of the proceedings "regularised" its situation. This pragmatic solution has made it possible to validate many procedures that could have been annulled on formal grounds, thereby securing past securitisation transactions.
The impact of the seller's insolvency proceedings on debt collection
One of the pillars of securitisation is the principle of "bankruptcy remoteness". The aim is to ensure that the receivables transferred to the securitisation vehicle are isolated from the assets of the transferor and protected in the event of the latter's financial difficulties. It is a kind of watertight partition that guarantees investors that their repayments will not be affected by any safeguard, reorganisation or liquidation proceedings against the transferor.
French law provides this protection in a very robust manner. Article L. 214-175, III of the French Monetary and Financial Code states that the provisions of Book VI of the French Commercial Code, relating to companies in difficulty, do not apply to securitisation undertakings. In addition, the assignment of receivables, once effective by delivery of the docket, is enforceable against all third parties, including the bodies of the assignor's insolvency proceedings. The financial flows resulting from the recovery are thus directed towards the securitisation undertaking and its investors, sheltered from the assignor's other creditors.
Litigated right of withdrawal and assignment of future claims
Although the assignment of receivables to a securitisation vehicle is a specific mechanism, it is not entirely exempt from ordinary law. Case law has confirmed that the disputed right of withdrawal, provided for in Article 1699 of the Civil Code, could in theory apply. This right allows the debtor of a claim that was the subject of a dispute prior to its assignment to 'buy back' his own debt from the assignee, by reimbursing him for the price that the latter paid. However, its practical application in securitisation is often impossible. Portfolios of receivables are generally assigned for a global, lump-sum price, without an individual price being assigned to each receivable. The Court of Cassation has ruled that this absence of an individualised price prevents the debtor from exercising his right of withdrawal.
In addition, the flexibility of the legal framework allows the assignment of claims that have not yet arisen, known as future claims. This could include, for example, rent due on commercial leases that have already been signed. To be valid, these claims must be sufficiently determinable. The assignment is effective as soon as the docket is signed, and remains valid even if the assignor is the subject of insolvency proceedings before the receivables become due and payable.
The specially allocated account: a mechanism for securing flows
To strengthen the protection of financial flows, the law provides a powerful tool: the specially allocated account. Article L. 214-173 of the French Monetary and Financial Code allows the collection agent to deposit sums collected on behalf of the securitisation undertaking in a dedicated bank account.
The main advantage of this mechanism is that it creates a new watertight seal. The funds credited to this account cannot be seized by the debt collector's own creditors. Even if the latter were to go bankrupt, the sums collected for the securitisation body would be protected and would not be included in the assets of the debt collector's bankruptcy proceedings. This system ensures that the debtors' money is channelled to the investors, thereby securing the entire financial package.
Managing the recovery of securitised receivables is a technical area where the rules have evolved considerably, seeking to strike a balance between the efficiency of financing transactions and the protection of debtors. Case law continues to refine the interpretation of these complex rules. To navigate these complexities and secure your financing transactions, the assistance of a lawyer who is an expert in banking law is crucial. Our firm can help you to analyse your collection agreements and defend your interests.
Sources
- Monetary and Financial Code
- Commercial code
- Civil Code
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