International Financings and French Corporate Interest
A French company’s corporate interest must not be conflated with the interests of its shareholders. Foreign banks financing a French borrower or requesting a guarantee from a French company regularly face this constraint.
More specifically, lenders may seek additional security by taking collateral over assets belonging to other solvent group companies, or by lending to more solvent group entities that may not necessarily need a financing. Directors should be reminded of the associated risks and made aware of certain financing arrangements that demand careful consideration.
Any director, acting in their capacity as the company’s legal representative when entering into a transaction, must ask themselves three questions:
- does the transaction fall within the company’s corporate purpose?
- is the transaction in line with the company’s corporate interest?
- could the transaction expose them to civil or criminal
liability?
Accordingly, granting a third-party guarantee and establishing various intra-group financing arrangements must be analyzed in light of these questions, particularly with regard to compliance with the relevant company’s corporate interest. In particular:
- the issuance of personal guarantees securing obligations of a French borrower’s parent or sister companies (known as “upstream guarantees”), which also carries a risk of misuse of corporate assets or, in the case of civil companies, breach of trust;
- a lender’s right to use a French borrower’s available cash, credited to an account with that lender, to pay the banking debts of another group borrower outside any cash-pooling arrangement (the “cash trap account” mechanism);
- a contractual allocation order, frequently included in intercreditor agreements, governing how proceeds from the enforcement of security granted by a French borrower are to be applied, potentially repaying obligations owed by another group entity to the same lender; or
- joint and several liability among multiple borrowers within the same group.
To ensure compliance with French law, it is crucial to include appropriate limitations or exclusions in the financing documentation for each of these mechanisms.