• Before the end of March in every year during the lifetime of the facility, there is an annual obligation by the lender (or, as the case may be, its agent) of a guarantor and/or chargor/pledgor for the aggregate outstanding guaranteed amount of the principal of the secured debt, plus all interest, costs and other sums outstanding and secured as at 31 December of the previous year.
• The lender also needs to inform the French guarantor or chargor of the expiry date of the security, or, if it is open-ended or undetermined, of the ability to rescind the guarantor.
• Such notification shall made by the credit institution or financing company’s to the guarantor/ chargor.
• Failure to comply with the above requirements may result in the guarantor/chargor to be discharged from and not be liable for the unnotified interest and/or penalties since the last notification. Any payment will be allocated in priority to the principal amount.

Actually, is this entirely new?

Not really. Such obligations were already existing when the guarantor was a physical person under a surety bond.

It was already set out in article L. 333-2 of the Consummation Code for physical persons. Article L. 313-22 of the French Financial and Monetary Code also provides for such information to the guarantor of surety-bonds in the context of financing granted by credit institution or a financing company.

So the change is a more consistent and harmonised approach, which is not governed by the provisions of the French Civil Code.

But, the change goes further. The key difference is that the scope is greater and that such obligations have now been extended to any security interests and charges granted by a third person, which are of limited recourse, as opposed to surety-bonds where the guarantor is liable on all its assets.

By way of background, a security interest may be granted by a person other than the debtor himself (usually a parent company because of French corporate law preventing straight upstream guarantees). Such security interest granted by a third party was referred to, in practice, as a “cautionnement réel” (charge by way of guarantee). But a case law (Cass Civ. I., 7 Jan. 2006, no 02-16.010) had considered that, in principle, the person who has agreed to grant a security interest to guarantee the debt of a third party, has not given a personal undertaking (with a recourse on potentially all assets of the guarantor and not those which are charged) and was denied the protections offered to surety-bonds.

French law now recognises in Article 2325, paragraph 2 of the French Civil Code, a ‘charge by way of guarantee’ (cautionnement réel), whereby the guarantor’s undertaking and liability is limited to the property over which he has granted a security interest, the remainder of his assets are outside the reach of the creditor.

However, in order to take into account the specific situation of the third party that grants a security interest, the legislator has granted such guarantor or chargor, by way of exemption, certain protections enjoyed by sureties. The said protections arise from the fact that the third party that grants a security interest, like the surety, has given an undertaking for the benefit of another person.

These protections include, inter alias, the duty to supply information on an annual basis, reversing case law that had deprived the third party that grants a security interest the right to be supplied with information on an annual basis (because previously they were not surety and personal obligations of the guarantor).

Such obligations apply when the guarantor is a physical person, but also to any corporate in relation to any guarantee to a credit institution or financing company in the context of financing a company.

As a consequence, in any financing with a security where the French chargor is not the main debtor (mainly parent company and presumably share pledge), the lender, or its agent have to notify prior to 31 March, the above information.

What exactly is the scope?

It applies to surety bonds and charges by way of guarantee.

In other words, it does not apply to any charge or security over a chargor’s own liabilities or obligations. It applies only when the underlying guarantee or secured obligations are not those of the guarantor or the chargor.

Moreover, it applies to guarantees and charges which are surety linked and ancillary to the principal underlying obligations and qualifies as cautionnement, as opposed to first demand guarantees or autonomous guarantees. French law now distinguishes between surety bonds (cautionnement) and first demand/autonomous guarantees as each are subject to specific provisions in the Civil Code. In the case of any doubt (e.g. when there is no expressed characterisation nor reference to the relevant provisions of the Civil Code), you should consult with a lawyer in order to determine whether the guarantee is a surety bond (cautionnement) triggering the information obligation or an autonomous guarantee.

Such regimes do not apply to letters of credit, insurance obligations or comfort letters, which are not surety bonds.

Some outstanding questions

There are some pending questions.

The new provisions still refer to credit institutions and financing companies, and do not refer to alternative lenders such as insurance companies or funds. It also still refers to financing (concours financier), does this broadly encompass any type of credit, e.g. financial leases?

Likewise, there are questions as to whether such obligations would apply to counter-guarantee in the context of a bonding or LC facility.

It is also questionable as to whether such provisions apply to guaranteed bond issues, and on which would apply such reporting obligations (on the noteholders’ representative), such cases being not captured or contemplated by the new provision of the Civil Code.

When there are several or a pool of lenders, do such obligations apply to all of them? Or, to their agents, who presumably would be entitled to claim the related notification costs back from the principal lenders?

As the new provision is mainly a harmonization of existing provisions, the case law applying to the former articles would presumably apply mutatis mutandis to the new provisions, and would provide answers.

The new provisions do not refer to any agent or security agent (despite security agents having a recognised statutory regime). In the absence of statutory provisions, the parties, and in particular the lender(s) may contractually agree to appoint an agent and/or sub-delegate to an agent or security agent. In that case, the agency provisions of the documentation should be reviewed in order to determine whom is bound to carry out such notification. There are also no details in the statute law on the practicalities of such notification, or as to whether a specific format or means must be complied with or not, or whether the parties could rely on the notification provisions in the documentation. In the absence of specific legal or contractual provisions, best practice should be notification by sound means, keeping evidence that notification has been duly made, at the registered office of the guarantor.

1. Article 37-III of the ordinance no 2021-1192 of September 15 2021

In-depth 2022-090