Vol 3 (2006) - Issue 5

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Reforms to Lender Liability in France

Introduction
The issue of how companies are to be financed in insolvency is an important but delicate one. The approach to insolvency will undoubtedly require the directors to consider whether an extension to existing finance or new finance is an option. This consideration is fraught with danger, given that many of the responses directors might take, including asset disposals, granting further security to creditors and payment of the most pressing demands, may well attract the use of transactional avoidance measures known to most insolvency systems.
As an added peril, going too far down the route of trading while within sight of the moment of formal insolvency may also attract the application of wrongful or insolvent trading rules, also a feature of many developed legal systems. The justification for both sets of rules is the impact that continued trading and transacting may have on the position of creditors overall. However, a situation where financing is obtained may also expose the creditor in this instance to risks other than those usually attendant on lending transactions: the possibility that their lending decision may have a detrimental impact on the position of other creditors by increasing the level of indebtedness to one creditor, which, with concomitant security, will put that creditor at a manifest advantage when compared to others. In many legal systems, lenders will have no liability provided they lend prudently. However, the notion of when it may be prudent as opposed to otherwise will usually take place, just like the examination of when wrongful trading has occurred, on the basis of an ex post facto analysis. A court may well re-qualify the lending transaction as imprudent resulting in that creditor perhaps losing the benefit of any advantage or priority gained through security. Exceptionally, a court may decide that the extent of the lending decision goes beyond the merely imprudent and acquires overtones of negligence or wilful behaviour, leading to possible liability to the debtor’s estate or other creditors.
This was certainly the case in France, where a developed doctrine of ‘improper support’ (soutien abusif) resulted in lenders being potentially subject to sanctions, particularly if the lender’s behaviour was deemed to have contributed to the insolvency of the debtor. This would usually only occur where the lender gave or extended credit, which was beyond the capacity of the debtor to handle appropriately, thus leading to an aggravation of its financial problems. In addition, lenders could face sanctions if their participation in the financing of a business or other close connexion resulted in their becoming closely enmeshed in the activities of the debtor and the acquisition of the status of a de facto or shadow director. These latter sanctions still remain as a possibility in insolvency, but the doctrine of improper support has seen considerable limitations placed upon its use as a result of recent reforms to the framework for insolvency law in France through the enactment of a new law in 2005.1 As of 1 January 2006, the date this law came into force, the general landscape of French insolvency law has seen fundamental changes, including in relation to lender liability.