CONTRACT ETD/2008/IM/H1/53

IMPLEMENTED BY FOR

DBB LAW COMMISSION EUROPEENNE

Study on the feasibility of reducing obstacles to the transfer of assets within a cross border banking group during a financial crisis

National Report FRANCE

By

Frédéric Leplat

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Part I - National regulation ...... 4

1. Summary ...... 4

2. Scope ...... 6

3. Conditions and sanctions ...... 11

a) Authorization ...... 11

b) Counterpart for the asset transfer ...... 17

a) Compulsory counterparts and guarantees ...... 20

b) Financial capacities of the transferor and the transferee ...... 20

c) Information and transparency ...... 20

d) Sanctions ...... 22

e) Third parties ...... 31

. Supervisory authorities ...... 31

. Minority shareholders ...... 32

. Creditors ...... 33

. Employees ...... 34

. Deposit holders ...... 34

. Member State ...... 35

. Others ...... 36

f) Private international law ...... 36

Part II -Evaluation of potential solutions ...... 39

1. Transfers from the parent company to the subsidiary or from the subsidiary to the parent at arm’s length: ...... 40

. Proposal n°1 ...... 40

2. Transfers from the subsidiary to the parent company (in preferential conditions) ...45

a) Prior and overall agreements ...... 45

. Proposal n°2:...... 45

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b) Strong guarantees covering the risk of outstanding payment ...... 48

. Proposal n°3 ...... 48

c) Liability of the parent company for the subsidiary’s debts ...... 52

. Proposal 4 ...... 53

d) Improving transferability transfer through the introduction of a new concept of "banking group" ...... 55

. Proposal n° 5 ...... 55 e) Other solutions ...... 58

. Proposal n° 6 ...... 58

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Part I - National regulation

Please provide a presentation of your national regulation (law, cases,…) and attach it as Annex A and B to this document :

. the relevant legal texts and cases in English (of summarized in English).

. If possible, examples of transfer of assets agreements.

For each question, please first consider:

. your national Civil Law, Company Law, and Insolvency Law

. and on a second time explain if there are specific regulations for Banking groups

. on a third time explain if there are specific regulations for cross-border transfer of assets.

1. Summary

. Generally speaking, is the transfer of assets allowed (could you please precise briefly under which conditions):

In crisis situation:

- from parent to subsidiary

- from subsidiary to parent

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- from subsidiary to another subsidiary

In going concern situations:

- from parent to subsidiary

- from subsidiary to parent

- from subsidiary to another subsidiary

Transfer of assets is not prohibited as such by the French legislation or jurisprudence.

However some transfers may be prohibited or subject to specific conditions.

Under French Criminal law, transfer of assets could be considered as a misuse of corporate property or an misuse of authority (“abus de bien social ou abus d’autorité”). The damage caused to the company by the offence may also be recovered.

Under French Company law, the transfer can be fall within the category of agreements that are regulated by French corporate Law. Those agreements are called “regulated agreements” (“Conventions réglementées”). French Commercial code has set a list of agreement that may fall within this category because the other party to the agreement is linked to the company (for example company/shareholders, see hereunder details hereunder). Those kind of agreements are subject to a specific procedure of approval and may be considered as void and/or may lead to the compensation of the damages of the company.

If the parent company is the management body of the subsidiary (de jure or de facto), the parent can be held liable for any breach of company law and regulations, for the non-respect of the memorandum of association (“les statuts”) and for mismanagement.

In addition, some civil law mechanisms (paulian and oblique actions) can be used by the creditors of the transferor. However, these are highly specific actions and seem to concern only critical situations and the most important creditors. Even in these particular cases, it does not seem that these two actions are used in practice.

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Finally, under French insolvency law, the transfer may be considered as void because it has been agreed within a short period before the insolvency of the transferor.

Are there specific regulations for cross-border transfer of assets?

. Are there any specific rules in Banking Law in relation to transfer of assets?

- from parent to subsidiary

- from subsidiary to parent

- from subsidiary to another subsidiary

. Are there specific regulations for cross-border transfer of assets?

There are no specific regulations in French legislation regarding cross- border of assets.

2. Scope

. Does the notion of company groups exist?

- Generally speaking in corporate Law? (If it exists, please give a definition, conditions and the main applications?)

The notion of company group is not recognized as such by French legislation. Hence, French legislation does not recognize any legal existence to a group of company. Each entity of group has its own legal existence. Therefore, the notion of company is recognized economically but not legally speaking.

Nevertheless, definitions of “subsidiary”, “holding” and “control” can be found in the French Commercial Code.

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Chapter II of the French Commercial Code concerns Commercial companies and economic interest groups. This chapter is divided in five titles and Title II refers to Provisions which are common to various commercial companies. In this Title II, Chapter III sets the basic legal framework for Subsidiaries, shares and controlled companies (articles L 233-1 to L 233-40 of the Commercial Code).

Article L 233-1 of the Commercial Code states: “When a company owns more than half of the capital of another company, the second company shall be regarded, in order to apply this chapter, as a subsidiary of the first company”. Therefore, only the portion of capital owned is taken into account, and not the right of vote.

Article L 233-2 of the Commercial Code defines the term holding, stating: “When a company owns, in another company, a percentage of the capital of between 10 and 50%, the first company shall be regarded, ..., as having a holding in the second company”. In the following articles, more particularly in articles L 233-29 to L 233-31, specific situations on this topic are dealt with, notably reciprocal investments and company self- control.

The holding as defined in article L 233-2 will have some information duties.

Since a company group is formed, the law makes provisions for information to be provided to the shareholders of the different companies forming the group, either specific or just annual information. The law states as well that in the event of circumvention of these provisions, the circumvented party shall be entitled to a legal penalty. Specific regulations are proclaimed concerning quoted companies crossing the legal threshold for participation.

Article L 233-3 is also relevant regarding the notion of company group. This article defines the notion of control. Due to the broad sense of the term, and according to the provisions of this article, the following notions are included under the concept of control: de jure control, de facto control, indirect control, or control due to partnership. The law states further presumptions of company control, for instance, in case where the executive of a company is appointed by another company.

The ambiguity issued from the independence of the subsidiary and the control of the parent company can lead to frictions. On the one hand, the subsidiary is considered as a legal entity, and on the other hand, the parent controls the subsidiary. However, under no circumstance the fact that the subsidiary is a member of a company group could mean acting Page 7 of 59

contrary to the subsidiary’s interest. This is the conclusion taken out of a decision of the Court of Cassation on November 13, 2007. More particularly, the decision stated that using the subsidiary as security in favour of the parent was not possible if t is contrary to the subsidiary´s interest (intérêt social).

Under insolvency law, the subsidiary may be considered as fictious, or the relations between the parent company and the subsidiary may be so extended that the court will treat both companies as a single company. In those cases, the insolvency proceeding of one of the company maybe be extended to the other one (see hereunder the notion of “intermingled assets”).

Under some circumstances, when the links between the parent company and the subsidiary are so extended that their creditors may believe that they constitute a single company, the creditors of one of them may ask for reimbursement to the other (appearance principle).

- Is there in your national law a definition of “group interest” that specifically allows or facilitates intra-group transfer of assets?

The notion of group interest does not exist in the French legislation. Nevertheless, this notion has been used by the courts under some circumstances.

Thus, the Court of Cassation uses the concept of “group interest” when the transfer of assets may be qualified as a misuse of corporate property or misuse of authority risks.

In this context, the courts use the notion of group interest to determine if the act must fall within the category of misuse of corporate property or misuse of authority.

Intermingled assets, or use of the subsidiaries’ assets by the parent company can be qualified as a misuse of the corporate company or a misuse of authority.

The infraction of misuse of corporate property or misuse of authority is constituted when the company managers (de facto or de jure) act against the company’s interest and in their exclusive own interest.

In the case of a parent/subsidiary relation, the personal interest may be constituted by the fact that the manager of the subsidiary acts in the parent’s interest, in which he also has interests. Page 8 of 59

The Court of Cassation, stated on the 4 February 1985 (in the Rozenblum case) that if the manager had acted in the group’s interest, the act could not be considered as a misuse.

For this purpose, the Court of cassation set three conditions:

- A group of company with a coherent and common policy must exist. Hence, it must be possible to identify a group interest which can be economic, financial or social. When only a disparate unit can be identified, such a group does not exist and no group interest can be distinguished;

- The support (especially the financial one) asked to an entity of the group must be in the group’s interest. Under no circumstances the previous engagements of the company concerned can be challenged and there must be a counterpart to the support

- The agreement must not exceed the financial capacities of the company granting the support.

We could consider then these three conditions as quite restrictive. This leaves Rozenblum decision with little practical relevance.

This solutions may also be applied to loans (Crim. Cass., June 24, 1991 – Crim. Cass., Jan. 18 1993).

- Are there specific tax issues that need to be addressed in intra- group transfers of assets?

- Are there specific regulations for banking groups?

There are specific rules for cooperative banks which do not seem relevant in this study since cooperative banks represent a minor part of the banks in France.

Article 511-42-2 of the Commercial code states that when at least one the subsidiary of a credit institution is another credit institution, an investment firm or financial holding or a company which owns shares in such an firm shall respect, on the basis of their consolidated financial Page 9 of 59

basis, the accounting rules states by order of the Finance ministry as well as the rules relating to participation stated in article 511-2 of the commercial code.

Therefore, commercial code provides that banking groups must respect specific rules but those rules are determined by ministerial order.

Furthermore, the Commercial code states specific regulations relating to the supervision of banking group which parent company is not established in France. Two different systems are provided for parent companies established in the EEE and out of the EEE.

Article L.511-41-1 of the Financial and Monetary Code states “When the parent company of a credit institution is a credit institution, an investment firm or a financial holding company having its registered office in a State outside the European Economic Area, the Banking Commission verifies, on its own initiative or at the request of the parent company or a regulated entity approved in an EU Member State or another European Economic Area Member State, that the said credit institution is subject to consolidated supervision by a proper authority in the third country which is equivalent to that applicable in France. If no such equivalence exists, the credit institution is subject to the provisions relating to consolidated supervision applicable in France.

The Banking Commission may also use other methods to guarantee equivalent consolidated supervision subject to approval from the proper authority responsible for consolidated supervision in the European Economic Area and after consulting the relevant authorities of an EU Member State or another European Economic Area Member State. It may, inter alia, require the formation of a financial holding company having its registered office in an EU Member State or another European Economic Area Member State."

. Please specify any relevant information relating to intra-group transfer of assets that has not been dealt with in the previous questions and that would be useful for the study.

The commercial code states a specific support obligation for the shareholders of a credit institution. Thus, article 511-42 of the Commercial code states : “When it appears that the situation of a credit institution warrants it, the Governor of the Bank of France, as chairman of the Banking Commission, after seeking the opinion of that Commission, except in emergencies, invites the shareholders or members of that institution to provide it with the support that it requires”.

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It is noteworthy that this obligation of the shareholders or members to provide financial support to the company depart from some company law regulations. Thus, the shareholder could be held beyond his contribution.

According to what is stipulated in article 511-42 of the Monetary and Financial Code, the purpose seems to be the financial support in order for the company to pursue its activity rather than to discharge debts.

3. Conditions and sanctions

a) Authorization

. Do decisions to transfer assets have to follow specific approval procedures such as the approval of the board of directors or the transferor or transferee or the approval of shareholders obtained through a special meeting of shareholders?

Generally, transfers of assets do not have to be specifically authorised. Nevertheless, the Commercial code has stated special rules for transactions between a company an its executives or shareholders (regulated agreements).

Therefore, those rules may apply to the transfer from the parent company to its subsidiary or from the subsidiary to the parent company.

If an agreement is to be qualified as a regulated agreement, a specific procedure has to be followed and specific approval of the board of directors and of the general assembly has to be required.

A-The qualification of “regulated agreement”

Under French regulation, the transfer of assets as such does not have to follow a specific approval procedure.

Nevertheless, the fact that the transfer occurs between two entities which are linked (parent/subsidiary) may have for consequence that the

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transfer will be considered as a regulated agreement and will be submitted to a specific approval.

Regulated agreements are neither included in the category of free agreements nor in the category of prohibited agreements.

1- Prohibited agreements

Prohibited agreements are the agreements agreed between the director, the general manager, the assistant general managers, the permanent representatives of directors which are moral persons and the company stated in article L.225-43 of the Commercial Code, i.e.:

- loan or deficit authorized by the company

- guarantee or support of personal engagements of the executive.

However, financial institutions are not concerned by this prohibition.

Article 225-43 of the Commercial code literally states:

“In order for the contract to be valid, directors other than legal personalities shall be prohibited from contracting loans from the company irrespective of their form, from arranging for it to grant them a loan account or other borrowing whatsoever, or to arrange for the company to stand surety for them or act as their guarantor in respect of their obligations to third parties.

However, if the company operates a banking or financial establishment, this prohibition shall not apply to current commercial transactions entered into under normal conditions.

The same prohibition shall apply to the general manager, to assistant general managers and to permanent representatives of directors which are legal personalities. It shall also apply to the spouse and relatives in

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the ascending and descending line of the persons referred to in this article, as well as to any intermediary.

The prohibition shall not apply to loans granted to directors elected by the employees by the company in application of the provisions of Article L. 313-1 of the construction and dwelling place code”.

2- Unregulated agreements

Free agreements are the agreements mentionned in article L.225-39 of the Commercial Code. These are agreed between the executive members and the company and refer to current operations which are concluded with normal conditions.

Article L 225-39 of the Commercial Code literally states:

“The provisions of article 225-38 are not applicable to agreements relating to current operations entered into under normal terms and conditions.

Such agreements are nevertheless made known to the chairman of the board of directors by the interested party unless they are of no significance to any party, given their objective or their financial implications. A list of such agreements and their objectives is sent to the members of the board of directors and to the auditors by the chairman”.

3- Regulated agreements

Article 225-38 of the Commercial Code mentioned by article L225-39 directly concerns regulated agreements.

“Any agreement entered into, either directly or through an intermediary, between the company and its general manager, one of its assistant general managers, one of its directors, one of its shareholders holding a fraction of the voting rights greater than 10% or, in the case of a corporate shareholder, the company which controls it within the meaning of Article L. 233-3, must be subject to the prior consent of the

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board of directors.

The same applies to agreements in which a person referred to in the previous paragraph has an indirect interest.

Agreements celebrated between the company and another firm are also subject to prior consent if the company's general manager, one of its assistant general managers or one of its directors is the owner, a partner with unlimited liability, a manager, a director or a member of that firm's supervisory board or, more generally, is in any way involved in its management”.

The notions of “current operation” and “normal conditions” have been defined by the jurisprudence.

Is considered as a “current operation”, the operation which does not present any unusual element. This criterion is determined according to the ordinary activity of the company or usual practices for companies within the same sector (CA, Paris, October 17, 2003 or CA Versailles April 8, 2002).

«Normal conditions» are seen as the same kind of conditions to those usually applied in the company concerned or to companies within the same sector.

Consequently, the criteria used to determine whether an agreement must be regarded as a regulated agreement raises a difficulty because the definition of these concepts can be interpreted differently.

In crisis situations, additional difficulties could be found to determine whether the operation must be regarded as “current” or with “normal conditions”. Indeed, the situation in which the agreement takes place is unusual in itself.

It is noteworthy that the Paris commercial court passed a judgement on April 26, 1990, concluding that the regulated agreement procedure was not applicable just because there was no existing antagonism of interest, due to the fact that the convention was concluded between a parent company and its subsidiary.

Centralizing agreements are likely to be qualified as regulated agreements, for each company, as well as for the centralizing structure (within the joint stock companies and the limited liability companies).

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It may be so because the agreement is either concluded between the company and one of its leaders, or between the company and one of its shareholders holding a fraction of the voting rights greater than 10%, or between companies which have common leaders. Is it then necessary to respect the procedure imposed for this type of agreement? The question arises because the agreements relating to current operations, concluded with normal conditions, are formalities-free. Could we consider then the agreement concluded with normal conditions as a current operation?

Doctrine had overwhelmingly considered them as different. On one hand, centralizing agreement is not a current operation since it is mean to last for a long-term and that it is provided with a unique nature.

On the other hand, treasury operations, made under the terms of the agreement, which are constantly renewed, are considered as current operations. This leads the signatory companies to observe the regulated agreements´ procedure as a matter of an obligatory formality.

However, a Versailles Court of Appeal judgment gave a different meaning to the term “current operation” (Versailles CA, Apr 2, 2002). The Court considered as a current operation any usual practice in this kind of situation, even if the practice in question needed to be a single operation. It is certain that treasury centralization is very frequent within groups. Formalities then would not need to be respected. An early recommendation of the National company of the auditors was made in this sense.

Even though the agreement takes place within companies of the same group, to observe the regulated agreements´ procedure could be considered as a cautious proceeding. This is due to the fact that in a different context, the Court of Appeal affirmed that a current operation could not be a unique operation (Com. Cass., March 11, 2003).

-Approval procedures of regulated agreements and sanctions in case of non-respect of these procedures

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Regulated agreements have to comply with a specific procedure of approval.

This procedure is established in articles L.225-38 and L.225-40 of the Commercial Code.

Thus, regulated agreements require a prior approval of the board of directors. Furthermore these conventions are subject to an auditor’s report. These two steps are followed by a general meeting, which decides whether or not to approve the agreements in question as well as the auditors' report.

The interested party (the shareholder getting profit out of the agreement) does not take part to the vote and his shares are not taken into account for the calculation of the quorum and the majority.

With regard to the sanctions in case of non-observance of these procedures, the agreement’s nullity can only be declared if the agreement in question was not priorly subjected to the approval of the board of directors. The agreement may also be considered as void in case of disapproval by the board due to harmful consequences for the company (article L.225-42 of the Commercial Code).

In case of prior approval by the board of directors, later non respect of the procedure provided by the Commercial code do not involve the nullity of the agreement. Indeed the only possible sanction is the personal liabilities of the interested party, who must compensate the damage of the company.

It may be so when the person concerned sits and votes at the general meeting (Versailles CA, September 12, 2002), or for the case in which the general meeting disapproves the agreement (article 225-41 of the Commercial Code).

Finally, the auditor’s report is not a validity condition for the agreement (Com. Cass., November 5, 1991).

Do transfers of assets need to be approved by other third parties or supervisory authorities?

. Do transfers of assets have to be notified to other third parties or supervisory bodies or published?

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If the transfer is to be considered as a regulated agreement, the beneficiary of the transfer must inform the board of directors. Next, the board of directors delivers his opinion and transmit it to the auditors. Finally the auditors submit a special report on these agreements to the general meeting.

The sanctions for the non-respect of these procedures are the same as the explained above.

. Would a specific agreement incorporating the terms and conditions of the transfer between transferor and transferee and executed by their authorized representative be required?

As mentioned above, the convention may be considered as a regulated agreement and may have to be approved by the board of directors and the general meeting.

. Are there differences between transfers in going concern situations / transfers in crisis situations?

The difference between transfer in going concern situations or in crisis situation it may not be considered as a convention in “normal conditions” and therefore may be considered as a regulated convention and may be subject to a specific proceeding.

b) Counterpart for the asset transfer

. Is the transfer of assets treated differently by your national Law :

As already explained above, there are two main risks for the transfer in French Law:

-the transfer can fall within the category of misuse of the corporate property or misuse of authority and therefore constitute a criminal offence

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-the transfer can fall within the category of regulated agreements and be considered as void if the mechanisms that must be applied in this case have not been respected.

In both cases, the person who is responsible for the transfer may be held liable for the damages sustained by the company or by third parties.

- if it respects the arm’s length principle/normal market conditions dealing (please explain what is considered as arm’s length)

Under Company law, if the transfer of assets is not carried out under “normal conditions” and is not regarded as a current operation, it must be subjected to the procedure of approval of regulated agreements stated by the Commercial Code (see first question in the “authorization” paragraph).

- if it is agreed under preferential conditions or disadvantageous to the transferee but advantageous to transferor and the group as a whole

Transfer agreed in preferential or disadvantageous conditions may be considered as a misuse of company property or misuse of authority (see the conditions for such a qualification above) except if it falls within the criteria set in the Rozenblum case by the Court of cassation (see criteria above).

Therefore, even if the transfer is agreed under disadvantageous or preferential conditions, the fact that it is advantageous for the transferor or the group as whole may

The concept of group interest does not seem to have any effect on the definition of regulated agreement. Thus, agreements concluded under preferential or disadvantageous conditions need to be approved under the conditions established for regulated agreements, even though the agreement is concluded in the interest of the group.

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- if there is no counterpart/compensation for the transfer

- If there is no counterpart, the transfer will certainly be regarded as a regulated agreement (since it is not an agreement in “normal conditions” ,see answers above on this subject).

- In addition, the transfer could be considered as a misuse of company property if it does not respect the criteria given by the Court of Cassation in the Rozenblum case (see above).

- Thus, there is no essential difference between the transfer carried out under disadvantageous conditions and the transfer without counterpart. However risks seem to be higher for transferability abusing of company property or authority.

- if the transfer is included in a loan or credit agreement between transferor and transferee.

If the transfer is included in a loan or credit agreement, it will be subjected to a different legal regulation depending on the conditions it takes place (see answers above on this question).

. Are there differences between transfers in going concern situations / transfers in crisis situations?

There is no legal instrument making a difference between transfers in going concern situations and transfers in crisis situations. However, as explained above, agreements will be more easily regarded as regulated agreements since they are concluded in unusual conditions. Consequently, this makes it even harder to consider the agreements as “current” or concluded under “normal” conditions.

As regards misuse of company property or abuse of power, there is no formal distinction between going concern situations and crisis situations. If the criteria given in the Rozenblum case are respected, the transfer will not be considered as a misuse.

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a) Compulsory counterparts and guarantees

. Is there any compulsory counterpart or guarantee that transferee should provide to transferor?

There is no specific obligation of counterpart or guarantee.

. Please specify any other relevant information relating to the conditions to be met for a transfer of asset to be authorized that has not been dealt with in the previous question and that would be useful for the study

b) Financial capacities of the transferor and the transferee

. Does the decision to transfer have to comply with conditions relating to the financial capacities/health of the transferor/transferee?

[To do]

. What are the consequences when the transfer has occurred but those conditions have not been respected?

. Are there any conditions relating to the consequences of the transfer on the financial situation of the group?

. What is the rank of claim of the transferor in case of insolvency proceedings of the transferee ?Please specify any other relevant information relating to Financial capacities of the transferor and the transfereethat has not been dealt with in the previous question and that would be useful for the study

. Are there differences between transfers in going concern situations / transfers in crisis situations?

c) Information and transparency Page 20 of 59

. Does specific information have to be communicated on the transfer to :

- supervisors

[To do]

- shareholders

In case of regulated agreement, shareholders are entitled to received the auditors special report on these agreements at the general meeting.

- employees

Article L2323-62 of the Labor Code states that two members of the workers´ council delegated by the council may attend with consultative power all the meetings of the board of directors or of the supervisory board (one or the other, according to the case).

Article L2323-63 states that the members of the workers´ council delegation to the board of directors are entitled to receive the same documents as those addressed or given to the members of this authority at the time of its meetings.

They can submit the wishes of the workers´ council to the board of directors which has to deliver a reasoned opinion on these wishes.

Consequently, whenever the transfer is regarded as a regulated agreement, the two representatives of the workers´ council attend the meeting of the board of directors during which the agreement is celebrated.

- third parties (specify who can have an access to this information and how)

In case of regulated agreement, auditors shall be informed before the conclusion of the agreement (see above).

. If yes should this information be communicated before the transfer or after it :

- supervisors

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Before/After

- shareholders

Before/After

- employees

Before/After

Before, in case of regulated agreement (see above).

- third parties (specify who can have an access to this information and how)

Before/After

Auditors: before, in case of regulated agreement (see above).

. Please specify any other relevant information relating to Information and transparency that has not been dealt with in the previous question and that would be useful for the study

d) Sanctions

. When a transfer of assets has occurred what at are the sanctions (civil liability of the manager or the supervisory authorities, nullity, criminal penalty, …) that may be incurred :

A- under Insolvency law

1-Fictitious subsidiaries

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When the subsidiary is entirely owned by the parent company or when it has no autonomy, it can be qualified as a fictitious subsidiary.

Two relevant judgements of the French Courts have to be mentioned. Firstly, on December 18, 2007, the Commercial section of the Court of concluded that even in the case in which the management bodies of the parent company and the subsidiary were common and in which the general assembly was taking decisions according to the interest of the parent only, it should not be assumed that the subsidiary is fictitious.

Secondly, on December 13, 2006, the Civil section of the Court of Cassation stated that the autonomous character of the subsidiary could not be denied only because the parent is in charge of the establishment of the subsidiary and contracts a commercial lease or chooses the architecture firm.

2- Intermingled assets

The fact that each member of the economic group is endowed with a separate legal status and treated as a unit is probably one of the main advantages out of operating as a group. With reference to assets and liabilities, in principle, each member is autonomous. Therefore, in crisis situations, the entity facing difficulties is alone to manage the crisis.

Since the group is not endowed with legal capacity, it could not be subjected to insolvency proceedings. Therefore, operating as a group allows the economic group to limit contagion risks. However, once the procedure is established, liabilities could be extended to other entities in case of fulfilment of certain conditions.

The fulfilment of those conditions could more easily be considered in case of transfer of assets and treasury centralization. This could even lead to treat the group as a whole, or to make the liabilities of the company in question common to all the members of the group. As a

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result of this, the above mentioned advantage could no longer be considered.

Only transfer of assets in the context of unbalanced treasury centralization, and not in the context of balanced treasury centralization, seem to directly lead to the situations explained above. In this case, intermingled assets may lead to a unique insolvency proceeding for all the entities of the group, and the company managers may be held liable.

Even though there is no law provision in the context of crisis situations for the extension of liabilities within entities of the same group, or for the treatment of the group as a whole, courts have played an important role in this field.

When the assets of several entities have been exchanged, it is sometimes not possible to determine to which entity each asset belongs to. Therefore, courts have stated that in this case the insolvency proceeding may be extend to all the entities of the group.

Courts have extended this principle to the cases where unusual assets flows have occurred.

In principle, unbalanced transfer of assets or unbalanced treasury centralization lead to the concept of unusual assets flows. This notably applies to the cases where payments are either way too high or way too low, as well as to the cases where the company does not have its treasury at his disposal any more.

The Commercial section of the Court of Cassation, in a decision rendered on April 19, 2005, concluded that the monetary links between companies of the same group, as well as agreements concerning treasury management and personnel and financial assistance were not strong enough for considering intermingled assets. This decision has set a precedent.

Courts’ decisions in this matter have most commonly stated the non- existence of equity merger rather than the opposite.

3- Liability of the company’s executive

Within the different law provisions concerning insolvency proceedings several rules are set for interested parties and/or authorities to bring an action for liability against the company´s executive. Some of these Page 24 of 59

actions can entail for some of de jure or de facto managers to be held responsible for the debts of the legal entity, in whole or in part.

In the context of treasury centralization, parent companies being at the same time the executive/manager of the company under control is a common practice. Therefore, treasury centralization under doubtable conditions can entail for the parent company to be held responsible for the debts of the subsidiary.

These actions have partly been modified by the Act No. 2005-845 of July 26, 2005.

Two actions are still contemplated in the new legal system: action addressing liability for excess of liabilities over assets, and action addressing liability for the debts of the company. The former is just about a continuation of the previous existing action. The latter is new.

4- Liability for excess of liabilities over assets

With regard to the action addressing liability for excess of liabilities over assets, the most significant modification is the fact that the action cannot be brought unless a safeguard or a reorganization plan is set.

In the new system, as well as in the former, unbalanced transfer of assets can be regarded as a management fault.

For that reason, the company manager/s may be compelled to bear the debts of the legal entity, in whole or in part.

The sums paid by the manager shall form part of the debtor’s assets and may be distributed to all creditors on a pro rata basis.

Article L.652-1 states that the right of action shall be barred after three years from the date of issuance of the order pronouncing the liquidation proceedings or the rescission of the plan.

5- Liability for the debts of the company

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Action addressing liability for the debts of the company replaces the action to extend corporate liability which was used before the 2005 Law. It is no longer regulated as a liability but as a monetary sanction.

If the manager/s of the legal entity commit one or several faults within the ones listed in article 652-3 of the Code of commerce, he risks to bear all or part of the entity’s debts.

Even if the company discharges part of its debts, obligation with regard to the manager/s is maintained. Contrary to the other action existing in the new legal system, “sums recovered shall be used to pay off creditors according to the order of their secured claims” (article L 652-3 of the Commercial Code). With regard to the faults listed by law, they are pretty much the same as the ones stated in the former system.

6- Acts agreed after the cessation of payments (cessation des paiements).

The transfer may be considered as void because they have been agreed after the cessation of payments of transferor.

In case of insolvency, the court generally fixes the date of the cessation of payments. In such a date has not been fixed by the court, the date of cessation of payments is the date of the judgement which declares the cessation of payment. Thus, the court has the right to consider that the financial situation of the company was compromised before the insolvency procedure is opened.

Some acts agreed after the date of cessation may be considered as void. The category of transfer that may be considered as void are as follows :

-gratuitous acts;

-commutative acts in which the obligations of the debtor exceed the obligations of the other parts (in case of unbalanced transfer);

-any contractual mortgage or judiciary mortgage on the assets of the debtor. Page 26 of 59

Except from these specific acts, any payment or act in exchange for payment may be considered as void if the party who has agreed the act with the debtor knew he was in a stage of cessation of payments.

The later proposition seems to be quite relevant in case of a transfer parent/subsidiary or subsidiary/parent since both companies are related and have information about the financial situation of the other (especially the parent company as a shareholder of the subsidiary).

b- under Civil Law

1 -Oblique action (action oblique)

Article 1166 of the Civil Code states : “creditors may exercise their debtor´s rights and actions, except those which are exclusively dependent on the person”.

This disposition makes it possible to fight against situations in which the debtor of a person has rights against third parties but refuses or neglects to exercise them.

For this action to be exercised two conditions are required:

- Firstly, the debtor must be inactive. Thus, if the debtor is active the creditor cannot use this action;

- Secondly, the creditor´s interference must be based on his interest to protect his rights. Thus, if the debtor´s assets are sufficient for the payment to be made to the creditor, so that the interests of the latter are not compromised, the oblique action cannot be exercised.

Oblique action has the following effect, the property recovered by a creditor in the name of the debtor falls into the patrimony of the latter and benefits all its creditors and not only the creditors who exercised the right.

Concerning transfer of assets between two banking entities, the use of this action seems rather reduced. Indeed, in order for the creditor of the transferor to exercise an oblique action against the transferee, the two

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before-mentioned conditions need to be present. Therefore, it is necessary that after the transfer, the transferor is no longer able to pay the creditor. This possibility seems rather rare.

Moreover, the transferor should held a right in re against the transferee. Consequently, the exercise of the oblique action seems to be left to loan matters only.

2- Paulian action (action paulienne)

Article 1167 of the Civil Code states: “They (creditors) may also, on their own behalf, attack transactions made by their debtor in fraud of their rights”.

This action called “paulian action” is aimed at making ineffective the acts agreed in fraud of the rights of the creditor.

Four conditions are required so that the action can be exercised:

-the act has to be of purely patrimonial nature;

- the act must involve the debtor´s impoverishment (therefore an unbalanced act is necessary);

- the act must involve the unability for the debtor to pay the creditor;

-the act must have been agreed at a date at which the debt was already existing.

However, if the act is in exchange of payment, it can only be challenged if the third party is aware of the fraud.

Unlike the oblique action, the result of the paulian action cannot be shared among all the creditors and only the creditor who exercised the action but only benefit to the creditor who exercised the action.

The conditions for the paulian action are very strict and not suitable for an action against a transfer of asset between two member of a banking group.

Hence, paulian action can only be exercised when the act to be challenged involves the unability for the debtor to pay the creditor.

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Therefore, as far as transfer of assets are concerned, the paulian action only relates to either the most problematic situations or transfers of high value.

C-Under company Law

1- Regulated agreements.

In case of a regulated agreement (see above the conditions for an agreement to be considered as a regulated agreement), if the procedure of approval is not respected, only some stage of the procedure will lead to the nullity of the agreement.

Thus, the agreement will be considered as void only if the board of directors has not given its approval to the agreement (if its approval has not been requested or if it has given a disapproval, article L.225-42 of the Commercial Code).

In case of prior agreement by the board of directors, non-respect of the later stages of procedure (for example, approval by the general meeting) cannot lead to the nullity of the agreement. In these cases only the personal liability of the interested parties for the damages suffered by the company because of the agreement can be incurred.

Therefore, only liability is incurred and not the nullity of the agreement when :

-the person concerned by the agreement sits and votes at the general meeting (for example, the parent company votes in sits at the general meeting and vote for the transfer of assets, which is strictly forbidden by the Code of commerce). This principle has been set by the Court of Appeal of Versailles on September 12th, 2002)

-In cases in which the general meeting disapproves the agreement (article 225-41 of the Commercial Code).

-when not auditor’s report has been made on the agreement (Com. Cass., November 5, 1991).

2- Executive’s liability

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Article 225-251 of the Commercial code states that the limited company’s executive “are liable either for infringements of the laws or regulations applicable to public limited companies, or for breaches of the memorandum and articles of association, or for tortious or negligent acts of management”.

Any action for liability against the executive must be brought within three years of the act or event causing the loss or damage, or, if this was concealed, after the discovery thereof (A.C. Paris, July 5, 2001, in particular).

The damage suffered by the company itself and the damages suffered by the third are not subject to the same rules.

a- Compensation for damage caused to the company

The executive itself can introduce an action for compensation of the damage caused to the company. This action, called the ut singuli action has, of course, a minor role when the damages was caused by the executive.

Shareholders can also introduce an action for compensation of the damage caused to the company individually or in association (the ut singuli action, article L225-252 of the Commercial Code).

In order for the executive to be held liable, a mismanagement fault has to be proved (“faute de gestion”). This type of fault is different from the kind of fault used in common civil law and has been defined by the Courts.

In case of a transfer of assets, this action cannot be used by the third parties since the transfer automatically falls within the duties of the executive.

b- Compensation for damage caused to third parties

With regard to third parties, the executive can be held responsible. The Court of cassation created a specific fault (which is also used in Labour law).

In order for the executive to be held liable to the third party “a fault which can be detached from the duties” (“faute détachable des fonctions”) must be proved. This kind of fault is more serious than the

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fault necessary for the liability of the executive to the company to be engaged.

This notion of “fault which can be detached from the duties” has been defined by the commercial section of the Court of cassation on the 20th May 2003 as the fault which incompatible with the normal exercise of the executive duties. This incompatibility is based on two elements :

- the act is deliberate

- the fault of great seriousness

The action of the third party against the executive must be brought within three year starting from the event causing the damage.

- D- under Banking Law

- E- under Criminal Law

Article L.241-3 of the Commercial Code states that the sanction for a misuse of company assets/property is a prison sentence of five years and a fine of 375.000 euros (see above for the elements that may constitute the offence of misuse).

- F- Other

e) Third parties

. Supervisory authorities

. What is the role of the supervisory authorities in case of a transfer of assets (right to be informed, have to give an authorization..)? Please distinguish the home/host supervisory authorities.

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. Are there any conditions or consequences relating to solvency ratios (implementation of Bale I et II notably)?

. Are there differences between transfers in going concern situations / transfers in crisis situations?

. Please specify any relevant information relating to the supervisory authorities that has not been dealt with in the previous questions and that would be useful for the study

[To do]

. Minority shareholders

. Does a minority shareholder of the transferor have any right concerning the transfer :

- before the transfer or the decision to transfer (eg. right of opposition, right of approval, right to be informed…),

- after the transfer (eg. Right to have the transfer annulled when transfer disadvantageous to transferor, request for an audit…).

-Liability of the executive

Shareholders can also introduce an action for compensation of the damage caused to the company individually or in association (the ut singuli action, article L225-252 of the Commercial Code).

-written questions and management auditoring

According to the article 225-231 of the Commercial Code, shareholders who owns at least 5% of the share capital are entitled to submit written questions to the chairman of the board of directors or the directorate on

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one or more of the company's management operations concerning companies under its control.

In case the shareholders are unsatisfied of the reply, procedure for the appointment of one or more management auditors can be launched.

. Creditors

. Do Creditors of the transferor have any rights concerning the transfer :

- before the transfer or the decision to transfer (eg. Right of opposition, acceleration rights, or right of approval, right to be informed…),

Under French Law, the creditors do not have any rights concerning the transfer before the transfer.

After the transfer, the creditors may exercise oblique or paulian actions in the conditions described above.

As regards the liability of the executive, and as it has been told above, the action of the third parties against the executive is restricted to the cases where a “fault which can be detached from the duties” can be proved, which is irrelevant in the case of a transfer.

Regarding criminal law, the creditors have no rights to join a victim’s demand for compensation.

(right to have the transfer annulled for fraud when transfer disadvantageous to transferor and aimed at fleecing creditors…)

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. Employees

. Do Employees of the transferor have any right concerning the transfer :

- before the transfer or the decision to transfer (eg. Right of opposition, acceleration rights, or right of approval, right to be informed…),

- after the transfer (right to have the transfer annulled when transfer disadvantageous to transferor and likely to result in redundancies…)

Articles L432-5 and L422-4 of the Labour code states that the work committee or the elected representatives of the employees can set up an alarm proceeding if he is aware of facts that can affect the economic situation of the company.

When the committee group has noticed such facts, the work committee can ask the executive to give him explanations about the situation of the company until the next meeting of the committee.

If he is not satisfied of the reply of the executive or if the reply confirms the fact that the economic situation of the company is affected, the work committee writes a report which must be transmitted to the executive and to the auditor of corporate accounts (if there is one for the company).

The work committee then decides if the report has to be transmitted to the board of directors, to the directorate or to the shareholders.

. Deposit holders

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Deposit holders have no special rights compared to the rights of the creditors.

. Regarding the directive 94/19 : Who provides the deposit guarantee (the government, national bank, insurers…)? For which amount?

. Is there a specific regulation concerning the deposit guarantee in case of a transfer of assets in another Member State?

. If a transfer of assets including deposited funds occurs, does the deposit insurer or guarantor have to be notified?

. Do Deposit holders of the transferor have any right concerning the transfer :

- before the transfer or the decision to transfer (eg. Right of opposition or right of prior approval)

- after the transfer (eg. right to have the transfer annulled as deposited funds not part of transferor’s assets but belong to deposit holders…)

. Member State

. In case of transfer of assets to/from a transferee/transferor located in another Member State, has the host/home Member State any right or obligation?

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. Others

. Please specify any other relevant information relating to third parties that has not been dealt with in the previous question and that would be useful for the study

Approved associations having as explicit purpose to defend inverstors interests may be entitled with a power of attorney from the shareholders empowering them to act on their behalf (article L 452-2 of the Monetary and Financial Code).

f) Private international law

. What is the applicable law in case of transfer of assets:

With regard to Private International Law, banking activities can be classified in two groups: activities carried out between two banks, and activities carried out between a bank and its clients.

Concerning relations between banks, and in case that the law applicable to the contract has not been chosen by the parties, the Rome Convention states a special rule.

This special rule is due to the fact that in a bank/bank operation context, the characteristic performance cannot be determined. Therefore, in these cases, the law of the country with which it is most closely connected should be applied to the contract.

Due to the diversity of operations coming out of a bank/bank context, a general rule cannot be stated concerning the applicable law, and a case to case study is needed to establish it.

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. If the transferor located in your member state and the transferee in another member state?

. If the transferor located in another member state and the transferee in you member state?

. Please specify any other relevant information relating to Private international law that has not been dealt with in the previous question and that would be useful for the study

Parent´s obligation of financial support to its subsidiaries

Case study: Decision of the Chamber No.15 of the Paris Court of Appeal, May 24, 2007:

Context

In 1996 a French bank became shareholder of an Argentinean bank. The French entity firstly hold 16% of the company’s shares. Three years later the percentage rose up to 70%.

In 2001, due to the Argentinean financial crisis, the government of the Republic of Argentina enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing only minor sums of cash to be withdrawn. Next, in January 2002 the fixed 1-to-1 peso-US dollar parity that had been in place for ten years was replaced by an official change of 1,40 peso for 1 USD.

The Argentinian bank in question was not able then to respond to all of its creditors’ demands.

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Based on the provisions stated in article 35 bis of the Argentinean Financial Entities Law, the French bank called upon Argentinean authorities to withdraw authorization of the Argentinean bank.

After that, the Argentinean bank clients brought an action in France against the French bank. Clients argued that the latter breached the law by not supporting the Argentinean bank.

With regard to the applicable law

The action brought by the Argentinean bank clients was based in the following objection: instead of supporting the Argentinean entity, the French bank brutally stop pursuing its activity in Argentina, and no further investment in the Argentinean bank was made. Parties agreed to treat the fault as a matter of criminal offence.

The decision of the Court of Appeal stated that the appreciation of that fault was to be made according to the lex societatis, i.e. the law of the country where the French bank had its central administration.

In matters relating to criminal liability, the Court stated as well that the applicable law was the one of the place where the harmful event occurred, i.e. the Argentinian law.

With regard to the French bank liabilities

The French entity was not found guilty by the Court of Appeal.

According to the Court’s decision, frozing bank accounts and abandoning the fixed 1-to-1 peso-US dollar parity was only due to the new policy established by the Argentinian government. Page 38 of 59

The Court’s decision did not take into account the legal arguments used by the Argentinean bank clients for two reasons: firstly, no legal binding was found for the French entity to continue its investments in the Argentinean bank; secondly, even if article 35 bis of the Argentinean Financial Entities Law sets a sort of financial support for financial entities in crisis situations, this support could only be considered if the Central Bank of the Argentine Republic decides it. Though, no Central Bank decision set so.

Action brought by the Argentinean bank clients mentioned article 511-42 of the French Monetary and Financial Code. This article happens to have great similarities with article 35 bis of the Argentinean Financial Entities Law. However, and according to what is stated above, the Court did not consider the legal arguments based on the French provision because according to the Court the only applicable law was the Argentinean law.

Part II -Evaluation of potential solutions

The purpose of this second part is to analyze potential solutions to remove obstacles to asset transferability. Different categories of solutions will be proposed.

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We first would like to know which parts of your legislation would need to be amended in order to implement the solution.

Second, we would like to have your personal opinion about the feasibility of the solutions regarding the legislation in your Member State.

After that, we would like know if you consider that this solution is satisfactory and we would like you to explain why.

Lastly, we would like to know what legal obstacles still remain in your Member State.

Regarding those proposals, please consider that a transfer of assets from the subsidiary to the parent company in a crisis situation should not be considered as a transfer at arm’s length.

1. Transfers from the parent company to the subsidiary or from the subsidiary to the parent at arm’s length:

. Proposal n°1

Community legislation allows:

- any kind of transfer from the parent company to the subsidiary and

- transfers from the subsidiary to the parent at arm’s length.

Possible consequences or conditions:

- Any restriction to those transfers have to be removed by Members States

- After the transfer, specific information about the transfer have to be communicated to supervisors and shareholders

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Questions i) Please provide a summary of the national measures that should be revised in order to reach this result.

None.

Transfer from the parent company to the subsidiary : no difficulty

Transfer from the subsidiary to the parent :

- there is a minor risk that the transfer would be considered as a misuse of corporate property. Nevertheless, when the transfer is in the group interest, the offence of misuse of assets is not constituted. To avoid the qualification of misuse of corporate property, the proposition should be clearly transposed in the laws in force (the exemption when the transfer is in the group interest has been introduced by courts and is not clearly stated in the legal texts).

-Regarding regulated conventions, it should also be written in the legal texts that this kind of transfer does not fall within the category regulated conventions.

ii) In order to determine the feasibility of this solution, please explain precisely whether those modifications would entail

frictions or even a disruption of your legal system or

entail substantial modifications but no major frictions with established legal principles or

merely minor changes.

This solution would only entail minor changes

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iii) Please precise if this solution does satisfactorily take into account interests of parent companies, subsidiaries, minority shareholders, creditors, deposit holders, employees, supervisory authorities or Member States as a whole

Preliminary comments:

It is assumed that:

-Since the transfer is decided on a voluntary basis by the parent, the transfer is in its own interest. Therefore, the transfer will help the subsidiary but will not be agreed when the subsidiary is not in a position that can be solved. Thus it is assumed that the help to the subsidiary is a mean to avoid the loss of an asset owned by the parent.

-the transfer does not lead to a solvency ratio under the legal requirements.

-transfer parent/subsidiary:

-for the parent company: yes, since it is on a voluntary basis, there is no risk of pressure from the subsidiary (unlike transfers from the parent to the subsidiary)

-for the subsidiary: yes, since it facilitates help from the parent. Nevertheless, the specific information communicated to shareholders about the transfer discloses the fact that the transferee may face some financial difficulties and the public might not trust the transferee anymore.

-minority shareholder: The benefit of the subsidiary’s shareholders is obvious. For the minority parent’s shareholders, it avoids the loss of an asset of the parent (since the subsidiary is an asset of the parent).

-creditors and deposit holders : their interest is the same as minority shareholders but if the subsidiary becomes Page 42 of 59

insolvent after the transfer, a preferential right should be given to the parent company to be reimbursed (of course, except in the case where the transfer is a capital increase or the like).

-employees: see creditors and shareholders. Furthermore, it is suggested that information should also be communicated to employees

-supervisory authorities : as mentioned in the preliminary comments, it is assumed that it does not lead to a solvency ratio under the legal requirements.

-transfer subsidiary/parent company

-parent company : the interest is obvious. Nevertheless, the specific information communicated to shareholders about the transfer discloses the fact the transferee may face some financial difficulties and the public might not trust the transferee anymore (this risk is less important than for the transfer from parent to subsidiary considered above since it is at arm’s length).

-subsidiary interest : the fact that it is at arm’s length does not mean that the subsidiary has the choice to transfer assets. There is a risk of pressure from the parent to the subsidiary that would lead to the transfer whereas the subsidiary needs her assets because she is in a difficult position. Solvency/liquidity ratios still have to be respected after the transfer.

-minority shareholders, creditors, deposit holders : same interest as the subsidiary itself. Regarding minority shareholders, the date and the amount of the transfer should be mentioned in the annual report to shareholders. This information seems necessary since some suspicion could exist regarding transfer from the subsidiary to the parent company because the parent may bring pressure to bear on the subsidiary. This information could lead to a control of the manager of the subsidiary. Page 43 of 59

-employees: it is suggested that information should also be communicated to employees

-supervisory authorities: The power of the subsidiary authorities (ie. Sanction) should be defined in cases when the transfer is not at arm’s length.

iv) Please precise whether legal obstacles remain and how they could be removed in banking, insolvency and company law).

Both: There is a risk of judicial insecurity: the transfer may be considered as a regulated convention and may be considered as void if the approval of the board of directors has not been requested.

Transfer from the parent to the subsidiary: If the parent company is facing financial difficulties (“période suspecte”), the transfer may be considered as void in case of insolvency procedure. Removing these obstacles would present advantages (make the transfer safer for the subsidiary) and inconvenient (this rule protects the parent’s assets, its creditors, shareholders and deposit holders).

Transfer from the subsidiary to the parent company:

-the notion of transfer “at arm’s length” should be defined in order to reduced the risk of challenging the transfer because it can be considered as a regulated agreement. The notion of “arm’s length” should be defined in relation with other transactions of the same kind.

- If the parent knows that the subsidiary is facing difficulties, the transfer can be considered as void (periode suspecte) in case of insolvency procedure of the subsidiary. Nevertheless, the risk of insolvency of the subsidiary is low because the transfer is at arm’s length and because we assume that solvency ratios of the subsidiary are still respected after the transfer.

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2. Transfers from the subsidiary to the parent company (in preferential conditions)

a) Prior and overall agreements

. Proposal n°2:

Similar EU instrument:

Art. 234 - Solvency II: Amended Proposal for a

Directive on the taking-up and pursuit of the business of Insurance and Reinsurance http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0119:FIN:EN:PDF

Proposal:

For this proposal, please consider that an EU instrument has been adopted, which provides that a group agreement under which the parent company and some of the entities of the group can mutually commit themselves to transfer assets in a crisis situation has to be allowed by the Member States. This agreement is endorsed by each legal entity being a party to the agreement. This agreement guarantees financial support from the parent to the subsidiary and from the subsidiary to the parent. This agreement could only be voluntary because of the freedom of contracts, the limited liabilities of companies and minority shareholder rights.

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This agreement is submitted to the supervisory authorities. A group-wide view of solvency and liquidity would be a useful part of the supervisory assessment of an intra-group transfer. This group-wide approach will be required as part of the review of the CRD on 'colleges'.

The agreement may already be submitted when the subsidiary asks for authorization to take up and pursuit the business of credit institutions. This agreement may also be submitted when the subsidiary asks for authorization and will be considered as a modification to the conditions of the authorization to take up and pursuit the business of credit institutions.

Possible consequences or conditions:

-The capital adequacy rules is still respected after the transfer

-The transfer does not endanger the transferor’s solvency

-The amount of the transfer is to be reimbursed by the transferee to the transferor. In case of insolvency, the creditors of the transferor will be reimbursed before the creditors of the transferor up to the amount of transfers that occurred

-After each transfer, the transferor informs supervisors and the shareholders during the ordinary General Assembly meeting following the transfer

- If the good faith, competence and prudence of the transferor's management is not in question and if the transfer fulfils all the conditions specified above, then the transfer cannot be challenged under Insolvency Law.

Questions

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i) Please provide a summary of the national measures that should be revised in order to reach this result.

[TO DO] ii) In order to determine the feasibility of this solution, please explain precisely whether those modifications would entail

frictions or even a disruption of your legal system or

entail substantial modifications but no major frictions with established legal principles or

X

merely minor changes. iii) Please precise if this solution does satisfactorily take into account interests of parent companies, subsidiaries, minority shareholders, creditors, deposit holders, employees, supervisory authorities or Member States as a whole

It is suggested that the existence of a prior and overall agreement should be disclosed and published because it may have important consequences for all the persons concerned. This information may be published by the supervisory authorities and/or in the annex of the annual report of the parent and the subsidiary.

If a transfer occurs within the conditions set in the agreement, no prior approval from the supervisory authorities is required. Therefore, even if there are major differences between the insurance sector and the banking sector, such an agreement would enable transfers in short delays (less than 24 hours).

Unlike the amended proposal in the insurance sector (Solvency II- article 237), the transfer would not only concern own funds but other kinds of assets.

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There should be other advantages that would prompt banking groups to conclude such an agreement (tax advantages for example).

Parent and subsidiary: this solution is balanced for all the members of the group, and especially the subsidiary. This solution would reduce the risk of undue influence from the parent to the subsidiary and would guarantee the subsidiary that in case of financial difficulties the parent company will help her.

Credit and deposit holder : On one hand, the interests of the creditors and deposit holders of the transferor would be harmed since the assets of the transferor would be reduced. Nevertheless, they will have a preferential right on the assets of the transferee up to the amount of the transfer. One the other hand, creditors and deposit holders of the transferee would benefit from this solution. Finally, the proposal is fair because even if the creditors and deposit holders of the transferee benefit from the transfer, the transferee is facing financial difficulties. The proposal is balanced because both parent and subsidiary are covered in case of a financial difficulty.

iv) Please precise whether legal obstacles remain and how they could be removed in banking, insolvency and company law).

b) Strong guarantees covering the risk of outstanding payment

. Proposal n°3

Similar EU instrument:

Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (http://eur- lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32002L0047:EN:HT ML ) Page 48 of 59

Proposal:

For this proposal, please consider that an EU instrument has been adopted, which provides that a group agreement under which the parent company and some of the entities of the group can mutually commit themselves to transfer assets in a crisis situation has to be allowed by the Member States. This agreement is endorsed by each legal entity being a party to the agreement. This agreement guarantees financial support from the parent to the subsidiary and from the subsidiary to the parent. This agreement could only be voluntary because of the freedom of contracts, the limited liabilities of companies and minority shareholder rights.

This agreement is submitted to the supervisory authorities. A group-wide view of solvency and liquidity would be a useful part of the supervisory assessment of an intra-group transfer. This group-wide approach will be required as part of the review of the CRD on 'colleges'.

The agreement may already be submitted when the subsidiary asks for authorization to take up and pursuit the business of credit institutions. This agreement may also be submitted when the subsidiary asks for authorization and will be considered as a modification to the conditions of the authorization to take up and pursuit the business of credit institutions.

Possible consequences or conditions:

-The capital adequacy rules is still respected after the transfer

-The transfer does not endanger the transferor’s solvency

-The amount of the transfer is to be reimbursed by the transferee to the transferor. In case of insolvency, the creditors of the transferor will be reimbursed before the creditors of the transferor up to the amount of transfers that occurred

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-After each transfer, the transferor informs supervisors and the shareholders during the ordinary General Assembly meeting following the transfer

- If the good faith, competence and prudence of the transferor's management is not in question and if the transfer fulfils all the conditions specified above, then the transfer cannot be challenged under Insolvency Law.

Questions

i) Please provide a summary of the national measures that should be revised in order to reach this result.

[TO DO]

ii) In order to determine the feasibility of this solution, please explain precisely whether those modifications would entail

frictions or even a disruption of your legal system or

entail substantial modifications but no major frictions with established legal principles or

merely minor changes.

X iii) Please precise if this solution does satisfactorily take into account interests of parent companies, subsidiaries, minority shareholders, creditors, deposit holders, employees, supervisory authorities or Member States as a whole

The parent company: the parent company may use the financial collateral concerned by the directive to obtain some liquidity from her central bank. Therefore, it is not obvious that the parent company has a Page 50 of 59

particular interest to ask for liquidity to its subsidiary rather than to her central bank.

Furthermore, the assets concerned by the directive (which are also accepted by the central bank) are cash and financial instrument. In case of a financial crisis, the parent company may have difficulties to find this kind of assets. Therefore, this solution may not be suitable to financial difficulties.

The situation may change if the directive is amended and provides that the subsidiary may accept credit claim as collaterals. In this case, the parent company would find it easier to give this kind of asset as a collateral.

Finally, the interest of the proposal depends on the amendment of the directive 2002/47

The subsidiary : If common criteria in the area of collateral are defined by central banks and if there a greater acceptance of the cross-border use of collateral, then this solution may help the subsidiary when she needs refunding.

Creditors and deposit holders : For creditors of the subsidiary, the directive provides for very strong guarantees. For the creditors of the parent company, the proposal n°3 does not change their situations. Their situation has already been modified by the directive 2002/47. The proposal only suppresses restrictions to transfer of asset from the subsidiary to the parent company.

Employees : NA

Supervisory authorities : NA

Member states : Member state of the subsidiary : Facilitating the transfer of assets from the subsidiary to the parent may reduce the number of cases where the Member states have to give financial support to the

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parent company. Member states of the subsidiary : Since the solution protects the interests of the subsidiary, there should be no opposition to this proposal from the Member state of the subsidiary.

Please precise whether legal obstacles remain and how they could be removed in banking, insolvency and company law )

c) Liability of the parent company for the subsidiary’s debts

Prior question

Firstly, please indicate if in your Member State, the parent company can be held jointly and severally liable for the subsidiary’s debts and why:

-due to the specific legal form of the subsidiary where the shareholders are systematically liable for all decisions

Yes, such a legal form exists in legal law and is called “société en commandit simple”. Nevertheless, it must be noted that this kind of legal forms are nearly never used. More precisely, no subsidiary in such a legal form can actually be found. The reason is that the parent company does not want to be held fully liable for the subsidiary’s debts.

-due to preferred shares under which the shareholder is systematically liable for some or all decisions of the company

In French corporate Law, a parent company can be held jointly and severally liable for the subsidiary’s debts due to preferred shares. Nevertheless, such shares are nearly never used in the banking

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sector. This kind of preferred shares may wear two different forms : preferred shares (Code de commerce) or “catégories d’actions”

. Proposal 4

Then, for this proposal, please consider that a EU instrument has been adopted and creates an automatic liability:

- by means of a specific type of company where the shareholders are systematically liable for all decisions that are disadvantageous for the company

- or by means of a preferred shares under which the shareholder is systematically liable for some or all decisions of the company

Questions

i) Please provide a summary of the national measures that should be revised in order to reach this result.

None ii) In order to determine the feasibility of this solution, please explain precisely whether those modifications would entail

frictions or even a disruption of your legal system or

entail substantial modifications but no major frictions with established legal principles or

merely minor changes. Page 53 of 59

X iii) Please precise if this solution does satisfactorily take into account interests of parent companies, subsidiaries, minority shareholders, creditors, deposit holders, employees, supervisory authorities or Member States as a whole

The parent company: the parent company has no interest to choose such a legal form for its subsidiary. One of the main reasons why she chooses to create a subsidiary rather than a branch is to limit her liability. Unlike the other propositions above, this solution creates a liability of the shareholders which can be more important than the amount of the transfer. Furthermore, this solution concerns a wider subject than only the question of the transfer of assets and the consequences may be more important than only removing obstacles to the transfer of assets. In order to be feasible, this solution should be based on a voluntary basis. But even in this case, it is doubtful that the parent company has any interest to choose this solution.

The subsidiary : It is obvious that this proposal is in the subsidiary’s interest.

Minority shareholders :

-If a specific company where all the shareholders are fully liable has been created, it would lead to a full liability of the minority shareholders. This solution is not acceptable because they do not have any power to take decisions.

-In case of preferred shares, minority shareholders would not be concerned. iv) Please precise whether legal obstacles remain and how they could be removed in banking, insolvency and company law ).

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d) Improving transferability transfer through the introduction of a new concept of "banking group"

. Proposal n° 5

Similar EU instrument:

Draft of the Ninth Company Law Directive for the conduct of groups containing a public limited company as a subsidiary

“Company Law Action Plan” dated May 2003 : “framework agreement” for group companies

Under the "Company Law Action Plan" dated May 2003, the European Commission recommended specific rules on the enforcement of the group policy, for which Member States are required to draft a "frame agreement" for group companies that allows them to adopt a coordinated group company policy, as long as the interests of the companies' creditors are protected. This initiative has not been pursued. There might be merit in further investigating whether the definition of banking groups might remove obstacles in terms of banking law.

In that respect, a draft Ninth Company Law Directive on the conduct of groups containing a public limited company as a subsidiary was presented in December 1984 for consultation. The Commission did not pursue this work. The Directive was intended to provide a framework in which groups are managed on a sound basis whilst ensuring that interests affected by group operations are adequately protected. Particular reference was made to the possibility to transfer assets while protecting the interests of different parties. Under the 9th Directive project, the legal recognition of the 'group' went hand in hand with specific steps to protect minority Page 55 of 59

shareholders and creditors. It must be noted that a banking group would be a contract freely entered into. As contemplated in 1984 under the 9th Directive on company law, if a banking group does not wish to submit to a group regime, it will have to respect the economic interests of the subsidiary.

Proposal:

For this proposal, please consider that the idea of “group company” has been adopted by an EU instrument,.

The managers of the subsidiaries will be obliged to follow instructions even if the subsidiaries will thereby incur financial losses. These managers must therefore not be held liable vis-à-vis their own companies. This power of management is accompanied by the right to use the financial resources of the subsidiary, since the economic advantage of the group can be maximized only where there is a complete intergartion of the two entities.

Once the agreement is concluded, transfers of assets are allowed between the members of the group.

Possible consequences or conditions:

- The constitution of the group is submitted to the supervisory authorities.

- In case of insolvency, there is a possibility for creditors to file their claims with any of the companies of the group

- In case of Insolvency, the creditors of the transferor will be reimbursed before creditors of the transferor up to the amount of transfers that occurred and the possibility for creditors to file their claims to any of the companies concerned by the transfer

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Questions

i) Please provide a summary of the national measures that should be revised in order to reach this result.

[TO DO]

ii) In order to determine the feasibility of this solution, please explain precisely whether those modifications would entail

frictions or even a disruption of your legal system or

X This proposal is in conflict with the fundamental principles of the French legal system, mostly regarding corporate Law and also regarding Insolvency Law. Furthermore, it would not be justified to create a specific corporate Law for banking groups only.

entail substantial modifications but no major frictions with established legal principles or

merely minor changes. iii) Please precise if this solution does satisfactorily take into account interests of parent companies, subsidiaries, minority shareholders, creditors, deposit holders, employees, supervisory authorities or Member States as a whole

Parent company : The interest of the parent company is obvious because she can use the assets of the subsidiary. Nevertheless, she has no interest to take so many assets to the subsidiary that she becomes insolvent since the claims of the subsidiary’s creditors can be filed against the parent company.

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Subsidiary: This solution may be considered as very dangerous regarding the subsidiary’s interest and may not be accepted by the Member states where there are mainly subsidiaries. This solution could be more balanced if the parent company’s power were limited to decisions in the group interest.

Creditors of the subsidiary : the risk for the subsidiary’s creditors is that all the assets of the subsidiary can be taken by the parent company. But ion the other hand, the can file their claim to the parent company. Nevertheless, if the parent company is located in other Member state, the proceeding may be quite expensive. Furthermore, if an insolvency proceeding is opened against the subsidiary because of the transfer, the losses may be more important than the amount of the transfer. Therefore, the fact that the creditors of the transferor will be reimbursed before creditors of the transferee up to the amount if the transfer may not be considered as sufficient.

Employees : this solution does not take into account the situation of the employees. They are not informed neither before not after the agreement.

iv) Please precise whether legal obstacles remain and how they could be removed in banking, insolvency and company law )

e) Other solutions

. Proposal n° 6

Supervisors of the transferor and the transferee can jointly authorize transfers of assets without any counterpart if:

- The transferee is facing difficulties but no insolvency proceeding has been opened;

- The transfer does not jeopardize the solvency of the transferor.

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Possible consequences or conditions:

- Transfer cannot be challenged by the national company Law, criminal Law or insolvency law because of the special resolution regime for banks/early interventions;

- The legislation ensures the entity providing a transfer a priority right in case of insolvency proceeding of the transferee.

Please feel free to suggest other solutions here.

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