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COVID-19: Pressure Points: State of health emergency: what are the impacts on credit agreements? (France) - Update

30 April 2020 | Paris
Legal Briefings – By Louis de Longeaux, Eric Fiszelson, Régis Oréal, Vincent Hatton, Laure Bonin, Pauline Bournoville and Virginie Barbier


A review of the questions raised by Ordinance No. 2020-306 of 25 March 2020 (the “First Ordinance”), relating to the prorogation of elapsed period during the health emergency period and the adaptation of procedures during the same period, as supplemented by Ordinance N° 2020-427 of 15 April 2020 (the “Second Ordinance”) (hereinafter together, the “Consolidated Ordinance”)

Apart from the extremely serious health situation that we are all experiencing both personally and professionally, the introduction of containment and the placing of our country in a "state of health emergency" have, and will have, unprecedented economic repercussions on our country.

We can already praise the responsiveness of our institutions to deal with this crisis and the stated desire to "rescue" our French companies. In just a few days – in addition to the loi de finance rectificative for 2020 establishing the State guarantee for loans to businesses – the emergency health act No. 2020-290 of 23 March 2020 was adopted, empowering the Government to take numerous measures in favour of the economy by means of ordinance. The First Ordinance was one of the twenty-five ordinances published in the journal officiel on Thursday 26 March 2020. Less than one month later, a Second Ordinance has been published and modified this brittle scheme but our previous analysis has been mainly confirmed.

In this changing legislative and regulatory context, we thought it would be useful to provide an initial overview of the Consolidated Ordinance and its effects on credit agreements in particular. We would like to share with you our thoughts on the main issues raised by this Consolidated Ordinance with regard to financing.

The Consolidated Ordinance introduces an extension of all periods, whether legal or contractual, that have expired or that will expire between 12 March 2020 and the expiry of a period of one month from the date of cessation of the declared state of health emergency, which can be prolonged if and as necessary (hereinafter the “Legally Protected Period”). More specifically, the duration of the state of health emergency having been set by the emergency law of 23 March 2020 has a duration of two months following the entry into force of the said emergency law (i.e. 24 March 2020), the Legally Protected Period of these exceptional measures should end on 24 June 2020 (unless the state of emergency is extended). 

In other words, both periods expiring before the 12 March 2020, and others period expiring after the end of the Legally Protected Period, will not be postponed. Above all, several exclusions are provided for in the text of the Consolidated Ordinance and notably (i) with regard to the financial obligations of L.211-36 et seq. of the code monétaire et financier and the related guarantees (including swaps), and (ii) the periods that have already been adapted by the emergency law itself (no overlap). 

We will focus here only on the impact of the Consolidated Ordinance on credit agreements, entered into by companies, bearing in mind that many other aspects of the law are affected, such as the suspension of the legal deadlines for registration, notification, etc., for the purposes of validity or enforceability (cf. article 2 of the Consolidated Ordinance) or the suspension of jurisdictional conciliation or mediation measures (cf. article 3 of the Consolidated Ordinance). It should be noted that various other topics have been impacted by the Second Ordinance (such as, for example, the exclusion of legal right of withdrawal or other cooling off period from the scope of the legal suspension period stated by Article 2 of the First Ordinance).

What is the nature of the measures covered by the Consolidated Ordinance?

According to article 4(1) of the Consolidated Ordinance, “Penalty clauses, termination clauses and clauses providing for forfeiture, when their purpose is to punish the non-performance of an obligation within a specified period, shall be deemed not to have taken effect or to have become effective if that period has expired during the [Legally Protected Period]”. 

Applied to a credit agreement, where the main obligation of the Borrower is to repay the loan within a given period, the measures introduced by the Consolidated Ordinance are intended to suspend the period within which the borrower must comply. The Consolidated Ordinance seems to establish a sort of a moratorium, even if there is no common meaning of these measures because of the extraordinary nature of the state of health emergency in our country.

The main changes arise in the second paragraph of Article 4, issued by the Second Ordinance, which modulate the duration of the suspension period. Pursuant to the First Ordinance, all contractual periods expiring during or due to expire until the end of the Legally Protected Period were extended until the end of the month following the end of the said Legally Protected Period (the “Initial Suspension Period”).

From now, the aforementioned clauses are suspended and their effects are postponed for a period equal to the period elapsed between 12 March (or the date on which the obligation arose, if later) and the date on which it should have been performed, unless the debtor has performed before (the “New Suspension Period”). The principle of a one-month lump-sum extension is therefore abolished and the deferral period potentially extended.

For example, if a borrower fails to pay on 13 February 2020 and the lender is entitled to accelerate the loan on 13 March 2020, the New Suspension Period should be understood as follows:

The acceleration clause will be postponed of a duration equal to the time elapsed between 12 and 13 March, such deferral running from the end of the Legally Protected Period (i.e. June, 24). As a consequence, the lender will be authorised to accelerate the loan as from 25th June (i.e. end of the Legally Protected Period + 1 day). In this example, the New Suspension Period is shorter than the Initial Suspension Period.

Another example, if a borrower is in default of payment on the 2nd April and the lender is contractually entitled to accelerate the loan on the 2nd June, the New Suspension Period shall be calculated as follows:

The acceleration clause will be postponed of a duration equal to the time elapsed between 2 April (this date is later than 12 March) and 2 June (i.e. 61 days). As a consequence, the lender will be authorised to accelerate effectively the loan on 24 August 2020. In this example, the New Suspension Period is longer than the Initial Suspension Period.

These examples can be illustrated as follows:

It should be noted that a specific duration of postponement of sanctions of the non-performance of an obligation other than sums of money has been created by the Second Ordinance.

The New Suspension Period is unfortunately unclear. Mostly, this creates a complex scheme which imposes to parties to determine themselves the time limit of each suspended period . Let’s bet that errors and future disputes will result. Legal certainty is not ensured.

Once the duration of the postponement is understandable, many questions arise.

What is the impact of the postponement on the stipulations of the credit agreement? 

The contractual deadlines in a credit agreement essentially concern the borrower's repayment term, as we have seen. Thus, it is above all the term forfeiture clause, more often referred to as the "early repayment clause", sanctioning the borrower's failure to pay that will be targeted.

The moratorium introduced by the Consolidated Ordinance means in practice that the borrower's failure to pay on the due date, as well as the interest on arrears resulting therefrom, can no longer be sanctioned if it expires during the Legally Protected Period, until the end of the Suspension Period. In other words, no further acceleration of the term may be pursued, nor any late payment interest may be claimed from the debtor, if these were to occur between the 12 March 2020 and the 24 June 2020, until the end of the New Suspension Period. 

However, does this mean that the sums, whether it is the principal borrowed or conventional or late interest, are no longer due? The answer is clearly negative: the postponement does not impose a waiver of debt. These sums are indeed owed by the debtor and continue to be owed - proof of this is that the debtor can even continue to perform its obligations during this period, as the Consolidated Ordinance itself mentions. The legal suspension introduced by the Consolidated Ordinance cannot therefore be confused with a paralysis of the debtor's performance of its obligations. This analysis is positive. Only the payment of the sums (principal and interest) is deferred by the Period of Suspension, if and only if the period expires during the Legally Protected Period. This tricky point has been confirmed by the French Government. 

Next, if the payment of the sums is suspended, is the compensation affected? Admittedly, the sums (principal and interest) remain due during the Legally Protected Period even if they are no longer due during the Suspension Period. But suspension of the due date should mean suspension of the compensation. Remember that set-off is a method of payment which is voluntary, whether it is legal set-off (since the reform of contracts, legal set-off is in fact "voluntary" and no longer occurs without the knowledge of the parties as before because it "operates only subject to being invoked" cf. article 1347 of the Civil Code), or contractual set-off. Consequently, the suspension of the binding nature of the enforceability of a debt is very likely to be invoked by borrowers facing economic difficulties in order to oppose any set-off. 

In any event, it might be regretted that the Government did not take care to make the benefit of this exceptional moratorium subject only to those debtors who did in fact justify economic difficulties in connection with COVID-19, as it did, for example, in the case of individuals or other entrepreneurs wishing to defer their tax due dates.

Next, does the moratorium apply only to current contracts?

It should be stressed that the Consolidated Ordinance is not a transitional legal text; therefore, it should not be reasoned in terms of the application of the law over time. The only question that must be asked concerns the date of expiry of the time period: does it expire during the Legally Protected Period referred to in the Consolidated Ordinance?

It is therefore irrelevant when the contract was concluded; it is the date of expiry of the time period that must be analysed. Either it falls within the Legally Protected Period of the Consolidated Ordinance and the debtor can avail himself of the moratorium, or it does not fall within this Legally Protected Period (before or afterwards) and the debtor will not be able to avail himself of the moratorium.

As a result, the moratorium defined by the Consolidated Ordinance applies if the period sanctioning the debtor's non-performance expires during the Legally Protected Period (i) to contracts in force before 12 March (date of retroactivity of the moratorium), (ii) to contracts entered into after 12 March 2020 (and therefore before 27 March - date of entry into force of the First Ordinance) and (iii) to contracts entered into after 27 March 2020.

Once again, it is not the date of conclusion of the contract which is important, but only the date of expiry of the moratorium period. One should not reason in terms of the retroactivity of the law but only in terms of the temporality of the expiry of the period covered by the moratorium Ordinance. Either the contractual period expires during the window provided for by the moratorium and the suspension applies, or the period does not expire within that period and the moratorium does not apply.

This second tricky point has been confirmed by a ministerial circular dated 17 April: the Consolidated Ordinance shall apply both to contracts entered into prior its entry into force and to contracts entered into, amended or renewed after its entry into force.

Finally, does the moratorium apply only to contracts subject to French law?

In other words, can the Consolidated Ordinance be applied to a contract under foreign law entered into by a French company?

In fact, the legal characterization of the Consolidated Ordinance is not clearly stated. And yet it is in this legal characterization that the answer must be found.

Once again, it is useful to stress that the Consolidated Ordinance establishes exceptional measures, permitted only by the state of health emergency declared in our country. This text could, moreover, be compared to the texts that were taken during the Second World War.

The Consolidated Ordinance therefore seems to be in the nature of an overriding mandatory provision, protecting our nationals.

However, as article 3 of the Civil Code states, "overriding mandatory provisions (lois de police et de sûreté) are binding on all those who live in the territory". As is Article 9§1 of EU Regulation n°593/2008 on the law applicable to contractual obligations, known as "Rome I", which specifies that "Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation".

The scope of application of an overriding mandatory provision is deduced from the overriding purpose assigned to it. The authorised doctrine teaches us that the connecting criterion that triggers the application of an overriding mandatory provision must always be in perfect adequacy with the aim pursued by the overriding mandatory provision. French case law confirms this analysis. 

Let’s remember that the aim pursued by the French legislator is clearly defined in the enabling legislation from which the Consolidated Ordinance is derived; which is to "deal with the economic, financial and social consequences of the spread of the COVID-19 epidemic and the consequences of the measures taken to limit this spread, and in particular to prevent and limit the cessation of activity of natural and legal persons exercising an economic activity and of associations and its impact on employment" (cf. article 11 of Act No. 2020-290 of 23 March 2020 on emergency measures to deal with the COVID-19 epidemic).

Consequently, both natural persons exercising an economic activity in France and legal entities duly registered in France will be able to take advantage of this moratorium, regardless of the law governing the contract. This third tricky point has been confirmed by the ministerial circular dated 17 April, the aim of the Consolidated Ordinance being to safeguard the economic organisation of our country.

Moreover, despite the mandatory character of the Consolidated Ordinance, the Governmental report under the Second Ordinance, provides that the parties remain free to exclude the application of this Article 4 by express clauses, in particular if they decide to take into account differently the impact of the health crisis on the conditions of performance of their contract. They may also decide to waive the provisions of this article. In other words, carve-out clauses are allowed.

If the Consolidated Ordinance at first glance had the appearance of a sober text, it is clear that it leaves many questions and with some certainly still deserve to be raised. The extraordinary nature of these exceptional measures undoubtedly justifies the extent of the induced consequences for the contracting parties. 

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