Belvedere SA, an international beverage company based in France, issued € 375 million Floating Rate Notes repayable in 2013. The bond documentation, governed by the law of the state of New York was entered into by Belvedere SA, its seven Polish subsidiaries, and Bank of New York Mellon as trustee. Natixis SA and Raiffeisen Bank Polska were appointed as security agents.
Belvedere SA and the relevant subsidiaries also entered into a collateral sharing agreement, under New York law, in favor of each security agent, creating a parallel debt obligation. This mechanism, which is frequently used in international financings, consists of the creation of a parallel debt in the same amount of the same debt owed to the trustee, but with the security attached to it.
In July 2008, French safeguard proceedings were opened in favor of Belvedere SA and its Polish subsidiaries. Each of the security agents and the trustee declared their claims for the full amount of the notes, which were then admitted.
However, Belvedere and its subsidiaries challenged the admission of such claims.
Before the Dijon Court of Appeal
The three proof of claims filed by the trustee and the security agents were upheld by the Dijon Court of Appeal in its decision dated September 21, 2010, on the ground that the trustee was not acting as a mere bondholder’s proxy but rather it was acting as the owner of the receivables in accordance with New York law.
Typically, under French law, only the creditors or their specially appointed proxy can file a proof of claim and the trustee thus often obtains a special proxy from the bondholders. However, in the Belvedere case, the trust agent did not have a special proxy from the various bondholders since it was deemed the owner of the receivables under the New York law.
As for the validity of the parallel debt mechanism, the Court of Appeal held that the parallel debt structure under the law of the state of New York was comparable to joint obligations under French law and was therefore not contrary to the French international public policy rules.
Before the French Supreme Court (Cour de cassation)
The French Supreme Court was asked to recognize as a matter of French law the effects of a trust governed by the law of the state of New York. The question was to determine whether the trustee was filing the proof of claims in its capacity as legal owner of the receivables pursuant to New York law (that governed the trust deed), or in its capacity as proxy, pursuant to French law.
In its decision dated September 13, 2011, the French Supreme Court approved the court of appeal and ruled, on the one hand, that the filing of the claims must be made pursuant to French insolvency law pursuant to article 4 of EC Regulation 1346/2000, and on the other hand, that the question as to whether the trust agent was the owner of the receivable must be determined according to the law of the state of New York.
As for the parallel debt, the Supreme Court also approved the court of appeal’s decision and rejected the argument raised by the debtor, according to which the filing of the parallel debt could lead to double payment in contradiction with public policy, on the ground that the contract specifically provided that any payment made to the security agent would reduce the main debt accordingly.
This decision clarifies key considerations raised in the context of international financings for French companies having access to either an international bank or capital market and should help bring certainty to the outcome of insolvency proceedings.