Enforceability of Covenants During French Safeguard Procedures: A New Precedent

Introduction

The case of Cassini SAS v Emerald Pasture Designated Activity Company & Ors ([2022] EWCA Civ 102) presents a pivotal moment in the intersection of English and French insolvency law. Cassini, a French company, entered into a Senior Facilities Agreement (SFA) governed by English law, which included specific covenants. Following Cassini's initiation of a French insolvency procedure known as "sauvegarde," Emerald Pasture, a significant lender under the SFA, sought to enforce these covenants in the English courts. The core issue revolved around whether the covenants remained enforceable during the observation period of the safeguard procedure, a matter complicated by Brexit and the interplay of cross-border insolvency regulations.

Summary of the Judgment

After a four-day trial, the High Court Judge Kramer determined that the covenants within the SFA remained enforceable against Cassini during the observation period of the French safeguard procedure. Cassini appealed this decision to the England and Wales Court of Appeal. Upon review, the Court of Appeal upheld the High Court's determination, ruling that under French law, as interpreted through expert testimonies and statutory provisions, the covenants in the loan agreement were indeed enforceable during the safeguard observation period. The appellate court meticulously analyzed the expert evidence, legal principles, and relevant case law to affirm the enforceability of the covenants despite Cassini's participation in the safeguard procedure.

Analysis

Precedents Cited

Central to the judgment was the reliance on the Heart of La Defense SAS ("HOLD") and Dame Luxembourg SARL ("DAME") case (Court of Appeal of Versailles, 28 February 2013). In the HOLD case, the Versailles Court of Appeal addressed whether the Paris Commercial Court was bound by the formal and substantive conditions of loan agreements during a safeguard procedure. The court held that non-ongoing contracts, such as fully drawn loans, could have their terms modified within statutory limits, specifically allowing for extensions beyond original loan terms without adhering strictly to contractual provisions. This precedent underscored the flexibility within French safeguard procedures to accommodate restructuring while ensuring creditor interests are balanced.

Additionally, the principles of "pacta sunt servanda" (agreements must be kept) and statutory interpretation methods like a contrario reasoning were pivotal in discerning legislative intent within the French Commercial Code.

Legal Reasoning

The court's legal reasoning hinged on interpreting French insolvency law, particularly the provisions governing safeguard procedures. Expert testimonies from Professor Michel Le Corre and Dr. Reinhard Dammann presented divergent views on the enforceability of covenants during the observation period.

- Professor Le Corre posited the existence of an "Enforceability Principle," suggesting that non-ongoing contracts become unenforceable during safeguard procedures, effectively nullifying the covenants in the SFA.

- Dr. Dammann, conversely, argued that the General Agreement Principle ("pacta sunt servanda") remains intact for non-ongoing contracts, allowing covenants to remain enforceable unless explicitly derogated by statutory provisions.

The judge evaluated the coherence, consistency, and alignment of these expert opinions with the statutory framework of French law. Emphasizing statutory interpretation, the court favored Dr. Dammann’s analysis, concluding that non-ongoing contracts retain enforceability during the observation period unless specifically altered by the safeguard regime.

The application of a contrario reasoning was crucial. The court inferred that since Article L.622-13 of the French Commercial Code addresses ongoing contracts without mentioning non-ongoing ones, the latter do not fall under the same derogations and thus remain enforceable.

Impact

This judgment has significant implications for cross-border insolvency proceedings, particularly post-Brexit, where the recognition of EU regulations like the Recast Insolvency Regulation (EU 2015/848) continues under the Withdrawal Agreement. It establishes a precedent that English courts may uphold the enforceability of contractual covenants under foreign insolvency laws, provided they align with recognized statutory principles.

For multinational lenders and borrowers, this case underscores the importance of understanding the nuances of insolvency laws across jurisdictions. It also emphasizes the role of expert testimony in interpreting foreign laws within English courts.

Moreover, this decision reinforces the principle that non-ongoing contracts retain their enforceability in safeguard procedures, providing clarity and predictability in the treatment of such agreements during insolvency processes.

Complex Concepts Simplified

Sauvegarde (Safeguard Procedure)

A French insolvency mechanism designed to protect companies facing financial difficulties but still capable of restructuring. It allows the company to continue its operations under court supervision while formulating a restructuring plan to satisfy creditors.

Observation Period

The initial phase of the safeguard procedure, lasting up to six months, during which the company is under protection from creditor actions and can develop a restructuring plan.

Pacta Sunt Servanda

A fundamental principle in contract law meaning "agreements must be kept." It underscores the binding nature of contracts and the expectation that parties will honor their commitments.

A Contrario Reasoning

A method of statutory interpretation where one infers that if the law specifies certain cases, it implicitly excludes others not mentioned. Essentially, it derives meaning by identifying what is not explicitly stated.

Ongoing vs Non-Ongoing Contracts

Ongoing Contracts: Contracts where the principal obligations are still in effect and have not been fully performed. Under the French safeguard procedure, these may be subject to specific enforceability rules.
Non-Ongoing Contracts: Contracts where the main obligations have been completed prior to the safeguard procedure. In this case, covenants within such contracts remain enforceable unless otherwise specified by law.

Conclusion

The Cassini SAS v Emerald Pasture Designated Activity Company & Ors decision establishes a critical understanding of how non-ongoing contractual covenants are treated under French insolvency law within the context of English jurisdiction. By affirming the enforceability of covenants during the safeguard observation period, the judgment provides clarity and assurance to creditors operating across borders. It underscores the necessity of aligning contractual agreements with applicable insolvency provisions and highlights the importance of expert analysis in interpreting foreign laws. This precedent will guide future cross-jurisdictional insolvency cases, fostering a more predictable and structured approach to enforcing contractual obligations amidst complex insolvency proceedings.