Coeur Défense: The Application of the Safeguard Procedure

The recent Cour de Cassation ruling in respect of the safeguard proceedings opened by Heart of La Défense SAS ("SAS Holdco") and its parent company, Sarl Dame Luxembourg ("Dame"), overturned the earlier decision of the Paris Court of Appeal in February 2010. The decision reinstated the safeguard proceedings of the two companies that were initiated in November 2008. The Cour de Cassation held that, contrary to the decision of the Paris Court of Appeal, safeguard proceedings are open to any debtor faced with difficulties that it cannot face alone, irrespective of their nature.




SAS Holdco had purchased part of the Coeur Défense site for more than €1.6 billion. The acquisition was financed by two loans granted by Lehman Brothers Bankhaus AG. SAS Holdco provided security for the loans and Dame also provided a limited recourse share pledge. The loans were subsequently sold to a special purpose vehicle, Fonds Commun de Titrisation Windermere XII FCT. Windermere XII issued notes into the capital markets to fund the acquisition of the loans and effect the securitization. LBIE, a subsidiary of Lehman Brothers, provided interest rate hedging in the form of interest rate caps.


Following the insolvency of Lehman Brothers, LBIE lost its credit rating. The loan to SAS Holdco required it to replace LBIE with a new counterparty with the requisite credit rating or face default under the loan agreement. SAS Holdco argued that it was not possible to find an alternative hedging counterparty within the timescale stipulated or on economically viable terms. Windermere XII gave notice that it was convening a meeting of noteholders to decide whether to enforce the loans to SAS Holdco. This would have resulted in the insolvency of both SAS Holdco and Dame.


Consequently, both SAS Holdco and Dame applied to the Paris Tribunal of Commerce to open safeguard proceedings. The court ruled in November 2008 that both companies were entitled to enter into safeguard proceedings with the protection that this procedure afforded.


This decision was challenged by creditors. In February 2010, the Paris Court of Appeal annulled the commencement of the safeguard proceedings on the grounds that SAS Holdco and Dame did not face operational difficulties. The decision was seen as an indication that French courts would not allow safeguard proceedings to be used in order to facilitate debt restructurings that favored equity investors.




The Cour de Cassation overturned the decision of the Paris Court of Appeal. In its judgment, the court held that the sole prerequisite for a company to benefit from safeguard proceedings pursuant to article L.620-1 of the Code de Commerce was for it to demonstrate that it was facing insurmountable difficulties. These were not confined to difficulties related to its principal activities.


The Paris Court of Appeal had stated that the difficulties must be "operational" and not merely financial. In its judgment, the difficulties facing SAS Holdco were purely related to the cost of replacing the interest rate hedging arrangements. The company was not facing difficulties in its principal activities of leasing the buildings that it owned.


The Cour de Cassation took a different view, accepting SAS Holdco's contention that, in fact, it was impossible to find a new hedging counterparty at that time due to market conditions. Consequently, the difficulty faced was not simply that the costs were too great, but also that the condition was impossible to fulfill. On that basis, the court upheld SAS Holdco's application to be granted the protection of safeguard proceedings.


The Cour de Cassation also accepted that Dame was entitled to enter safeguard proceedings. Although the security that it had granted had been limited recourse to the shares that it held in SAS Holdco, the court accepted that deprived of its only asset, it would be unable to repay its shareholder loans and would consequently face insolvency.


The decision made clear that safeguard proceedings cannot be refused to a debtor on the grounds that the debtor may be requesting the protection afforded by the proceedings purely in order to escape from its contractual obligations. Provided that the debtor can show it is facing insurmountable difficulties, which may lead to it becoming insolvent, safeguard is a viable option. Moreover, the court also clarified that a debtor cannot be denied safeguard proceedings solely on the basis that, as a consequence, its shareholders may enjoy the protection afforded by the proceedings.


The case has now been referred to the Versailles Court of Appeal in accordance with French judicial procedure. Other litigation relating to the safeguard plan is still pending.


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