Inter-company lending: a little-known solution that deserves to be highlighted in this context of a health crisis?

Introduced into the Monetary and Financial Code by Law No. 2015-990 of August 6, 2015 for growth, activity and equal economic opportunities (known as the Macron Law), inter-company lending allows a company to financially support another company with which it has economic ties, by granting it a loan.

This system has been subject to several adjustments, the latest of which took place in May 2019 (Pacte Law No. 2019-486 of May 22, 2019 and Ordinance No. 2019-698 of July 3, 2019).

We invite you to find below a presentation of the inter-company loan scheme.

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Article L. 511-6, 3 bis, of the Monetary and Financial Code provides that the prohibition relating to credit operations does not apply:

"To commercial companies whose accounts for the last closed financial year have been certified by an auditor or which have voluntarily appointed an auditor under the conditions defined in paragraph II of Article L. 823-3 of the French Commercial Code and which, as an ancillary activity to their main business, grant loans of less than three years to micro-enterprises, small and medium-sized enterprises, or mid-sized companies with which they maintain economic ties justifying it. The granting of a loan may not have the effect of imposing payment terms on a business partner that do not comply with the legal limits defined in Articles L. 441-10 to L. 441-13 of the French Commercial Code. A decree of the Council of State shall determine the conditions and limits under which these companies may grant these loans.".

This article is supplemented by decree no. 2016-501 of 22 April 2016 , amended by decree no. 2018-1075 of 3 December 2018 which sets out the provisions of articles R. 511-2-1-1 , R. 511-2-1-2 and R. 511-2-1-3 of the same code.

The criteria to be met to apply for inter-company loans:

• The terms of the loan

• The conditions for being a borrower

• The conditions for being a lender

• The economic links that must exist between the borrower and the lender

The terms and conditions of the inter-company loan

1. The duration of inter-company loans is now limited to less than 3 years, whereas it was initially set at less than 2 years by the decree of April 22, 2016.
2. The principal amount of the loan is doubly capped by article R. 511-2-1-2, 3°:

by an overall limit, the total amount of all loans granted during an accounting period cannot exceed a ceiling equal to the lesser of the following two amounts:

• 50% of net cash or 10% of that amount calculated on a consolidated basis at the level of the group of companies to which the lending company belongs; or
• 10 million euros, 50 million euros or 100 million euros for loans granted respectively by a small or medium-sized enterprise, an intermediate-sized enterprise or a large enterprise (the classification being defined by article 3 of decree no. 2008-1354 of 18 December 2008);

by an individual limit, the total amount of all loans granted by the same company to another company during an accounting period cannot exceed the greater of the following two amounts:

• 5% of the ceiling defined in point 3 above; or
• 25% of the ceiling defined in point 3 above, up to a limit of 10,000 euros.

3. Finally, the granting of the loan must comply with certain formalities, which are embodied by:

• drafting a loan agreement;
• compliance with the procedure for regulated agreements; and
• The auditor is notified annually of the current loan agreements granted and certifies, in a statement attached to the management report, for each agreement, the initial amount and the remaining capital due of these loan agreements as well as compliance with the provisions which govern them.

The conditions for being a borrower

The identity of the borrower is subject only to a condition of size and numbers.

Thus, the borrower may fall into the category of micro-enterprises, small and medium-sized enterprises (SMEs), or mid-sized enterprises (ETIs). It is worth noting the exclusion of large companies, which, by their very nature, should not be eligible for such a loan.

As a reminder, the (cumulative) thresholds for classifying companies are as follows:

Micro-enterprises are those that:

• employ fewer than 10 people; and
• have an annual turnover or balance sheet total not exceeding 2 million euros;

Small and medium-sized enterprises are those that:

• employ fewer than 250 people; and
• have an annual turnover not exceeding 50 million euros or a balance sheet total not exceeding 43 million euros;

Medium-sized enterprises are those that do not belong to the category of small and medium-sized enterprises, and which:

• employ fewer than 5,000 people; and
• have an annual turnover not exceeding 1,500 million euros or a balance sheet total not exceeding 2,000 million euros;

Large companies are those that are not classified in the previous categories.

The conditions for being a lender

All commercial companies (SAS, SASU, SARL, SCA, SA, etc.) can act as lenders in the sense of inter-company loans.

Furthermore, articles L. 511-6 and R. 511-2-1-2 set out 4 other conditions (in addition to the status of commercial company and the limitations related to the amount of the loan) for a company to be eligible to grant such a loan:

1. the accounts for the last financial year must have been certified by an auditor;
2. the lending activity must remain ancillary to the main activity;
3. At the closing date of each of the two financial years preceding the date the loan is granted, equity must exceed the amount of share capital and gross operating profit must be positive; and
4. Net cash, defined as the value of current financial assets due within one year, less the value of current financial liabilities due within one year, recorded at the closing date of each of the two accounting periods preceding the date of granting the loan, must be positive.

The economic links between the borrower and the lender

The complex issue of the economic links that must exist between the parties involved in the loan is settled by article R. 511-2-1-1 of the Monetary and Financial Code.

First and foremost, it is important to clarify here that these links can be identified not only between the lending company and the borrowing company, but also between the lending company or a member of its group and the borrowing company or a member of its group. The term "group" is understood here as that used to determine the scope of consolidation of accounts as defined in Article L. 233-16 of the French Commercial Code.

Thus, according to this article, the economic links are, alternatively, identified:

by belonging to the same economic interest group (or group awarded a public procurement contract):

“The two companies are members of the same economic interest group mentioned in Title V of Book II of the Commercial Code or of the same group awarded a public procurement contract, mentioned in Article L. 1220-1 of the Public Procurement Code”;

by belonging to the same project for which a public subsidy has been awarded (under certain specific conditions mentioned in I, 2°, a), b) and c) of the article cited above):

“One of the two companies has benefited during the last two financial years or is benefiting from a public subsidy as part of the same project involving the two companies and, where applicable, other entities”;

through the existence of a subcontracting relationship (the borrower assuming the role of subcontractor):

“The borrowing company or a member of its group is a direct or indirect subcontractor, within the meaning of Law No. 75-1334 of December 31, 1975 relating to subcontracting, of the lending company or a member of its group acting as main contractor, subcontractor or project owner. Any loan established in this context may not affect or replace the obligations of the lending company or the relevant member of its group acting as main contractor, subcontractor or project owner in accordance with the terms of this law”;

through the existence of a grant by the lender to the borrower of a license to exploit a patent, trademark, franchise or lease-management agreement:

“It has granted to the borrowing company or a member of its group a patent exploitation license as referred to in Article L. 613-8 of the Intellectual Property Code, a trademark exploitation license as referred to in Article L. 714-1 of the Intellectual Property Code, a franchise as referred to in Article L. 330-3 of the Commercial Code or a lease-management agreement as referred to in Article L. 144-1 of the Commercial Code”;

when the lender is a major client of the borrowing company or a member of its group:

"She is a customer of the borrowing company or a member of its group. In this case, the total amount of goods and services acquired during the last financial year preceding the date of the loan or during the current financial year under a contractual relationship established on the date of the loan is at least 500,000 euros or represents at least 5% of the turnover of the borrowing company or the member of its group concerned during the same financial year";

through the existence of an indirect link, when the parties are important customers or suppliers of the same third-party company:

“It is indirectly linked to the borrowing company or a member of its group through a third-party company, with which the lending company or a member of its group and the borrowing company or a member of its group, each in their respective capacity, had a business relationship during the last financial year preceding the date of the loan or have an established business relationship on the date of the loan. Within the framework of this business relationship, the goods and services acquired by the customer from the supplier during the last financial year preceding the date of the loan or during the current financial year within the framework of a relationship established on the date of the loan is at least €500,000 or represents at least 5% of the supplier's turnover.”.

Please note that the granting of the loan cannot result in placing the borrower in a state of economic dependence.