A Closer Look at Security Trusts

Definition of a Trust

Inspired by the Anglo-Saxon “trust,” the fiducie was introduced into French law in 2007.

A trust involves temporarily transferring ownership of an asset to a third party, who will manage it in accordance with the responsibilities assigned to that party. It should be noted that a trust may be used for asset management purposes (“management trust”) or as security (“security trust”). This article will focus on the latter role.

A security trust may be established for all types of property, whether tangible or intangible, movable or immovable, present or future.

In connection with bond offerings on its platform, Raizers may require trusts, particularly with respect to membership interests and receivables.

The parties to the contract

There are three types of people involved in a trust agreement:

1. The party to the agreement, which may be an individual or a legal entity (in this case, the borrower).
2. The trustee must be a credit institution, an investment firm, an insurance company, or an attorney.
3. The beneficiary, who is the person for whose benefit the purpose of the trust is fulfilled, is generally the lender.‍

Role & Functioning

A security trust offers a relatively effective advantage in that the property subject to the trust agreement is transferred to the trustee's estate and is thus no longer part of the debtor's estate.

In the event of a default on the loan, the trustee holding the property may receive instructions from the creditor to foreclose on the security trust.

There are two ways to implement this:

1. The creditor may be permanently granted ownership of the assets in question.
2. The trustee may arrange for the sale of the assets and remit the proceeds of the sale to the creditor.‍

Execution

Throughout the term of the agreement, the trustee is required to manage the assets transferred by the settlor (lender) while fulfilling the duties entrusted to the trustee under the trust agreement. In exchange for fulfilling this purpose, the trustee receives compensation.

The trustee must also act and use all available means, in accordance with the powers granted to him or her by the settlor, to achieve the purpose specified in the trust agreement. He or she must regularly inform the settlor of progress toward achieving the trust’s purpose.

Example: Company A (“issuer”) issues bonds totaling €100,000 on the Raizers platform. To guarantee full repayment of this bond issue, a trust agreement covering the company’s shares is entered into. In this transaction, the issuing company is the settlor, Raizers—acting as the representative of the bondholders—is the beneficiary, and the trustee is a dedicated attorney. In the event of default, the trustee will sell the company’s assets and distribute the proceeds of the sale to the bondholders. In this case, there is no seizure in the strict sense, as ownership is transferred initially upon the establishment of the security trust.

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