For a long time, the legal classification of security in rem created to guarantee the debt of another person has been the subject of major controversy in French law. Traditionally referred to as "cautionnement réel", this practice allowed a third party to guarantee the principal debtor's debt by assigning an asset belonging to the principal debtorwithout making a personal commitment. In 2005, a resounding ruling by the Court of Cassation called this classification into question, creating considerable legal uncertainty. Order no. 2021-1192 of 15 September 2021 reforming the law on sureties finally settled the issue, establishing a clear legal regime for this frequently encountered situation.
To what extent does this reform reconcile the legal position with practical needs? Has the real surety bond risen from the ashes under a new name? Let's take a look at the contours of this innovative system, which applies to many property loans and business financing.
The problem of "real surety": the history of a controversy
The traditional practice of real guarantees
For almost two centuries, notarial practice and case law have recognised the legal concept of "real surety". This expression referred to the situation where a third party constituted a real security (usually a mortgage) on property belonging to him to guarantee the debt of another, without committing himself personally to the payment of that debt.
This practice had several advantages:
- For the collateral provider: he limited his risk to the collateral alone
- For the creditor: he benefited from a solid guarantee covering a specific asset
- For the debtor: he could obtain financing thanks to the guarantee provided by a third party
This clearly distinguished real surety from personal surety, in which the guarantor commits all of his assets. It was subject to a hybrid regime, borrowing both from the rules governing surety bonds (for aspects relating to the guarantee of a debt owed to others) and from those governing security interests (for aspects relating to the basis and realisation of the guarantee).
The decision of 2 December 2005: a turning point in case law
On 2 December 2005, the mixed chamber of the Court of Cassation handed down a decision that overturned this traditional view. In this fundamental decision, the highest court ruled that "a security in rem granted to guarantee the debt of a third party does not imply any personal commitment to meet the obligation of another and is therefore not a guarantee".
This ruling concerned the application of article 1415 of the Civil Code, which limits creditors' pledge to the own property of a spouse who has stood surety without his or her spouse's consent. The Cour de cassation refused to apply this protection to the grantor of a mortgage for third parties.
This position has been confirmed by numerous subsequent rulings, banishing the very expression "real guarantee" from the official legal vocabulary. The Court of Cassation thus drew a clear line between:
- Personal guarantees, subject to the rules protecting sureties
- Collateral security for third parties, subject only to the rules on collateral security
The practical consequences of this case law
The 2005 case law has had significant and often unfavourable consequences for third-party settlors:
- The inapplicability of the protections afforded by surety law, in particular:
- No obligation to provide annual information on debt trends
- Lack of information on payment incidents
- Lack of control over the proportionality of the commitment
- The creditor has no duty to warn
- Challenging established case law solutions:
- The possibility of raising against the creditor defences belonging to the principal debtor
- The benefit of discussion (possibility of requiring the creditor to sue the debtor first)
- Recourse against the principal debtor
This break in the case law has been widely criticised by academic writers. While it resolved a specific difficulty (the application of thearticle 1415 of the Civil Code), it created many other difficulties by depriving third-party constituents of the protections they traditionally enjoyed.
The new system for security interests granted by third parties (article 2325)
A balanced legislative solution
In response to these difficulties, Order no. 2021-1192 of 15 September 2021 introduced a new article 2325 into the Civil Code, which establishes a clear legal regime for security interests created by a third party.
The first paragraph of this article states that "a contractual security interest may be created by the debtor or by a third party". This provision confirms the lawfulness of this practice and expressly recognises the role of the third party grantor.
The second paragraph of Article 2325 provides two fundamental clarifications:
- "When it is constituted by a third party, the creditor only has an action on the collateral".
- "The provisions of articles 2299, 2302 to 2305-1, 2308 to 2312 and 2314 shall then apply".
This last clarification is crucial: it makes twelve articles of the chapter devoted to surety applicable to third parties, thereby re-establishing a link between security in rem for third parties and personal surety.
The legislature has not directly changed the characterisation given by the Cour de cassation (it does not use the expression "real guarantee"), but it has largely neutralised its effects by extending to third parties a significant part of the protective regime for guarantees.
A renaissance in real guarantees?
Although the term "real guarantee" is not explicitly rehabilitated by the ordinance, its legal content is largely restored. This can be seen as an "unspoken resurrection" of this traditional term.
The legislator has chosen a middle way: neither a frontal challenge to case law nor a pure and simple acceptance of its consequences. It has created a sui generis system that recognises the specific nature of security in rem for third parties while bringing it closer to surety bonds.
This pragmatic choice makes it possible to preserve the achievements of case law (in particular the limitation of the commitment to the property affected) while restoring the necessary protections for the third party settlor.
In short, although real surety bonds no longer exist formally, their legal substance is largely preserved by this new regime. This balanced solution should satisfy both practitioners and legal theorists.
Application of the rules protecting personal sureties
The creditor's duty to warn
Article 2299 of the Civil Code, which is applicable to third-party settlors by virtue of Article 2325, imposes a duty of warning on professional creditors. The creditor must warn the third-party settlor if the principal debtor's commitment is unsuited to the latter's financial capacities.
This obligation, enshrined in the 2021 reform, is an important safeguard. If the creditor fails to comply with this duty, he will forfeit his rights against the third-party settlor to the extent of the loss suffered by the latter.
The extension of this obligation to third-party grantors of security in rem represents a significant advance on previous case law, which did not allow such protection.
The creditor's information obligations
Articles 2302 and 2303 of the Civil Code, which also apply to third-party grantors, impose two essential information obligations on professional creditors:
- Annual information (article 2302):
- The creditor must inform the third party grantor, before 31 March each year, of the amount of principal, interest and other accessories outstanding at 31 December of the previous year.
- Failure to do so will result in forfeiture of the guarantee for interest and penalties accrued since the date of the previous notification.
- Payments made during this period are deducted in priority from the principal.
- Information on payment incidents (article 2303):
- The creditor must inform the third party grantor of the principal debtor's default as soon as the first payment incident is not remedied within one month of the due date.
- The same penalty applies in the event of failure to comply with this obligation
These obligations to provide information, which have traditionally been refused to third parties since the 2005 case law, are now fully applicable to them, which significantly strengthens their protection.
The controversial issue of proportionality
One notable point is the absence of article 2300 (relating to the proportionality of the undertaking) from the list of provisions applicable to third-party settlors. This omission seems deliberate and could be explained by the difficulty of applying this principle to a security whose basis is limited to a specific asset.
However, after 2005, case law had ruled that a security interest created for another person "is necessarily proportionate to the subscriber's ability to pay" (Cass. 1re civ., 7 May 2008). Will this praetorian solution survive the reform? The question remains open.
However, it may be considered that the third-party guarantor benefits from an intrinsic form of proportionality since his commitment is, by definition, limited to the value of the collateral.
The third party's defences
The benefit of discussion is now recognised
Article 2325 makes article 2305 of the Civil Code, which defines the benefit of discussion as allowing "the guarantor to oblige the creditor to sue the principal debtor first", applicable to the third party.
This extension is remarkable because previous case law expressly denied this benefit to the third party grantor of a real security. In particular, the Court of Cassation had ruled that "the benefit of discussion cannot be invoked against a preferential creditor or a creditor with a special mortgage on the property" (Cass. 1re civ., 21 June 1978).
The third party settlor may now invoke this benefit, provided that he complies with the conditions set out in article 2305-1 of the Civil Code:
- It must be invoked from the outset of proceedings
- The garnishee must indicate to the creditor the debtor's assets likely to be seized
- The assets must not be in dispute or subject to a special security interest in favour of a third party
This important protection enables the third party grantor to preserve its property in the event of the principal debtor's solvency.
The enforceability of exceptions: a regrettable omission?
Surprisingly, article 2298 of the Civil Code on the opposability of exceptions is not mentioned in the list of provisions applicable to third-party settlors under article 2325.
This omission is difficult to understand, as the third party settlor should logically be able to raise against the creditor all the defences, personal or inherent in the debt, which belong to the debtor. This principle was generally accepted before the 2005 case law.
Article 2455 of the Civil Code recognises this right for the third party purchaser of a mortgaged property, who is in a situation comparable to that of the third party settlor. This raises the question of whether this is simply an oversight on the part of the legislature.
In practice, it would be surprising if the courts were to deny this right to the third-party guarantor, especially as the overall intention of the reform is to bring his regime closer to that of the traditional guarantor.
Recourse against the principal debtor
Articles 2308 to 2310 of the Civil Code, which apply to third-party settlors by virtue of Article 2325, guarantee them effective remedies against the principal debtor:
- A personal appeal (article 2308):
- The third-party settlor who has paid all or part of the debt has personal recourse against the debtor.
- This recourse covers sums paid, interest and costs.
- Interest accrues automatically from the date of payment.
- A subrogatory action (article 2309):
- The third party grantor is subrogated to all the creditor's rights against the debtor.
- He thus benefits from the securities that guaranteed the claim
- Recourse against co-debtors (article 2310):
- Where there is more than one joint and several debtor, the third party settlor shall have recourse against each of them
These provisions ensure that the third-party guarantor is able to take effective action against the principal debtor once its security has been enforced.
Collateral security and insolvency proceedings
Protective provisions in the event of insolvency proceedings
Order no. 2021-1193 of 15 September 2021, published on the same day as the order reforming the law on sureties, amended the Book VI of the Commercial Code on companies in difficulty.
This reform expressly extends to "persons who have assigned or transferred an asset as security" the protections traditionally granted to natural person guarantors in the event of the main debtor's insolvency proceedings. The third party constituting a real security thus benefits:
- Stopping the accrual of interest when proceedings are initiated (article L. 622-28 of the French Commercial Code)
- Suspension of proceedings during the observation period (article L. 622-28)
- Unenforceability of undeclared claims (article L. 622-26)
- Deadlines and remittances for the safeguard plan (article L. 626-11)
This extension is particularly significant in the case of receivership, where the regime is now aligned with that of safeguard with regard to guarantors.
Comparison with the situation of personal sureties
The third party grantor of a security interest now enjoys protection broadly comparable to that afforded to guarantors who are natural persons in the event of the main debtor's insolvency proceedings.
This change represents a considerable advantage over the previous situation. Prior to the reform, third-party settlors did not necessarily benefit from these protections, as case law restrictively applied the provisions aimed at "natural person guarantors".
The reform thus unifies the treatment of the various types of guarantor in the context of insolvency proceedings, which is in line with the overall objective of simplifying and harmonising security law.
Practical impact for creditors
For creditors, these developments mean that the new protections afforded to third-party settlors must be taken into account. These include
- The need to comply with annual and payment incident reporting obligations
- The impossibility of suing the third party settlor during the observation period of a safeguard or receivership procedure
- Respect for the benefit of discussion
These new constraints may affect the effectiveness of security in rem from the creditor's point of view. However, they are largely offset by the increased legal certainty provided by the new legal regime.
A balanced reform with room for improvement
The new system of security in rem for third parties, resulting from the Order of 15 September 2021, is undeniably a major advance on the previous situation. It restores a balance between the effectiveness of the security for the creditor and the protection of the third party grantor.
The main advances are
- Legal recognition of this form of guarantee
- Extension of a significant part of the protective regime for surety bonds
- Clarification of recourse against the principal debtor
- Harmonisation of treatment in the event of collective proceedings
A few areas of uncertainty remain, however:
- Lack of express inclusion of article 2298 (enforceability of exceptions)
- The absence of a specific proportionality test
- The application of certain provisions of the law of suretyship not expressly referred to in article 2325
These issues will probably be clarified by case law in the years to come.
In the final analysis, while the legislature has not formally resurrected the "real guarantee" as an autonomous legal category, it has largely restored its substance. In doing so, it has struck a satisfactory balance between respect for the characterisation given by the Cour de cassation in 2005 and the practical need to protect the third party grantor.
If you are concerned by a security interest created to guarantee the debt of a third party, or if you are considering this type of guarantee, our team of expert lawyers can advise you on the practical consequences of this reform and help you to secure your position. Don't hesitate to contact us for advice tailored to your situation.
Sources
- Civil Code, article 2325 and articles 2299 to 2314 (reformed by order no. 2021-1192 of 15 September 2021)
- Commercial Code, articles L. 622-26 et seq. (amended by Order no. 2021-1193 of 15 September 2021)
- Order no. 2021-1192 of 15 September 2021 reforming the law on securities
EN 
FR